The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick
“I am looking for the reliable. I am looking for the trustworthy. I am looking for the tried and tested and true, or the timeless. I am looking for the definitive measure of value, the bedrock of knowledge. I want a reference point that doesn’t require batteries. Perhaps this is why I am so comfortable with gold. Gold, in the monetary and financial sphere, is a bedrock.”
– David McAlvany
Kevin: We’re just getting you back, Dave, from New York, but it certainly wasn’t without some difficulties, and I want to talk about that in a little bit, but what a week while you were gone – the Chinese situation, the Greek situation. Let me ask you, starting with China, these guys are intervening like mad right now to keep this market from going down. Is there only one direction that is allowed in China, and that is up?
David: That appears to be the course. What you really have to ask is, what is at stake? Is it revolution that they fear? I think whenever you look at China and the potential for instability, you are dealing with a very small number of people at the top, whether it is the nine-member politburo or a slightly larger cadre in terms of the membership within the party. They are still a fraction of the society at large and when you look at the needs of the state in terms of maintaining control, you realize just how close they are to revolution. We mentioned this a number of years ago, that on average they have close to 70,000 social disturbances and riots each year – 70,000. And this is a conversation that we had with Minxin Pei and a couple of other people who have spent a good bit of time in China, and they are always concerned with social stability and the fear of revolution.
Kevin: And you have an awful lot of people who would either be on the farm, or be in the cities, maybe very hungry, that have been day trading, and they have been getting the quick, easy hit on the stock market that has just been flying over the last year. When you talk about a small group of people in power over an extremely large group of people that could become unsettled, I think of the dynamic, like in a prison, where you have very few guards, and one of the key elements of maintaining control is to keep the perception that the people could not unite and overwhelm them.
There was a great movie, a true story, called Escape from Sobibor, about a group of Russians that were brought into a concentration camp during World War II, and the commander of the Russians who had been brought into captivity understood that they could overpower the guards. There was a certain amount that would be lost, they knew that there was going to be certain losses during that time, but they actually were able to escape by overpowering the guards. And once the people in any civilization understand that they can overthrow that power, like France in the late 1800s, you can have something change radically.
David: I am reading a book on that right now, dealing with deterrence theory, and where the threat of force is sufficient and the threat of destruction is sufficient to control the diplomatic process. It is one of the ideas that is explored. And of course we are talking about, in our conversation about China, an internal dynamic. And I guess you could bring in the element of a carrot and stick. There are times when you have to be very forceful.
But we mentioned that last week there has been a number of people arrested for shorting the market, for suggesting that there are reasons to short the market, as being, essentially, the dilettantes within the Chinese culture who are stirring things up, so to say. And if they are a source of instability for the stock market, it is very easy to solve that problem. Eliminate them from the environment, from the milieu, and don’t allow them to make those threats, write online articles saying why the stock market could potentially go down.
Keep in mind that the stock market in China started at a price earnings multiple when it was at its peak just in June, of about 140. So, that is about 140 years worth of earnings packed into the current price, and right now it is more reasonably priced at 60, which is still about four to five times what you would expect of normal. And that is what makes the intervention so extreme — you are intervening at four to five times multiple of what would be considered a normal or sustainable level. Why the government has drawn a line in the sand and decided to push the market up from these levels? I think it does come back to the fear of revolution and something that is more cultural in terms of their concern, and not really related to market dynamics, so to say, it is really what can come out of the market dynamics that they fear.
Kevin: And I found it strange that our stock market shut down for several hours when this crisis was occurring in China. I want to talk about that because you were directly affected. Your travel was affected.
Kevin: The markets were affected. And frankly, even your ability to get information from the Wall Street Journal would have been affected. So, I would like you to tell the story of last week, just your travel, and how it personally affected you.
David: Sure. Through the weekend, just before we get there, it is that whether it is China and there being a subtext to the story, a fear of revolution, or Greece, where we are talking about, again, tens of billions of euros being discussed as a solution to the problem, I just want to remind you that this is the third proposed bailout – it is proposed at this point, it hasn’t been agreed on – but you are dealing with triple the problem. We had a problem which was just over a 100 billion dollar problem six or seven years ago. Now we have no solution, we are onto the third bailout, and instead of a 100 billion dollar problem it is about a 300-340 billion dollar problem.
What happens each time is that the powers that be attempt to do the same thing, quite frankly, that is happening in China, which is ease the concerns of the people on the street, take the panic level “off the boil” and bring a sense of calm back into the marketplace. Now, they are not fixing anything. The structural issues which got them there are actually compounded. We discussed that last week by saying that the average household debt obligation is about $20,000, and you look at a $40,000 figure being a reality, just compounding that debt negatively over the next ten years. Now, if you introduce a new bailout, all you are doing is layering in even more debt onto an economy that is having a hard time paying its existing debt. So you begin to see the insanity of any proposal when the existing debt can’t be paid. But the solution to that debt problem is just to layer on more debt and this passes as an intelligent solution. Why it is intelligent, from a political standpoint, is that is avoids revolution. It avoids conflict in the street. It avoids panic, it avoids violence.
Kevin: It is another element of this deterrence theory. It is just basically kicking the can down the road.
David: But in point of fact, all you are doing is compounding and increasing the likelihood of something far more violent down the road.
Kevin: It is my children’s problem, not my own. That is really the way they are answering the question.
David: Right. And what happens when your children not only face the economic realities that you left them to, but then deal with an intergenerational resentment, having been saddled with major obligations that can’t be paid? It is the kind of thing that goes from rending a societal fabric to even rending a familial fabric, the most basic unit of the society. So, I think there is a huge amount at stake in Greece. Gideon Rachman in this week’s Financial Times quotes Karl Marx. He says, “History repeats itself, first as tragedy, and second as farce.” The last bailout was a tragedy because it was compounding silliness on silliness, unsustainable numbers on unsustainable numbers. Now it is farce, and it really is interesting that the world equity markets somehow return to calm in the face of something that is completely farcical.
Kevin: I think we need to remember when the people who are in power, like you talked about in China, or in the euro, or even here in the United States, want to maintain the perception of control and normalcy, they will do literally anything to keep it. Now, this is what is going to take me to the market shutdown because that was too suspicious for me, Dave. It just happened to be timed right as we were 200 points down here in New York, and China was melting down.
David: I was traveling to New York City last week and I sat in the airport for about four hours. I was reminded of both the benefits and the costs of technological dependence and it was funny, I called the United help desk at 6:30 in the morning to inquire about our six o’clock departure, as I knew I was going to miss a very close connection in Denver, and the person assisting me said this: “I show that your flight is on time. There is no problem with your connection in Denver.” (laughs) And I reminded her of what the current time was, and that we were already half an hour late, and that I was going to miss that second flight, and that didn’t deter her. She just repeated, “I see no problem with your flights today. That’s what my screen tells me.” And so, at this point I just cordially said goodbye, realizing there was nothing more that she could tell me, and nothing more she could help me with.
Kevin: Right, because the screen always tells her the truth.
David: And isn’t this interesting? Reality is not defined by what you see on a screen. When you read something you need to critically analyze the source, you need to look at the argument, you need to consider the motivation in reporting from a particular perspective. Just because it shows up on a screen does not mean it is true, does not mean it is clean, does not mean it has any basis is fact. Or if it does have a basis in fact then you have to consider the possibility that there is a little bit of fact and a lot of fiction to go with it. (laughs) Sometimes what you find on a screen can even turn out to be comical. Imagine a text message that reads, “I am having significant wife issues today. Can you stop by and fix them?” And then realize that wife could be – have you ever had something auto-spelled in your text messages? Wi-Fi switched to wife?
Kevin: You’ve got to be careful with those. Yes. (laughs)
David: Exactly. I had no problems with my wife, it was just my Wi-Fi. But it is a very different message, and what you see on the screen can lead you to believe one thing, and even begin to say, “Oh, what’s wrong with them? What’s going on in their relationship?” And that is not what was intended to begin with. What is on the screen does not define reality. I mean, come on, I can go to a Bloomberg monitor and I can get a quote on a particular stock or bond and the current price doesn’t tell me everything I need to know. Reality is deeper than that. Sometimes it is hidden under layers of complexity. Sometimes it is intentionally obscured.
We have talked about financial engineering and that being the order of the day amongst CFOs in publically traded companies today. Ten minutes after my encounter with what I’ll call the Helpless desk at United, over the PA in the airport there was an announcement that there had been a system-wide failure of the United reservation and check-in platform. It’s done, and their working on it, solving it, etc. So, while we are stuck in the airport later that day, Bloomberg sends a notice to my phone that the New York Stock Exchange has had an unsolvable glitch and trading is being suspended.
Again, maybe it is coincidence, but I am already hypersensitized to computer glitches on a day where I was expecting to be going through the Frick collection that afternoon before dinner with my wife, and we were not going to go to the museum, we might not make it to dinner, we might not make it to New York at all because we are still stuck in the airport. So here comes the New York Stock Exchange “market is closed” notice, and I’m thinking, “Oh, this is curious.”
Kevin: Did you feel like there was a connection at the time, or did it just feel like two random events?
David: Well, there is a part of me that holds some level of suspicion about things like that. One hour stretched to two, and then to three, and the curious thing is that your dark pools and your off-exchange settlement of trades continue for institutions, your regular trading platforms were frozen. So for instance, if you wanted to go to Charles Schwab and try to place a trade, the New York Stock Exchange is not functional, you are not placing a trade. But if you are an institution you can still place a block trade into a dark pool and have it settled. And that is interesting to me just in terms of new dynamics and there being a two-tiered system.
Kevin: It is a privileged market is what it is.
David: Well, that is one of the things that you can learn from it.
Kevin: But don’t they have backups? The New York Stock Exchange, Chicago, these major trading exchanges – why don’t they have a backup?
David: That is interesting to me, and curious to me, as well, because the Chicago backup systems for the NYSE, New York Stock Exchange, were never turned on, and I don’t know why. I still don’t know. But when a backup generator is supposed to turn on when the power fails, and it doesn’t, it is worth exploring why it didn’t. And there may have been a reason. It may have been a deliberate choice to leave them off as opposed to a failure of the system to automatically engage. But there are other questions. Why was it not engaged? Were the New York Stock Exchange quotes inaccurate? Was there something impacting the data feeds such that the data, although it was flowing, was considered unreliable? It was a good day for the dark pools, not so good for NYSE.
Kevin: Dave, I talked to one of your analysts over at McAlvany Wealth Management, and he has a little sarcastic side to him, and I was just thinking about it…
David: Which one of them?
Kevin: (laughs) Should I name Gavin or not?
Kevin: But Gavin says, “Would this have been cut off if the market was up 200 points, or could it have only happened when the market was in freefall? It was a straight line down.
David: Right, so you have issues in China which are playing out in real time. You have the U.S. stock exchange which is off close to 200 points, as you mentioned. And again, maybe it was just a bad day. When it rains it pours. You know, when you read one obituary of a famous person you know that within seven days there are going to be two more because they all seem to die in threes?
Kevin: Oh, you’re dark, Dave. You’re dark.
David: (laughs) So, here we have the NYSE, we have United, and lo and behold the Wall Street Journal has problems on the same day. And yes, there are significant glitches. Maybe it is mere coincidence, but it is worth pondering. And I think this is what is particularly worth pondering. What areas in your life are dependent on technology? Can you drive across town without using your phone’s GPS? You realize there is a whole part of your brain and normal functioning which, given the advancement in technology has, for many years, for most of us, simply been turned off.
I remember in college, out in the Los Angeles area, we had these huge books – I think they were called Thomas Guides, if I remember correctly, and you could navigate anywhere, to any neighborhood. And when you were in the wrong neighborhood you really wanted your Thomas Guide to know, “I’m at point A. How do I get to point X, Y, or Z? Get me the heck out of here, and what is the fastest way?” That is the sprawling Los Angeles metropolis. You did need to know how to read a map. Today you just have to have a Smartphone.
Kevin: And Dave, we have been in that situation. I remember being in Zurich with you and there was no way to drive around Zurich without a GPS. It had been laid out hundreds and hundreds of years ago. Cars were not even thought about when that city was laid out. I am sure Boston is like that. So, if a person is visiting, or a foreigner, to a particular city, these days, yes, the GPS is how most of us get there.
David: Right. Well, I guess it just underscores this point of the idiocy of a Smartphone, being what creates in us as we become more and more dependent on it.
Kevin: A dumb owner.
David: Exactly, because it does the work for us. And there are other areas of dependency you might know. Is your daily news information all online? Can you even recall those black residue marks on your fingertips when you used to page through the daily paper? (laughs) Or like we do around here may be five of them. Anyway, I thought it was interesting. The market did shut down in a context, and perhaps it is irrelevant, but you have Chinese equities which were under pressure, and still are. The Dow was down over 200 points, then a technical glitch occurs. I mentioned to my wife the significance of cancelling all standing orders, because that is what happened when they shut down the market, they canceled all outstanding orders. And that was actually the most significant data feed onto my phone from Bloomberg.
Kevin: And those orders – there was nothing looking like the market was going to go up when this thing was canceled. Like I said before, these orders were canceled. I wonder how many outstanding orders were further sale orders?
David: My first comment to Mary Catherine was, “Imagine having a stop loss order in place. If price is going down in an asset that you own and you want out at a certain price, that stop loss order gets triggered at a certain price. But lo and behold, imagine the market approaches that trigger price, the market closes, and all of a sudden your order is canceled. You would have been additional downside volume and probably would have pushed the price even further to the downside, and yet, here we are with outstanding orders canceled, both to buy and to sell. So, yes, you can simply go in and replace your order, it is not big deal. To me, it feels like a circuit breaker – it feels like a circuit breaker.
Here is where I would, as an investor, and anyone who is listening who has a dollar in the market, keep this in mind. Don’t be surprised by the same kind of event on a very bad day, the Dow is selling off 100 points, 300 points, 600 points – the market temporarily closes. For whatever the reason, just understand that when things happen, and it has happened to you before, you are less sensitive to it. So, the second, or third, or fourth time, you have this glitch, “It is an update, just like the last update that we did to our software package, it needed to be done because there are more high-frequency traders, and so we are improving to accommodate, etc., etc.,” whatever the malarkey is that is given to explain and soothe the nerves of market participants, realize that there is a certain degree of conditioning occurring, and as the conditioning occurs, I think you move forward to, let’s say, a September to October timeframe. That is the timeframe in which most markets sell off, if you are looking at the great catastrophic declines in the U.S. market.
David: But lo and behold, we have an investment population, “netizens,” if you will, only aware of what happens in the world of the net and what is given to them in digital portals.
Kevin: And you are assuming human actors, but you know, Dave, I remember being in New York a couple of years ago when Bloomberg announced that they had a new algorithmic trading program that they were selling to the brokers that actually trades on good news and bad news and new stories. And I thought, “Gosh, that sounds like a feedback loop. It sounds like Bloomberg is actually doing the news, and then they are selling algorithmic trading programs that trade on the key words on the news that Bloomberg actually produces.
David: Isn’t that curious? Well, that is an issue, when you look at the headlines, because you can ask two questions. Number one, what does the headline mean? And number two, what you are suggesting, what is the headline meant to do? So yes, we have the trading algorithms, they are tied to headlines and news feeds, and you are talking about an automatic deployment of capital, investments which are automatically made by super-computers on the basis of those headlines. So we are told, let’s take, for instance, last Friday and this Monday, that a bailout deal has been reached in Greece. Markets instantly rallied.
Kevin: Instantly – within nanoseconds, Dave.
David: Yes, but was it true or false? Well, it was false. There was no bailout deal that had been reached. The German government hasn’t even received a parliamentary mandate to open negotiations with Greece.
Kevin: But the word triggered the algorithm.
David: That’s right. And that same issue of parliamentary permission has yet to occur with the Dutch and the Austrians, and several other countries within the eurozone, as well. The offer on the table was, essentially, “Right now, you implement the austerity we told you to, and have told you to for months, and then we can have a conversation about some form of a lifeline which could be upwards of 89 billion euros.” The only commitments made thus far is to start talks on a conditional basis (laughs) and that may include X, Y, and Z – may include X, Y and Z. So, the promises are iffy, but you have to right now, go ahead and put money on the barrel, that is, specifically, 50 billion dollars of assets on the barrel. It is almost like in a game of poker, “Do you have the money to play at this table? You put 50 billion on the table and then we will talk about 89 billion, and the potential of even playing the game.”
Kevin: Dave, let’s go back to this deterrence theory, where the people who are managing and trying to control the larger picture are actually trying to deter things from going any other direction than what they have planned. You know, Tsipras, the Greek Prime Minister, who was voted in with a no vote on austerity, seems to have made an about face this week. That also seemed strange. It is a week of strange occurrences and coincidences. Is there something behind the curtain there?
David: I don’t know, I don’t know that we will know, but I think it is worth, as an intelligent humanoid, thinking about it and trying to figure out, “What happened this week, and is there any similarity to events in the future?” What happened in Greece? I don’t know if Tsipras was threatened, if this is a scare tactic for other European countries where maybe you have populist trends in France, for instance, and you need to send a very clear message. “The populist trend in Greece is being crushed and if you want to pursue a populist mandate in Italy or Spain or France, it will not end well for you, exhibit A being Tsipras, who we are in the process of crucifying politically.” Again, what was happening behind the scenes? I don’t know, but how do you go from being a hard-edged, in your face, Greek dilettante prime minister, to a compliant, “Yes sir, may I have another” European politician? This happened in a matter of days, and wouldn’t you love to know what was put on the table over the weekend?
Kevin: You mean the table in the smoke-filled room that no one could see? Yes.
David: (laughs) Well, political acquiescence of this sort – what it does suggest is threats and coercion. It also suggests that Europe would like to, as I mentioned earlier, crucify a populist representative in order to send a message to other would-be populists in Europe. “We will break you,” is the message.
Kevin: Well, let me ask, though, because the Greeks voted against austerity – that vote is only a week-and-a-half old – and yet, don’t the Greeks have to agree to austerity, to even come back to the table to get any of this bailout money?
David: That’s right, so Tsipras comes back to get a mandate from the people, he is given a mandate, he goes back to the Brussels meeting rooms and what happens next? An about face from what the people told him to do. What happens next? It is anyone’s guess. But to agree to austerity measures is what opens the talks to the bailout. And again, back to this issue of headlines, and many of these headlines being fallacious. This is from Yahoo Finance. “Global stocks rise after Greece agrees to new bailout. Dow up nearly 180 points.”
Kevin: That is that circular system we talked about where you have these news points that come out, and things just react to surface news. They are not really fully true.
David: It is a circular system of price reinforcement. It is a form of gaming the system and manipulation, and it continues on the basis of misleading headlines. And the average guy who doesn’t have the time to read any deeper than a headline is going to say, “Hey, you know, everything is fine in Greece, they have finally figured it out. We have reached the point of terminus last week and saner minds prevailed.” I don’t know that saner minds prevailed, or agreed to anything.
We have negotiations which may be entered into, which will take three to five weeks, and trust you me, the headlines in that kind of timeframe, it is going to give traders ample opportunity to play games, even as fundamentals continue to deteriorate, both here in the U.S., our markets, but also in the European and global economy. You have the IMF, you have the BIS, the Bank of International Settlements, which agree, there are concerns about slippage in the economy. I don’t know if you saw this. Claudio Borio, in a recent report from the Bank of International Settlements – he is head of Economic Research at the BIS – said, “Look, we have ultra-low interest rates which may be feeding economic weakness by destabilizing financial markets. In short, low rates beget lower rates, is how the BIS, in this report, concludes.
What he is basically asking is, “Are central banks really doing their jobs, and are interest rates at these low levels consistent with what the market needs to actually allocate assets effectively?” And he is saying, “No, absolutely not. We are in a dangerous position. The mandate that the central banks have put into place, errant to begin with, is not really working.” So, what do you find in Greece in response to a troubled set of circumstances? “Why don’t we just spend a little bit more money that we don’t have to solve the problem?”
Kevin: So, Dave, when someone dies on an operating table, a lot of times they get those electronic pads out and they put them over the heart and go “pop” and it supposedly revives the heart, or that is what it is supposed to do. But it seems like for the last at least four years, that is what they have been doing. They have been basically popping that heart over and over and over with low interest rates, with quantitative easing, all these emergency operating room measures.
David: But what we are really talking about is the problem of the 800-pound man. If you want to know why there is a heart problem, you can revive and revive and revive, but the problem with the 800-pound man is a systemic problem. It is a systemic problem. That is not to say it is not complex. There may be many elements to it, from diet, to psychology, to environment, to environmental factors – you name it.
Kevin: But it is a longevity issue, and the longevity of that 800-pound man is much shorter than someone who is maybe in better shape.
David: This week we had the ex Finance Minister of Finland saying that Greece is now under custody, and it is eerie when the eurozone insists that in order to have a conversation about another 89 billion dollars in extended loans, they are asking for the equivalent of 25% of Greece’s GDP up front as an asset placement, almost like, “You give us 50 billion in assets, we’ll give you 89 billion in debt.” So, it is a secured loan. It is a more secured loan. And the reality is, they did something similar to this in the last bailout and it was supposed to be a very high figure, not quite 50 billion, and they have only raised three in the process of selling off state assets. It is not happening.
And I think what people don’t realize is that it is all smoke and mirrors. Everyone is pretending, and everyone is assuming that if we just extend and pretend everything is going to work out all right. Listen, when I think about debt, when I think about default, when I think about forgiveness, I want to be very clear on this point, because my analysis is pragmatic. This has nothing to do with having moral girders to it. Do I think people should pay their debts? Yes I do. But pragmatically, do I see a reason for Greece to default? Absolutely. At the level of pragmatism, I draw on Lex Rieffel’s book, Restructuring Sovereign Debt. It is an amazing book. Here is what you know from market history. Markets forget past failure very quickly. It is not a default that euro politicians are concerned about. It is not a financial event which euro politicians are concerned about. It is the dissolution of the eurozone, with Greece being the first olive out of the jar.
Kevin: Well, it is who ends up actually paying the debt, because in a default like this, the predator creditor, like what we see in Europe, where you have the Germans knowing full well what they are doing when they are originally giving a loan to Greece, knowing that it is not going to get paid back. Or like here in America, where a bank knows they are giving a mortgage to somebody who literally cannot pay that debt back, but they know someone has their back. Now, with that being the case, they don’t want to end up losing money, even with a bad debt.
David: I think it goes beyond that to the political side of things where, whatever the cost is – I mean, if you just expunged all of Greece’s debt, 200-300 billion dollars of debt, it is going to hurt somebody, but it is not, in the end, that big of a deal.
Kevin: Until you add Spain, Portugal, France, everybody else who sees that happen.
David: Right. And then what you have is the dissolution of a political union – not quite a political union, not quite a fiscal union, not quite anything. What is the eurozone? It is a political body without a political mandate, without a fiscal mooring. And again, it comes back to this issue of, can Greece leave the monetary union and still be a part of the EZ, the eurozone? Probably it can, and probably it should. We talked about that last week, we don’t need to reiterate it, but I think the concern is a political one, because, again, if you are looking at it from a pragmatic standpoint, the clearest way toward Greece’s economic recovery – if you cared about Greece’s economic recovery, wanted to see where they were 10 or 20 years from now in a growing and thriving economy, remove the burden of debt. Remove it. Don’t multiply it, don’t compound it. And adding 89 billion, or however much they may eventually add to it, does nothing toward solving the problem. Latin America is a perfect set of case studies for how you move toward a growth path and away from what was an unsustainable encumbrance to begin with. Get rid of it – get rid of it. Does it hurt creditors? Absolutely. In my opinion, who cares?
Kevin: I want to shift back for a little bit to reliance on technology, because when you talked to Nazli Choucri, she analyzed this new environment of the Internet, and how it going to have to either be controlled – she gave various scenarios as to how the future of the Internet is going to move – and we have something that is outside of our paradigm that has occurred in the last month, Dave, that just keeps getting bigger and bigger and bigger. You have 4.2 million personnel files that have been grabbed, and now they have said, “Well, it really wasn’t 4.2 million personnel files.” I’m talking about – this has information about everything, private information. Now they are saying it is over 20 million.
David: That’s right, 22 million U.S. government personnel files, including information about immediate family members, residence, social security numbers, educational history, personal and business acquaintances, health records, criminal history, if there is any.
Kevin: Things you don’t mind sharing with your friends.
David: Financial history. Have you ever declared bankruptcy? What is your current state of financial wherewithal? This is the issue. We are seeing things unfold that I think could play very poorly in terms of our rights as individuals and freedoms as a country. Why? Because, as we mentioned earlier, when I sit in a Denver airport, the only thing that is happening is I am inconvenienced by a few hours, and I think to myself, “I wish the system worked better.” If somebody came along and said, “Well, I can fix the system and make it better,” for the sake of convenience I might give them a green light or a thumbs up.
But when you combine the issue of desire for greater convenience and desire for greater security, in a world that is dependent on the Internet, I think all of a sudden there are some very complex issues which we have to deal with. We tried to open that conversation with Nazli Choucri last December, and you look at what just happened – 22.1 million U.S. government personnel files disappearing, being in the hands of an unknown state, or nonstate, actor. This is a treasure trove which during the cold war would have been considered a sufficient shift in the balance of power between the Communist block and the free world to change the outcome of the Cold War!
Kevin: Even before the Cold War. Any kind of dictatorial system understands the power of information. The KGB was one of those groups. But the Gestapo and the SS during World War II – Hitler was manic in many ways, but he was also manic about gathering data on people. Now, who has that information, Dave.
David: I have a very good friend in the security complex in Washington, D.C., dealing with IT and IT security. It is interesting, because just like the volatility index measures the volume of puts and calls and tells you who is concerned or not concerned in the stock market, what we have seen is sort of a yawn as different things have happened around the world, major macroeconomic headwinds, and people just continue to yawn. The same thing is happening on this issue – 22.1 million U.S. government personnel files absconded with, and what is the concern level? Amongst the security and IT community, it is virtually silent. Nothing is happening, nobody cares. If you can imagine, I had this conversation with this gentleman, it is like pretending that Pearl Harbor was a non-event. “Just a couple of ships, don’t worry about it.”
Kevin: “Nothing to see here folks, just move on.”
David: “It’s just bodies, feeding the sharks. Don’t worry about it, it’s not a big deal.” And the main reason I am concerned, because you heard at some of Katherine Archuleta’s first comments in response to this – this is the Director of the Office of Personnel Management – she says, “Right now there is no evidence of criminal usage with the stolen material.” Where would you have that evidence?
Kevin: Right. We don’t even know who has it.
David: Exactly. So, when you say stupid things in response to crisis, your credibility goes way down. And I would encourage listeners to revisit the conversation that we had in December with Nazli Choucri dealing with Internet security and control. It is in the Weekly Commentary archives.
Kevin: Dave, all weekend long I was just contemplating and pondering the power of the word. You know, you look in the Bible and all of creation is a word. Jesus is called The Word. Words have so much power. I think of what we were talking about with Bloomberg – selling an algorithmic system that takes just single words and single phrases and turns them into major block trades on the stock market, either buying or selling based on the understanding of that word.
David: The implied meaning.
Kevin: Yes. Now, you told me something last night that is intriguing, that isn’t going to tell anyone the direction of the market for the next year, so for the person who is really just waiting for the timing signals on the market, you are going to have to put that aside. But enjoy, with David, what he purchased in New York. Because you do – you have this way of treasuring certain things for the right reasons, but it is not necessarily always a good monetary investment choice, is it?
David: I invested in something this past week knowing that I would lose money – knowing that I would lose money, and it still to me seemed like a smart move, and when I looked at it, the fundamental value, to me, is apparent. But, arguing against the purchase was the technicals and the price action, which are awful. I mean, the price is in freefall. What you see is not what you get in this case, and I was looking for comparables on price on the asset in question and couldn’t find any. It is a very scarce item, so the final decision came down to recognizing the bedrock nature of the asset. And again, here is what sort of stacked up against it. I was looking at the changes in technology, and this is not a buggy whip type purchase – not to me, anyway.
Kevin: But it doesn’t come with batteries, either.
David: Exactly. But in the modern digital era it is cumbersome, it is slow, it is irrelevant. Who needs it? Also stacking up against the purchase was looking at the current market’s decline, and again, it is an asset whose price is in freefall. You have bear market dynamics, you have no buyers, no interest. Where is the bid? The price has been falling for the last three to five years consistently, the decline has been well over 50% and if you define a bear market as a decline of over 20%, you’ve got one. You have a bear market in this asset. And I think the last thing was that looking at a shrinking market that is in a shrinking audience, it is a strange and idiosyncratic asset to begin with, and in all likelihood I won’t be getting my money out of it.
Kevin: And you are probably not recommending other people go buy it, which a lot of the investments that you buy, Dave, that is part of your job is to recommend that you go buy it.
Kevin: But this one you are probably going to call a personal choice.
David: So, why do I consider it a smart move? Well, I think the asset is foundational to other things, and the asset has stood the test of time as a source of value, even though its price does not reflect it today. And you could say, “Well, if the price is going down, obviously, the vast majority of people would say it doesn’t have value.” And you’re wrong. The vote of the market discounts the basic qualities that I believe are actually important.
Kevin: Now, by this time in the conversation last night, Dave, I was curious because I had no idea what you were talking about, but there is a store in New York that you turned me on to years ago when I had moved my daughter to New York, and it is hard not to go in there, because there are treasures all over the place. You just have to take the time and have the appreciation of something called “a book.”
David: I walked through a shop in downtown Manhattan, considering an addition to the portfolio, in this case to our library, and as my wife and I have had many long and detailed conversations about legacy, what we desire to craft for future generations, when I saw this it seemed like a no-brainer to me, but in deference to my wife, our relationship, etc….
Kevin: And the money in your pocket.
David: Exactly, and I wanted to check in with Mary-Catherine just the same. And no surprise, she overwhelmingly agreed. What is it? It is the first edition of an Oxford English Dictionary. 1933 was the print, 13 volumes with four volumes to supplement it, which were printed in 1971. I have always wanted to own the two-volume set, and that is with the magnifying glass. What they have done is, they have compiled and condensed all of it into two volumes. The problem is, it is sort of a microfiche encounter. You have these miniature fonts which completely annoy me. It is very unusable. If you lose your magnifying glass you might as well use the books for kindling. You cannot read it without the help of a microscope, practically.
Kevin: I’ve tried that before. I’ve got books that are in that microprint and you never get them out again, so I’m glad you didn’t do that.
David: But what I like about it is, it is the comprehensive, definitive work on the English language. It is the basis for everything else.
Kevin: But you got the full-sized version.
David: When you are building a library, and I think this concept is inspired by our friend Russell Napier, who has developed the Library of Mistakes in Edinburgh, Scotland. It is also, I think, borrowing from and inspired by, Umberto Eco’s 30,000 volume collection. If I took a gander back further in time, you might even say, the early North African libraries which defined the learning centers of those areas.
Kevin: Like Alexandria.
David: Exactly. But then fast forward to this day where books are going the way of the dodo bird.
Kevin: Sure. We have Wikipedia. We have what we need online, any time we need it, Dave.
David: And apparently, the Oxford English Dictionary is also going the way of the dodo bird. Prices of the 1989 version, a 20-volume cloth set, have dropped 54% on the secondhand market, and if you want to order it direct from the Oxford printers it is selling at a 60% discount off of the retail sticker. Listen, I understand, this is not cutting edge technology. But what is it? It is 65,000 printed entries, in 17 volumes, with the history and the evolving usage of each word in the English language. It is like gold to me. It is the basis for everything else. How do you build a library without a dictionary? And we are talking about the dictionary. This is a process that started in 1857 and was not completed until the 1920s, and even then it hadn’t been printed in hardback version until 1933. What was happening in 1933? You have the world’s financial markets which are falling apart. London is a mess. New York is a mess. We are in the middle of a banking crisis. Gold is confiscated in 1933.
Kevin: Standard oil. That’s when they made their mark in the Middle East.
David: And this monumental achievement was being published in hardback, leather bound, beautiful blue Moroccan leather. My set, the set that I bought at The Strand, was the personal copy of the U.S. President of the Oxford University Press. It is in perfect condition. The price is in decline. Am I concerned about losing money? Or do I appreciate its variegated value, its foundational role in our family library, the impact that it has in terms of the life of the mind within our family? And do I, in turn, apply a certain discount to the market appraisal, the judgment of this set as irrelevant?
I walked to the back of the bookstore and there was the 20-volume, cloth-bound book set up high. There was a gentleman there, I’ll just say his name was Ryan, I forget his name exactly. And I said, “I’m just curious, how much is that 20-volume set?” And there was a look of pain, almost mixed with anger, in his eye, and he said, “Well, it’s not right, we’ve had it far too long and we’ve just had to discount it again.” They had dropped their price by half on the cloth-bound version. He looked at me and he said, “But if you are really interested you need to go up to our Rare Book section, because,” and again, he had this pained and angry look on his face, “there is the 17-volume set from 1933…”
Kevin: And this is the leather bound.
David: “And it’s leather bound, and it’s only a few hundred dollars more than the cloth-bound. Well, only if you’re interested.” I said, “I’ll go look.”
Kevin: (laughs) You had told me that this guy had told you that he would go up and just thumb through it, just enjoying it. This is a bibliophile, for sure.
David: Absolutely. And I mean, yes, the price is in decline, but I’m asking the question about what value does the process of learning have, and is there added value in the search, the hunt, through these leather-bound books?
Kevin: Yes, because you can get this online, Dave. I think they have a fee that you pay every year, but you can get the Oxford English Dictionary online any time.
David: $250 a year will get you a subscription to this database and you can search any word at your convenience on any mobile device, for as long as the lines are up and you are, in fact, online. And again, harkening back to United Airlines and the New York Stock Exchange…
Kevin: Wall Street Journal.
David: You hope that you are online when you need to be online. And I think there is a basic insecurity that I have, Kevin, about the stability of the system, as we know it. I think of Joseph Tainter’s book, The Collapse of Complex Societies. We have these huge areas of dependence, and we assume that we will always have the market, the status quo will always be maintained, and maintainable. There can be glitches in the system, which cause for those dependent relationships to all of a sudden compromise vast amounts of data which is critical to normal functioning. I am asking a question about our family library, which is a little bit different, I understand. But I wanted to make sure that it is rooted and grounded, and not dependent in the wrong ways.
Kevin: You know, David, a few weeks ago we had a discussion about Bitcoin and gold. Gold, obviously, has its merits, we don’t have to go through that again. But Bitcoin – we had a lot of responses from people who said, “Now, wait a second, when technology goes down, what about your Bitcoin?” And they are absolutely right, Bitcoin is an interesting concept but it is still incredibly dependent on the system.
David: Right, so at the end of the year, what do I have with my $250 subscription to the Oxford English Dictionary? I have nothing but the memory of the question. What does the word mean? Can I even remember the answer? Who does that? Who even tries to remember the answer when you can access it online quite easily? We don’t even store in our brains the answers to the questions that we have because we have figured out where to get the answer next time, and so we don’t clutter our brains.
Kevin: It’s called outsourcing your memory, Dave.
David: Well, and that can be a problem. It is easier to access in an instant search for the word I need, and I can get it in a nanosecond, but what of the value of leafing through the pages at random? Have you ever been on a walk through the forest and just appreciated the discovery process? Call it an off-trail excursion, where you are aware of the sights, the smells, the sounds, and you’re not on a trail to get from point A to point B, it is just to enjoy the experience of it, and I think there is an enjoyment to the learning process which is being carved out and thrown away.
Kevin: There is something about a process of learning that requires a little bit of an investment, Dave. I’ll give you an example. When you smell an older book, do you know more about that book and more about the history of books than when you just get online and look up the name of the book?
David: It goes back to this issue, Kevin. There is a process to learning. There is a way to get information, and it has a more profound and lasting impact on the person in the process of acquiring it than just doing a word search or a Google inquiry. You are working something out in the process, and as you work it out, there is something of an intrinsic benefit that occurs.
I think one of the reasons why I am fascinated by the Oxford English Dictionary, for the same reasons that I benefitted from a year’s study at Oxford, and the process of learning there was very, very different, working through primary and secondary sources and having to wrestle with concepts, having to work hard to develop a thesis and then be in a position to defend it. That whole process of learning was very critical. And actually, the same thing happened in the development of the Oxford English Dictionary. It was a process, a very long process. The guy who started it – it took him over 40 years and he never even saw the completed edition of the Oxford English Dictionary.
It reminds me in our conversations, because you do some celestial navigation – it reminds me of the value of the sextant, and how, similarly, in our society, no one needs it, no one uses it. Who needs it when you have a GPS on your phone?
Kevin: But you know what is interesting, there is thinking that goes into creating a celestial fix, but there is an aesthetic to it, Dave. There is beauty to it. When you ask a person why they would rather sail a boat than motor around, because you really don’t need sails like you would in the past, most sailors would say, “Well, there is an aesthetic to it. There is a reason. There is an immersion into the environment. There is a requirement for thought.” Celestial navigation is the same way. I have my books out for tonight, actually, to pick out the seven most prominent stars, preset the sextant to it and see if I can actually see them right after the sun goes down, when no one else can see anything, but my sextant will show me where that star is.
David: Your experience in sailing is going to be very different, immersed in your environment, and deeply aware of what is going on than, say, imagining a sailing trip for someone in Lifestyles of the Rich and Famous, or if you wanted to borrow Veblen’s Theory of the Leisure Class. There are people who just get out of the boat and enjoy the wind in their hair and the freedom they have of sipping champagne in a carefree way. Are they immersed in their environment? No, they are not. Are they served well by a GPS? Yes, they are. And a crew to sail that boat for them? Certainly. And that may be appropriate in certain instances.
But what you are describing is really what I am describing in the process of learning from books. You don’t get it all online. You can’t. And what you have online is not necessarily going to always be online. Do you know how to read? Do you know how to think? In your case, do you know how to navigate? We are talking about technology allowing for a greater disconnection with events and the environment that you are in, changing the nature of your encounter, changing the nature of decision-making and the actions that you take, the shifts that have to be made in our daily lives because of our dependence on technology and things being done for us, not inside a thoughtful process. The thoughtful process goes into the algorithm, and then we just assume that autopilot is sufficient. There is an experience that comes from full immersion. Experience is cheapened when you can pay to have it done and have the skills replaced by technological gizmos. Batteries run out. Software and hardware – they can fail.
Kevin: And just to point out, David, you are not anti-technology. You use technology all the time. But you just can’t depend on it, you have to use your brain.
David: Well, that’s right. So, I’m sitting there in the airport wondering about the blessings and the curses of technological dependence and it is a question of confidence in the new versus the old. Confidence in the new, technology, requires a special faith. It expects a hopeful outlook.
I am looking for the reliable. I am looking for the trustworthy. I am looking for the tried and tested and true, or the timeless. I am looking for the definitive measure of value, the bedrock of knowledge. I want a reference point that doesn’t require batteries. Perhaps this is why I am so comfortable with gold. Gold, in the monetary and financial sphere, is a bedrock. It is the basis for everything else. When you come to building to a library, what is the basis for everything else? Libraries are made of books. Books are made of words. To understand what a word is, and what it can be, you have to have something as basic as a dictionary. To me, you are talking about real money. You are talking about, again, the standard for things.
Kevin: Well, Dave, the market did re-open. Technology came back. United Airline’s screens came back on. The Wall Street Journal went back online. But what if it hadn’t? And I guess that is the question. I am not trying to talk about some apocalyptic end of all technology, but if it hadn’t, would people have felt vulnerable the next morning?
David: No, again, Kevin, I think it is just the question of, what is the basis for things? And my reference point for money, for wealth, for the financial markets, is, and has been, the basis for those markets for 3,000-5,000 years. It has been the unchangeable thing. What is a word? What is a book? What is a library? What is the basis of our understanding of these things?
Again, I think as you return to the basis there is a great degree of comfort in understanding them, in appreciating them, in surrounding yourself with them. The markets today judge books, not only by their cover, but even by their relevance given their physical substance, and they are discounted because it can all be gotten on Kindle or some other hand-held device.
The question I was struck by, sitting in the airport, and I linger over still, is this issue of dependence. Technology is not bad, it is very good, but it can create unhealthy levels of dependence. I want a reference point that doesn’t require batteries.