Milei Goes to Davos

Blame the rich, embrace capitalism...

 

HITLER had 'Mein Kampf', Chairman Mao had his 'Little Red Book', the United Nations have given us Agenda 2030 and their 17 Sustainable Development Goals, writes Tim Price of Price Value Partners.

 

Amid the latter, that word 'sustainable' – though undefined – is doing an awful lot of heavy lifting.

 

The UN promises to promote sustainable agriculture; it plans sustainable management of water; it plans to ensure sustainable energy; it intends to promote sustainable economic growth; it promises sustainable industrialization; it pledges to make cities sustainable; it intends to promote sustainable consumption.

 

By Sustainable Development Goal 14 it has resorted to lazy reiteration, pledging to "Conserve and sustainably use the oceans, seas and marine resources for sustainable development".

 

If recent trends in European government policy in relation to farming, for example, are any guide, then "sustainable agriculture" really translates as "no agriculture". Cue farmers taking to the roads and motorways of Europe to protest against the continued immiseration of their industry, all in the name of a specious commitment to protecting the world from the (likely non-existent) threat of anthropogenic climate change. Mao is believed to have killed anything from 40 to 80 million countrymen by means of starvation, persecution and mass execution. What will the final toll from UN policy be?

 

And then, just for a moment, reality peeped through the veil. For a few minutes at Davos 2024, Argentina's President Milei spoke truth to (delusions of) power. Kate Andrews for 'The Spectator':

 

"...Credit goes to the WEF this year for inviting the antidote to the conference's misguided ideals – and giving him a platform on the centre stage. Argentina's newly elected President Javier Milei's 23-minute speech swiftly and eloquently dismantled the underlying assumption of the Davos conference: that the state and its friends tend to know best. In a total break with the usual platitudes spouted at Davos, Milei opted instead for an unabashed defence of free market capitalism – the only system, he said, which is really 'morally desirable' because of its proved outcomes for people.

 

"The president embraced his previous profession as an economist, starting his speech with a history of global growth and prosperity. What we see is an 'explosion' of growth once capitalism is adopted, he told the audience, which takes the 'shape of a hockey stick' (i.e. an exponential rise). 'Thanks to free enterprise capitalism, the world is now living its best moment' he said. 'Today's world is more free, more rich, more peaceful, and more prosperous than in any other time of human history.'

 

"But Milei has no interest in living in the past: indeed he insisted that his country must provide a contemporary example of what can happen when socialism is implemented. The president is currently working to stabilise the Argentinian economy and prepare the way for classically liberal reforms as he tries to get a grip on the country's inflation rate, which currently sits at over 200 per cent. Argentina should become the warning, he said, for what happens when western countries that 'got rich' off of a 'model of freedom' trade that freedom for the 'road to servitude'.

 

"'The main leaders of the western world have abandoned the model of freedom for different versions of what we call collectivism,' said Milei. 'We're here to tell you that collectivist experiments are never the solution to the problems that afflict the citizens of the world – rather they are the root cause.' These shouldn't be considered extraordinary remarks to hear at an economics conference. Sadly, they are. But his robust attack on socialism was not only a warning to fellow politicians. It was also a warning to business leaders – a call to arms for entrepreneurial 'heroes' to break with the cronyism of political friendships and contracts and to risk the competition of free markets.

 

"Do not live in fear of the 'parasites who live off the state', he insisted. To the disappointment of his critics who keep trying to label the new president as 'far right', Milei was not talking about those who might take benefits or rely on safety nets. Rather, he was talking about the bureaucratic class for whom a big state is necessary to preserve their way of life: a 'political class that wants to 'stay in power and retain its privileges'. It will have made for uneasy listening at a conference like Davos, which is founded on the idea of bringing the state and business into closer partnership."

 

It is difficult not to conclude that the troubles of today's world are largely caused by distant, unaccountable globalist lobby groups populated by psychopaths. Sprinkle in some high profile psychopaths from the corporate sector and the threat to the rest of humanity is all too palpable.

 

How did the rot become so entrenched? As we argue in the book 'Investing Through the Looking Glass', just about everybody played a part, but we would single out bank executives, politicians and central bankers for especial credit in the debacle. Bank executives horribly mismanaged their businesses, but rather than have those businesses painfully restructured and lose their jobs in the process, they pleaded innocence and got politicians and central bankers to bail them out instead. Central bankers then ran with the ball in a game that politicians professed to ignore (namely fiscal stimulus, as opposed to wild monetary experimentation), and brought interest rates to where they sit today. The free market essentially got mugged, twice.

 

Interest rates matter, and it matters that they are set by a free market, and not by clueless technocrats. As James Grant recently put it in his 'Interest Rate Observer':

 

"...interest rates are the traffic signals of a market economy. Turn them all green, as the central bankers did for years on end, and fender benders will eventually clog the intersections.

 

"Interest rates are prices, and prices convey information, but the thoughtful investor will be careful to weigh the calibre of information thus conveyed. Beware the data that embody the intentions of policymakers rather than the objective facts of the marketplace.

 

"The rate of rise in interest rates this year (2022) is the fastest I know of. For context, in the first 10 years of the great bear bond market, 1946-81, the yield on the long-dated Treasury eked out a gain of just 100 basis points, rising to 3¼% from 2¼%. I can think of three reasons, apart from market structure and positioning, to explain this upside lurch. No. 1 is the artificially low level from which it began; the familiar image of a beach ball shooting to the surface of the water comes to mind. No. 2 is the belated recognition of the persistence of a supposedly transient inflation. No. 3 is the recognition, also belated, of the tendency of clustered financial errors to store up credit risk for some future day. The view at Grant's is that the current batch of mistakes had its origin in suppressed interest rates and that the day of reckoning is here, or just around the cyclical bend."

 

We can use a more delicate phrase than an outright mugging, namely "market failure", which puts in an appearance in Yale Endowment CIO David Swensen's excellent guide for individual investors, 'Unconventional Success'.

 

The title is an allusion to Keynes' famous observation that fund managers, courtesy of endemic groupthink, tend to prefer (and to deliver) conventional failure over unconventional success. Swensen himself is famous for steering the Yale endowment through many years of impressive investment returns. He uses "market failure" in the context of a managed fund industry that involves the interaction between sophisticated, profit-seeking providers of financial services and naive, return-seeking consumers of investment products.

 

The drive for profits by Wall Street and the mutual fund industry overwhelms the concept of fiduciary responsibility, leading to an all too predictable outcome: except in an inconsequential number of cases where individuals succeed through unusual skill or unreliable luck, the powerful financial services industry exploits vulnerable individual investors. To Swensen,

 

"The ownership structure of a fund management company plays a role in determining the likelihood of investor success. Mutual fund investors face the greatest challenge with investment management companies that provide returns to public shareholders or that funnel profits to a corporate parent – situations that place the conflict between profit generation and fiduciary responsibility in high relief. When a funds management subsidiary reports to a multiline financial services company, the scope for abuse of investor capital broadens dramatically. In contrast, private for-profit investment management organizations enjoy the option of playing the role of a benevolent capitalist, mitigating the drive for profits with concern for investor returns."

 

The financial crisis of 2007-? has taken the role of giant vampiric money-squids masquerading as investment banks to new levels of surrealism quite beyond the realm of satire. Not content with ripping the faces off clients, banks – not limited in the scope of their operations to pure investment banking – have now shown themselves quite adept at ripping the faces off taxpayers too. If deficit exists, it is not in free market terms, because as we have seen, no such free market exists. The deficit is rather a political and regulatory one. It took 10 years or so for the waves of popular anger at the banking bailouts to wash onto the shore of popular opinion, but they eventually landed all the same. First Brexit and then the election of Donald Trump were just two of the belated consequences.

 

The remedy, were executives and voters alike willing to behave like grown-ups, would be to return to the sort of managerial culture cited in the Hopper brothers' magisterial study of the American economic golden age, 'The Puritan Gift' (I.B. Tauris & Co, 2009). Such a return would largely banish consultants and supposed experts from the body politic and corporate, and reintroduce the iron concept of personal responsibility. The Hopper brothers' Principle Seven for good corporate practice states unequivocally: one man, one boss. No sheltering amongst multiple co-heads and amongst collective (lack of) responsibility.

 

In 'The Puritan Gift', the Hopper brothers also identify the proximate cause for the crisis as

 

"..an excess of borrowing by government, businesses and individuals.. Increasingly, reckless lending and borrowing – two sides of the same coin – have characterized most aspects of American [and western] society for the last thirty years..

 

"This abuse of credit across the whole of society coincided with, and could not have occurred without, a deterioration in corporate culture occurring in the last third of the twentieth century. In the Golden Age of Management (1920 – 1970), executives had learned the craft of management "on the job" from more senior colleagues. As they progressed up the ladder of promotion, they would also absorb "domain knowledge" about the activity for which they were responsible – to borrow a term favoured by Jeff Immelt, [the now discredited] chairman and chief executive of General Electric. Starting in the late 1960s, however, a new concept appeared on the corporate scene: that management was a profession like medicine, dentistry or the law, which people were "licensed" to practise at the highest level if they had studied the subject in an academic setting. Business school graduates and accountants set the pattern of behaviour; others would follow in their footsteps. In 2001 a "professional" manager entered the Oval Office of the White House to take charge of the nation."

 

Whether considering the managers of listed businesses or the managers of discretionary funds, investors should be well served by identifying those conforming to a moral as opposed to a purely self-interested approach. Decent moral behaviour is to a degree subjective, but as Justice Potter Stewart famously said of pornography, we know it when we see it. Reforming banking sector pay will only be the start of an overdue cleansing of the Augean stables. When banks compete properly for business and run the risk of genuine failure in so doing, the market will be on its way to being fixed. But as things stand, banks in collusion with central banks are distorting the term structure of debt markets (and through inflationism, all other asset markets too) and giving investors a delusional sense of safety with regard to sovereign bonds.

 

Both financial signals and financial signalling are all wrong. When monetary policy rates and supposedly market-led interest rates are as low as they currently are it is not a sign of confidence, but rather a reflection of absolute terror on the part of the crippled institutions that have been buying them in preference to any form of more constructive lending or investment. It is a moot point as to whether the next financial crisis is now upon us, in the form of imminent financial failures by US and / or Euro zone banks and perhaps German or Italian insurers and pension funds. We would argue, rather, that the last financial crisis never got resolved in the first place. The answer, we conclude, is now to avoid paper promises by bankrupt states and institutions entirely, and to seek value in sensibly priced real assets, notably highly cash-generative but lightly indebted commodity-related companies. It's an ill form of inflation that does nobody any good.