Perspective is gold

Drink enough wine, drink enough tea, kiss enough frogs. With time, experiences arrange themselves along a scale, the finer ones appearing even finer than the first time, the bottom tier going from “thinkable” to “unthinkable”. 

Having access to the entire scale of something adds a whole new dimension to your knowledge.

Investment-wise, having seen enough economic and financial cycles, and being able to pin point your current place, you’ll be in a qualitatively different position to assess the relevance, risk and value of a single piece of information.


Length: 10 minutes

Topic: deep time, the cycles and pendulums of history, the importance of perspective to gauge your actual state, and guide your long-term action and investments

The catch: You need perspective to appreciate perspective.

Bonus: if you’re Swedish, listen to episodes 102 and 103 of my podcast “25 minuter” that both deal with the book The Fourth Turning, its implications and how you can prepare


Breaking news: the US has left the gold standard

-that’s why there is an epic bull market in 2017

On August 15, 1971, president Nixon decided it was about time the U.S. abandoned the gold standard. That was a dick move. Unfortunately I didn’t recognize that, even when I got it stamped on my forehead in school.

I started business school in August 1990, almost to the date 19 years after Nixon’s most criminal act. Those 19 years dealt me a severe blow, since when I studied the breaking up of the gold standard in college, I erreneously thought of 1971 as ancient history.

In other words, in 1990 more than my entire life separated me from the fall of 1971. That myopia made me disregard gold matters as irrelevant. Now, with more perspective, it’s almost as if 1971 and 1990 took place more or less at the same time. Another interesting observation is that the ink of the Bretton Woods agreement had barely dried when it was nullified just 13 years after its full implementation in 1958.

When I was younger I tended to think of historical things, of laws, of institutions as eternal, and historical people as different from modern people. Eventually I realized they were just like us, and their decisions and institutions just as ad hoc, flimsy, desperate and ephemeral as the retarded measures we now in real time witness the central bankers take today.


The below picture shows the life span of a long-lived person born around the time of The Great War, aka World War I. The second line is my own life span (if I only live to a hundred, rather than forever). The minuscule time, admittedly not quite to scale, between the gold coup and my starting business school is marked with a ‘micro’ sign. Notice how close to today even the World Wars seem, when compared to a life or two.

The question marks mean that nobody actively remembers the history or future outside a long life span.


Ahhh, the golden 1990’s — how modern they were

I think I instinctively considered the gold standard a barbarous relic, relying on an expensive metal and a post-war agreement (Bretton Woods) — one thing more ancient than the other

In my view, the whole business of “gold standard, no gold standard” had taken place in a whole different era than the 1980’s in which I had spent the entirety of my young adult years — or, for that matter, the truly modern and promising 1990s that had finally kicked off the countdown to the new millennium.

yours truly, 1993 1991

Book tip: Ready Player One, if you want to relive the 80’s and don’t mind some teen science fiction action.


News flash: the USD has dropped by 97% since Nixon’s coup

Today it’s been 27 years since I started studying finance and first learned about the breaking of the dollar-gold bond at 35 USD per ounce. Since then the dollar has lost 97% of its value, as gold is now changing hands at some 1300 USD per ounce.

I no longer think of my college years as that far away, and I actually feel the early 1970’s are pretty close too. They’re not history anymore, but rather part of my own first hand economics life experience.

My perspective took time, yours doesn’t have to

I’ve gained quite a bit of perspective managing a hedge fund through the roller coaster years of 2000-2015, not to mention being an IT and internet analyst during the dotcom bubble of 1994-2000. As an added extra I got to experience first hand how the Swedish central bank raised its policy rate from 25% to 75% and finally 500% in September 1992, in a futile attempt to defend the Swedish Krona. I’m sure they felt just as invincible and smart as the Bernankes, Kurodas, Draghis and Yellens of today.

If I only had had that perspective in 1990, I would have paid more attention. I would have understood the relevance of both the beginnings and the end of the Bretton Woods agreement. I had the opportunity to learn crucial lessons about money, but botched it due to a lack of perspective. Because of that, most of my time as an investment professional I had a muddled view of the credit cycle, of interest rates, of the mechanics and incentives of central bankers, of how money is made, how it sloshes around in search of a resting place it can never find*, how money, debt and interest rates control everything in nominal terms, but nothing in real terms (except temporarily).

Experience and perspective is the hidden assumption behind my 12 pillars of investment wisdom (the TAOS framework). You just can’t be expected to master or understand them unless you have enough perspective.

* A perspective on cash: all money is always money, until it is officially retired. All cash created always exists forever on the sidelines, since any cash purchase immediately lands the cash in the pocket or bank account of the seller. The same goes for securities, where all stocks are always held by somebody, and can thus in aggregate never be held in excess or vice versa. Money can chase stocks in a never ceasing whirlwind of higher prices, or stocks can chase cash in a death spiral of a price crash. All the stocks and all the cash nevertheless are all always there, never on the sidelines, never more buyers than sellers, just more or less eager ones.


The 12 pillars of TAOS:

StrategyPatienceResilienceEnduranceZealZenAgilityTemperatenessUnbiasednessResolutenessAdequateness, and Self-analysis.


Perspective

Here’s the catch-22 with perspective: You don’t appreciate its value if you don’t have it…, so why would you bother getting it in the first place?

Once you catch on to the concept and its usefulness you just can’t get enough of it, but how do you make that first spark fly without wasting decades on actual experience? Unfortunately, I don’t have a definitive answer on how to ignite an appetite for perspective. However, getting it is a little more straight forward.

Read

Read economic history. Read biographies. Talk to older people. Hang out with groups outside your typical sand box of clones. Visit other countries, and study long term charts of macroeconomic data. “Long term” means many decades, if not hundreds of years, not just 5-10 years. See if you can pick out any useful recurring patterns, cyclicality if you will, in growth, productivity, inflation, interest rates, gini coefficients and the price of gold, oil and other commodities.

Specifically I would like to recommend the following books:

  • 4th Turning
  • Signals
  • Lords Of Finance
  • Tomorrow’s Gold
  • Bull!
  • The Great Crash
  • Reminiscences Of A Stock Operator

The Fourth Turning and other views of history as a cycle or pendulum

The Fourth Turning by Strauss and Howe tells a story of “cyclical time” rather than linear time. It tells a story of recurring patterns of calm, prosperity, turmoil, crises and rebirth. It tells a story of how generations shape society and society shapes generations.

The main tenet of the theory is that big events, like the second world war, e.g., affect young people in a certain way, adults in another, middle-aged people in a third and older leaders in a fourth and final way. The young people grow up as a certain generational archetype due to their common experiences during the crisis. They then shape society as well as the next generation in a certain way, thus creating the second generational archetype. This process continues for a third and a fourth archetype.

When the four archetypes are thus arranged in a certain way, and the former crisis has been forgotten, the society is predisposed for decisive action when triggered by a major event. One thing leads to another in that environment and a new crisis takes hold, breaking down old dysfunctional institutions to make way for new.

Just as there are four generational archetypes, there are four societal moods,or “turnings”. When gen1 are children, gen2 are adults, gen3 middle-aged and gen4 are elders, history is ripe for a fourth turning, a period of crisis. Each generation spans some  20-25 years, as do each turning. Once the generations move one step out of the crisis constellation, the fourth turning’s climactic end yields to first the first turning, then the second and finally the third. Then it starts all over again.

I don’t expect society as a whole to learn, but a few select individuals can take advantage of the rhythmical variations.


There are many other, more or less similar, depictions of recurring patterns in deep time, a pattern that is often overlooked due to taking place at time scales just outside the normal attention of a long lived single human. What history forgets, history repeats.

If you make sure to remember the patterns of history, something completely different than memorizing dates, presidents, kings and wars in school, you could gain an enormous advantage, not least as a long term investor.


Flatland

There is a movie called “Flatland”. No, don’t see it, it’s awful! It does convey an important lesson on perspective though:

Flatland takes place in a two-dimensional world. The main character has a dream about visiting 1D-land and how he finds their lack of perspective unfathomable. He in his turn is visited by a sphere from 3D-land, a divine entity that can move perpendicularly to his entire 2D world, magically appearing and disappearing, as well as moving from room to room without opening any doors. 2D guy has a very hard time wrapping his head around the concept of a 3D perspective but once he sees it he’s mesmerized.

Now, imagine being visited by a 4-dimensional creature that can appear and disappear in space, that can move from room to room with closed doors by entering into a fourth dimension outside our three, repositioning itself and entering another room seemingly from nowhere.

That’s the kind of perspective knowing your deep history can give you. That’s the kind of powers being able to pinpoint where we are in cyclical time can get you.


Summary – you may not know it but you need and want perspective

Did you know nation states are a quite recent innovation? Are you aware that state pension systems are designed in a way that a snow ball in hell stands a better chance at survival than they do — in particular with low interest rates? Equities are significantly more expensive today than at any other point in history, despite lower growth potential – why do you think that is? The Fourth Turning probably started in 2008. Typically, institutions such as the UN, the EU, the USD and many more would crumble as we get closer to the 4T climax around 2025-2030.

Do you think you know enough about how to handle a future of automation, job death, no pensions, a failed dollar, more authoritarian government etc? Do you have sustainable plans for your career and for your investments?

If not, it’s high time you gained some perspective of deep time, the changes that may or may not come, and what skill sets and preparations could lend you the upper hand.

Good luck!


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14 Comments

  1. Great post (as usual)! As a 20-something I just want to thank you for providing TREMENDOUS value for free, when you could easily monetize it. I truly appreciate it and I am sure many do as well
    Greetings from Portugal

  2. Was actually disappointed that you didn’t take your thoughts on the end of a gold-backed dollar further. Can fiat exist for another century or is to doomed to failure? Is going back to gold possible or even a good idea. What about bitcoin? What is the future of money?

  3. A 37:1 increase in the price of gold does not mean the dollar has devalued 97%. According the Consumer Price Index, the dollar devalued about 83% between 1971 and 2017, i.e. a six-fold price increase. The actual price increase is more like ten-fold (figures after 1996 have not been accurately reported) but the high price of gold is driven much more by speculation than by the devaluation of the dollar.

    But there wasn’t really a gold standard before Nixon; FDR killed it in 1933. Even before then, the US$ wasn’t really the “sound money” that is often imagined, nor was it the whole money supply of the USA. It was Ronald Reagan’s fiscal policies that made systemic inflation a permanent feature of the US economy.

    • Perspective is important here too. Most of that inflation was the first 10 years — 1971-82. If the dollar was going to be un-backed, oil countries demanded a lot more of them. The price doubled a few times.

      I lived thru those times. It was chaos as business adjusted. You could park your money in a bank account for 5-7% interest, so inflation was at least that high for 10 years.

      If you earned your money after that, you haven’t lost that much purchasing power. Avoid doctors, college tuition and buy your house and you might actually see deflation.

  4. A lot (perhaps all) professional investors should be humbled by the scale of this bull market. I’ve heard exactly zero who expected it to run this long. Many still don’t understand the role of money printing.

    As an American who has retired relatively young, I spend a lot of time thinking about what happens if they destroy the dollar. How could my modest savings be protected? Here is what I’ve come up with.

    Nothing will happen suddenly. There is no successor waiting in the wings. China — at least 3 decades away. Their bad debt levels are extremely high, and they don’t want a strong currency. They want a weak one. Japan, the UK, and the EU are all a flaming mess. I believe the stress will hit each of these first.

    Each time there is a crisis, investment funds come running to the US “safe” haven. As financial crisis go around the world, US assets will be bid, not sold.

  5. Your analysis process sounds a lot like Ray Dalio lays out in his new book Principles.

    • And the fundamental premise will remain intact.

      “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance.”

  6. I totally agree with what you point out in this post. The more books I read, both fiction and non-fiction, the more I realize I have to keep reminding myself the importance of trying to see the bigger picture.

    Regarding the different turnings do you really think that institutions worry about if they are doomed by 2025-2030 and take precautions already today? As you mentioned ” Eventually I realized they were just like us, and their decisions and institutions just as ad hoc, flimsy, desperate and ephemeral as the retarded measures we now in real time witness the central bankers take today.” Maybe some might at least consider the possibility and then on New Years Eve 2030 they think “It is really different this time” as nothing have happened. Then 5 years later they are gone and the reason for the delay is that the time frame of 25-30 years is based on the average lenght of a generation. We get older and older and get our first child later so this turning time frame should also get longer? Or maybe it time for me to step back and get some perspective on this :)

  7. Great article about perspective and funny how the comment section gives you even extra perspective to the article! Great blog, keep posting! Älskar också din podcast som har gett mig ett helt annat perspektiv på livet som troligen hade dröjt mycket längre om jag inte hittat den. Fortsätt gärna med den också;)

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