A book by Rothschild's Kevin Gardiner challenges the "glass is half empty" mindset in macroeconomics to explain what he sees as the lessons of the 2008 financial crisis. He goes on to set out what he sees as the smart way to think as an investor.
“If you ask a representative group of private investors whether the global economy is in good shape, few – if any – will raise their hands. (I have now tried this myself with a total sample now reaching into the thousands.) Many people will be amused even to be asked the question: of course the world economy is not in good shape! But if you then ask whether the group can think of a time in recorded history when the average human being has been significantly better off in material terms, more hands will start to rise, but will quickly falter and fall back the net result being very similar to the first question. The point being made is that a short-term focus on disappointing growth, frustratingly slow improvements in labour markets, and volatile financial markets can cause to forget that the underlying levels of some key indicators of human welfare and corporate efficiency are historically very respectable – because as those global GDP data suggest, average human living standards have likely never been higher.”
This paragraph, on page 20 of Kevin Gardiner’s Making Sense of Markets, goes to the heart of one of the central qualities of this arresting and calmly-argued guide to the recent financial turmoil. Gardiner is no Dr Pangloss but his book is an immensely effective counterblast to some of the more “we are all doomed” style of books on finance and economics to have hit the bookstores in the past few years. (I have lost count of the number of tomes predicting the end of free enterprise capitalism, modern banking, or even money itself. Plus ça change.)
As well as a tour around some of the big issues (debt, the financial crisis, worries about greying populations and the like) Gardiner also examines investments and gives advice to the layperson on the limitations of certain investment models and practices. Your reviewer has known Gardiner for the best part of 20 years; he is now chief investment strategist at Rothschild Wealth Management and previously was chief investment officer, Europe, at Barclays Wealth and Investment Management. He has also worked at investment banks as well as the Bank of England.
For this reviewer, perhaps the most effective part of the book is in how Gardiner deals with the narrative of how the West is saddled by crippling debts that are unlikely to be honestly repaid; he also challenges the narrative of how much of the World economy is on a downhill path; he argues that the crisis of 2008 was fundamentally a financial, not an economic crisis: the drivers of economic growth (technology, innovation, etc) haven’t gone away.
Consider how, on page 39, he responds to headlines such as “Global Debt Exceeds $100 Trillion As Governments Binge”. We have all read headlines such as this; the conservative commentator Mark Steyn, for example, likes to point out that the interest the US has to pay on its federal debt is equivalent to roughly what Communist China pays on its defence budget. Across the political spectrum, the weight of debt is a target for ire. Gardiner doesn’t dismiss debt as a worry but he makes this very important point: if there is all this reckless borrowing, then who has been lending? And he notes that if our descendants have to make good our borrowing, to whom will they repay this money? At the level of society as a whole there is no “net debt”. In aggregate, Gardiner says, a “society as a whole cannot be meaningfully insolvent since its financial claims are also its liabilities – collectively we have no creditors”. Of course, he accepts that when some borrowers default this can put other lenders in financial trouble. Even so, there is, Gardiner says, no way of knowing what is the “right” or “wrong” amount of borrowing there should be in an economy. “Our collective wealth is not ultimately financial in nature. Financial assets and liabilities are entitlements and obligations: they do not directly produce anything, or yield the sort of direct satisfaction that tangible treasure such as art or jewellery might." He argues that what really counts is if society’s stock of productive capital is high, and rising. There is a world of difference between a society where debt is used to finance productive investment and hence future goods and services, and debt that is used to finance consumption.
Gardiner also tackles some of the worries about human ageing. As he rightly notes, it speaks a lot of human cussedness that the triumph of modern medicine and lifestyles in enabling people to live longer than their forbears has the Jeremiads all aflutter. Sensible tax and public policy to encourage later retirement, and support for in-work education and training, among other developments, are likely to help fix some of the current workforce worries, he says. He even argues that growth is not all about labour – so if there are fewer youngsters around, that doesn’t mean a more decrepit economy.
Besides all of the forgoing, Gardiner explains how, despite the volatility in financial markets (dotcom boom/bust, housing bubbles, etc), large areas of the non-financial part of the economy got through the 2008 financial crisis in relatively good shape. The big picture, he says, is not one of a global economy swinging from euphoria to deep gloom because of the inflation and contraction of credit; the narrative should read more like a set of accidents and embarrassments. He even notes that nominal GDP growth – output growth and inflation together – has been more muted since financial liberalisation took place. (He writes, quite fairly, that one doesn’t know what would have been the case in a parallel financial universe.)
In challenging some of the conventional narratives around how we
got to our financial state, he also explains his approach to
investment and sets out advice to readers on how to think about
building and saving for the long term. Even an experienced
investor will find this section of the book a useful reframing of
arguments about the limitations of conventional portfolio theory
and asset allocation ideas.
Rational optimism or at least an alternative to gloom, isn’t particularly fashionable at the moment. And in an age when fear stalks the land – worries about war, terrorism, debt and so on – trying to take a different course requires a certain bravery. If investors want to build a sustainable pool of wealth, and if our policymakers want to avoid the traps of easy populism, they can do a lot worse than heed the insights of Gardiner.