Whose High Horse?

The sin of doing nothing is the deadliest of all the seven sins. It has been said that for evil men to accomplish their purpose it is only necessary that good men should do nothing.”

Reverend Charles F. Aked[1]

“God always rides a lame horse and carves on rotten wood.”     

                                  Martin Luther

His comments at the National Prayer Breakfast offered two elements at which Obama excels – first, some statements of general principle, designed to demonstrate his generosity and reasonableness, followed by a brief but shocking aside to signal his true feelings to his base. In the aftermath, critics on the right have been predictably outraged at the peek behind the curtain, while useful idiots on the left have defended President Obama’s historical perspective.

The President’s request to Congress for an Authorization of Military Force resolution was also vintage Obama, beginning with a strongly-stated case of the dangers posed by ISIL, followed by a specific non-authorization of “enduring offensive ground combat operations,” proceeding to a three-year hard deadline, and ending by repealing the 2002 authorization of force against Iraq, thus in effect more constraining the actions of this and future Presidents than enabling them. Unclear ends to be achieved by limited and probably insufficient means, with an exit timetable in place regardless of the future facts on the ground.

Think for a moment about what Obama would have said had he been President at the time of Pearl Harbor. I imagine it might have been something like this:

‘Yesterday, December 7, 1941, a date that should serve as a prompt to reflect upon our own past offences against persons of color at home and abroad, naval and air forces associated with the Greater East Asia Co-Prosperity Sphere made an unscheduled visit to our installations at Pearl Harbor, Oahu, facilities that must remind us of our own shameful history of neo-colonial aggression. Lest we get up on our high horse, it will be recorded that the distance from the administrative center of the Co-Prosperity Sphere to the Hawaiian Islands is actually less than that to the center of our own capital of Washington, DC. This makes it obvious that we must ask the question, whose interests stop where? Let’s not confuse our own narrow self interest with some sort of moral crusade, especially against a nation with which we have such a special history of positive engagement, going back to an earlier act of outreach by a great leader of the other party. If Teddy Roosevelt could so generously reach out to Japan in 1908, sending our brave sailors on a mission of peace, not conquest, surely we can find common ground in 1941, especially when we ourselves have, perhaps unwisely, contributed greatly to tensions by imposing a needless embargo on the steel and oil that our neighbors across the Pacific need to grow their own economy and provide opportunities for their own young people. We are better that that.’

Fighting a war requires clarity of purpose, determination and mobilization of popular sentiment, all on display in President Franklin Roosevelt’s actual Pearl Harbor address to Congress. It does not require prior moral perfection or a national history free of blemish. Indeed, if those were required prior to any exertion of military force, we would never have fought the Civil War or intervened in Europe during the Great War, and we must surely have allowed the Nazi and Japanese military expansionist regimes to run unchecked, and surrendered the rest of the world to Communism instead of fighting the Cold War.

[1] The classic statement of this principle, “All that is necessary for the triumph of evil is that good men should do nothing,” is attributed to the great Irish parliamentarian Edmund Burke. It is impossible to exaggerate Burke’s contribution to Western thought and modern conservatism. Unfortunately, there is no evidence he ever said or wrote this precise construction of this sentiment.

Je Suis…Qui?

After last week’s brutal attack in Paris on the satirical newspaper Charlie Hebdo, over a million Parisians took to the streets, many of them holding signs reading “Je suis Charlie.” (I am Charlie.) It was at once a defense of the free speech that is a central value of Western civilization, and an act of defiance against the the violent strain of Islam that killed twelve journalists, three policemen, and four shoppers, and which threatens to kill others who “insult the Prophet.”

A day or two after the #JeSuisCharlie hashtag appeared, a second began to make the rounds: #JeSuisAhmed. Ahmed Merabet was the brave Parisian police officer who was murdered by one of the terrorists outside Charlie Hebdo’s offices, shot in the head at close range during their escape. He was Muslim. Ahmed’s brother, also Muslim, made an eloquent plea for calm and tolerance at his funeral service.

At its best, the #JeSuisAhmed meme is a reminder of the tens of millions of decent, kind, hard-working Muslims around the world, including those living in every Western democracy, who behave in ways consistent with democratic (small d) values and do not support terror in any form. May God bless them all.

But many of those copying the #JeSuisAhmed hashtag, and others tweeting #JeNeSuisPasCharlie, do so from an entirely different viewpoint. They aren’t offering Ahmed as another victim of the Paris killers, but as the real victim. The implication of many is that the Charlie Hebdo cartoonists were asking for it. They should have been more prudent. They should have been more culturally sensitive, more respectful of other people’s religious beliefs. They are not the real victims here; the dead policeman who defended such jerks and paid with his life is the only one who deserves our sympathies. He was the tragic collateral damage of an understandable act of religious self-defense.

Ironically, the friend who sent me the #JeSuisAhmed link is an in-your-face atheist, who once referred to my Christian faith as “a science fiction story.” No apparent need for cultural respect there. But then, 21st century American Christians who live in wealthy suburbs do not generally behead, shoot, or blow up their critics.

That Muslim policemen was doing his job. So were the two other police officers who died, whose faith if any is unknown, at least to me. But there is no spontaneous tweeting of #JeSuisFranck or #JeSuisClarissa. Martyred police officers, and others who put themselves in harm’s way in defense of our physical safety and our way of life, are heroes all. The families of the three murdered cops in France are as deserving of our memory, prayers and support as those of Officer Daniel Faulkner of Philadelphia, or such military heroes as CPO Chris Kyle, or Navy diver Robert Stethem.

Yet support for police who are doing their jobs, and opposition to their murder, is not a set of Western values that is at risk. (Well, at least not in Paris. In New York City and Oakland California, maybe, but not in Paris.)

The value that is very much at risk in France and throughout Europe is the right of free expression, unconstrained by threat of violence. So is the ability of French Jews to live in the land of their birth without rational fear of murder. In defense of those values, I echo, “Je suis Charlie.”


Over the next few weeks, I will begin posting again to this blog. I’ve been quiet for two reasons. First, we’ve had lots going on in our business, including an updated edition of one of our two books. Second, and more important, our compliance attorney informed us that we cannot accept comments for this blog or on our other online forums.

Saying I’m unhappy about this is an understatement. While the comments section has never been as active as I might wish, I have found the energetic back-and-forth in the comment threads among the most valuable aspects of writing the blog.

The reason I have to shut down comments is simple. We are concerned about full compliance with regulatory policy. An open discussion carries the possibility that a reader comment might constitute a violation of the SEC’s evolving communications standards.

In simple terms, we need to pre-sanitize the blog to avoid possible trouble with regulators. For those clients who have commented in the past, please know that I value your feedback very much, and I really want to know your thoughts. Please continue to share them with me by email, or just pick up the phone.

More to follow.

Buffett vs. the Technologists, Round II

“The historical track record of old white men crapping on new technology they don’t understand is at, I think, 100%.”

                                         Marc Andreessen, Venture capitalist and Bitcoin investor

Andreessen made his dismissive comment this summer at a forum discussing the future of Bitcoin, a crypto-currency I mentioned in a prior blog. The old white guy he was dissing was Warren Buffett, who had made some comments skeptical of the intrinsic value of Bitcoins.

Andreeseen was technically correct about Buffett’s predictive track record. He just had the value sign wrong. Buffett’s track record of forecasting the value of new technologies is indeed 100%, but the Sage of Omaha has been correct, not incorrect. Back in the late 1990s, Buffett published a comprehensive takedown of the technology bubble in Fortune magazine. At that time, tech enthusiasts dismissed him, indeed often ridiculed him for being old and out of touch. But Buffett was right. Investors in high-flying tech stocks lost most of their money as the tech-heavy NASDAQ index fell by almost 80% between March of 2000 and October of 2002.

Paying respectful attention to Warren Buffett is an intelligence test for any investor. So in trashing Buffett, was Andreesen ignorant, arrogant, or both?

The answer, I suspect, is neither. He was simply, as the tech world puts it, “talking his book.” (Thanks for that phrase, Mike.) Andreessen is a smart guy. He was one of the inventors of Mosaic, the first web browser, and a founder of Netscape. He reaped billions from his early tech career. Now a venture capitalist, he’s recently invested millions in the Bitcoin ecosystem — the range of companies working to provide support services to facilitate the deposit, spending, and transacting of Bitcoins and/or other crypto-currencies.

Most of what is happening around crypto-currencies is absolute nonsense, entirely reminiscent of past bubbles from the tech bubble to the original South Sea bubble in the early 1700s. (A new crypto-currency named after the tooth fairy? Really?) Will any part of the Bitcoin phenomena persist? Hard to say.

What is easier to understand is the overall track record of venture capital since the collapse of the tech bubble. Over the last decade and more, the return on venture capital as an asset class has been roughly zero. (As Jayne Cobb said, “Ten percent of nothing is, let me do the math here, nothing into nothing, carry the nothin’. Nothing.”) That does not mean there have no profitable new technologies. In fact, Andreesen was an early investor in Twitter, Facebook and other key tech plays. But it does suggest that, across the span of new business initiatives, the universe of venture capitalists have been unable to discriminate between promising and dead-end technologies, or perhaps between good and bad business plans. (Some successful first-generation venture capitalists, like Bill Janeway formerly of Warburg Pincus, refer to the approach of many current VCs as “spray and pray.”)

Back in 1997, the last time tech stocks were flying high, I went on a bike trip in France. One of the other cyclists was a famous venture capitalist, whose firm had bankrolled some of the most successful tech breakthroughs of the prior decades. At that time, he was contemplating leaving his firm and starting over, because his partners were not aggressive enough. He wanted to go into the freshman dorms at MIT to fund new Internet startups. Understand that he did not really think those freshmen were likely to have any genuinely valuable business ideas. He simply saw them as a source of new merchandise to peddle to the eager suckers.

This is a capital markets model, not a business model. I suspect part of the reason for the lousy returns may be that venture capitalists have gone from trying to invest in a broad range of technologies that solve actual human problems to trying to manufacture product for credulous investors.

Perhaps I am over-complicating the issue. It may be as simple as too much money chasing too few genuine economic opportunities. In any case, here at TGS we remain entirely comfortable have exactly zero direct exposure to venture capital as an asset class. Or as Jayne would say, “Nothing, carry the nothing. Still nothing.”

Progress on Pensions

This morning I was making my usual tour through my two go-to news aggregation sites, the Markets and Politics sections of the Real Clear franchise. There was a link to an article in the WaPo titled “Gina Raimondo reins in Rhode Island pensions, propelling a bid for governor.”

Since I’ve posted several times on the pension issue, I checked out the article. Several elements of the story seemed especially interesting to me:

1) Raimondo is a Democrat, in a small state entirely dominated by Democrats. She won the gubernatorial nomination over two other Dems supported by the public-sector unions, both of whom opposed her reforms.

2) When she was elected Treasurer in 2010, she began a process of education of the citizens of her state, respecting their intelligence and showing the various stakeholders the consequences for other public-sector spending of the growing costs of pensions. Her message was, “I’m a progressive, and unless we do something now the future costs of pensions will squeeze out other interests (health care, schools, roads) that every progressive must support.”

3) Having won agreement on pension cuts, she remains highly popular. Telling the truth about public finances need not be political suicide.

Just as it is not clear how Chris Christie’s success attacking the issue of unfunded liabilities in New Jersey will translate into success on the national stage, it is also uncertain whether Raimondo’s success will lead other Democrats to follow suit in states with even larger unfunded entitlement problems. (Illinois, New Jersey, Connecticut and Massachusetts are among the worst.)

But it seems possible that voters may be more intelligent and deliberative than most politicians think, and that an electoral conversation based on an honest presentation of the numbers is at least possible. This suggests that our public finances, and the social democratic programs they support, may be endangered, but we are not necessarily doomed.

Cover-Up 1, Tech Support 0

There may be someone still out there who doubts that the IRS targeting of conservative groups was a deliberate strategy with the intent of suppressing political activity. For the rest of us, the news that Lois Lerner’s hard drive “crashed” in 2011, that her emails could not be recovered by tech support, and that the drive was “recycled,” is as damning at it is unsurprising. Her hard drive was not the only one. As Politico reported, “Earlier this week, Ways and Means Republicans said as many as six IRS employees involved in the scandal also lost email in computer crashes, including the former chief of staff for the acting IRS commissioner.”

So here is what we know:

1) The IRS selectively and comprehensively targeted conservative 501(c)4 groups for elevated scrutiny and denial of approval, for a period of several years including the 2012 election cycle.

2) Individuals associated with new conservative 501(c)4 groups were also targeted by the Department of Labor, the EPA, and other Federal agencies.

3) Since this came to light in early 2013, the IRS has stonewalled Congress and the Department of Justice has failed to investigate with even the appearance of seriousness.

I was a Democrat during the Watergate years. Back then, the fact that Nixon abused the powers of the IRS, on a retail basis, to go after individuals he considered political enemies, was immediately recognized, by observers across the political spectrum, as cause for investigation and ultimately grounds for impeachment.

More than a year after this scandal broke, we have no special prosecutor, and the left-wing and mainstream media are largely silent. I have to ask my many friends on the Left — do we really want to support empowering the explicit use of the taxing authority as a means of political intimidation? Will you be OK with this when and if the Republicans eventually win the Presidency?

My essential anguish on this issue is due to the fact that, unlike back in the 1970s, we have lost a bipartisan understanding of what constitutes an abuse of power, and whether it should be punished. The fact that we can no longer agree on whether the law should be uniformly enforced is one of the most frightening aspects of the current climate of political division. To say that most of the media has been more lapdog than watchdog since Obama took office is to rehearse the obvious. (Not everyone. Ron Fournier, a left-leaning journalist who was once an Obama enthusiast, continues to do solid work on the IRS scandal.)


A Tale of Two Kitties

Bill Gross Recently wrote a post about his cat Bob, mourning the loss of a long-time feline companion. Bob followed along wherever Bill went, ever-present, alert and on-guard.

Bandit, one of my two cats, is different. He is a large, black, neutered male. He does not guard anything. Instead, his habit is to lie on the floor right in the middle of the traffic pattern, staring vacantly into space. (Some cats are smart. Not Bandit.)

If you watch Bandit, he seems inactive. Observing his size and girth, you might suspect that his fat has compromised his mobility.

Until he moves. Suddenly, the huge, quiet beast is transformed into a flying ball of fur, a black blur scampering up the stairs chased by the dog, or hurtling around the family room, leaping over furniture and sometimes smashing glassware, in pursuit of our older and smaller cat Millie. (Millicent T. Katt, for those not on a first-name basis.)

Bandit’s apparent inactivity is an illusion. He is simply waiting for his moment, keeping his energy in reserve until some silent alarm goes off in his dim, strange brain, telling him it is time to go. Sometimes I think we should have named him Barkley, after the Round Mound of Rebound who once played for the 76ers. Like Sir Charles, Bandit may look fat, but he has serious hops.

They say pets come to resemble their owners, and vice versa. And maybe not just in appearance.

Bob was quite a lot like his owner Bill Gross, who runs PIMCO, one of the largest bond managers in the world. PIMCO pursues investment advantage within the opportunity set of fixed-income, continuously looking to add a basis point here, two hundredths of a percent there, making the advantages of size, perspective and trade execution gradually accrue returns for their investors.

At our little firm (we run less than one-third of a billion dollars, while PIMCO runs over $2 trillion), we are asset-allocators, like Jeremy Grantham of GMO or Rob Arnott of Research Affiliates. Our advantage is not continuous but episodic. As investors, we spend lots of time sitting and pondering, observing the markets, back-testing different approaches.

But like Bandit, sometimes we move in a hurry. We may react to a threat, when the barking dog of over-valuation chases us partially out of a frothy asset class. (Tech, anyone?) Sometimes we chase the black-and-white cat of investment opportunity, over-loading a cheap asset class in pursuit of gains. Often, we believe our allocation moves may offer both lower risks and higher potential returns.

It is rare when our portfolio adjustments are immediately rewarded. Like the other asset allocators named above, our advantage is usually both delayed and discontinuous. If we buy emerging markets because we think them cheap, it is rare that they begin to out-perform right away. Much more likely is a continued decline.

Sometimes we move quickly, sometimes we wait, and sometimes it is the markets that change fast. But when our results do show up, they are often significant and abrupt. Here is a recent example. For the year ending February 28, U. S. large-cap growth substantially out-performed value, driven in large part by tech stocks:

S&P/Citi Growth: +28.70%

S&P/Citi Value: +21.88%

As you can see, growth had almost a 7% advantage over value. Since we were (as usual) over-weight value, these numbers drove under-performance by the U. S. equity portion of our target portfolio.

But things changed abruptly in March. For the month of March 2014, Large Cap U.S. Growth declined -2.51%, while Large Cap U.S. Value advanced an almost perfectly symmetrical +2.52%, a net swing of 5%. Through last Friday’s close, April saw growth down 3.8% and value down 2.2%. In a bit less than six weeks, a year’s worth of advantage for growth stocks has been reversed.

Of course, any amount of short-term performance surplus or deficit cannot prove a long-term performance advantage or lack thereof. Certainly, I’m not suggesting that these recent numbers demonstrate the likelihood of a continued trend of value out-performance.

What I will observe is that the benefits of asset allocation, when they manifest, often do so significantly and will little prior warning. Let’s enjoy them while they last.