Wealth, War and Wisdom
Review by Christopher Silvester
Reading this book while the world gets to grips with the global credit crisis gives it an added piquancy. Barton Biggs, an erstwhile Morgan Stanley asset manager who was renowned for his published research briefings, is concerned here with two subjects: the wisdom of markets in evaluating global events and the preservation of wealth through the extreme shocks of World War II.
‘History suggests that the rich almost always are too complacent,’ he writes, ‘because they cherish the illusion that when things start to go bad, they will have time to extricate themselves and their wealth. It never works that way.’
Borrowing the notion from James Surowiecki’s The Wisdom of Crowds that groups are more often than not better at decision-making than experts, Biggs seeks to show that several of the world’s stock markets knew better than politicians and commentators when key inflexion points in World War II had been reached. He reminds us that the 1930s was not one monolithic period of economic recession.
The New York and London stock markets had bottomed by 1932 and recovered over the next few years until London’s Financial Times Index ‘had more than doubled to a new all-time high’ by the end of 1936. But the following year both the United States and Britain drifted back into recession.
Once World War II had begun, the London market reached a bottom after the fall of Dunkirk. ‘Somehow investors sensed that it was a watershed event that the core of the British Army had been saved’. With the Battle of Britain, ‘the market realised early on’ that the Germans could not mount an invasion without air superiority.
Similarly, the US market bottomed after the Battle of Midway in 1942 smashed the offensive capability of the Japanese navy. ‘The bottom of a bear market by definition has to be the point of maximum bearishness,’ Biggs explains, ‘and from that point, the news doesn’t actually have to be good, it just has to be less bad than what has already been discounted in prices.’
The market in 1940 did not experience a double bottom. There was ‘one final panic and a buying opportunity for the ages’. After April 1941, despite various setbacks and while newspaper commentators spread gloom, the London stock market ‘perversely but intuitively rallied’ by 24 per cent to its mid-December high, as the prospect of American involvement grew stronger.
The German stock market had anticipated the Nazi victories of 1940, but by the late autumn of 1941 it was ‘somehow sensing’ that ‘the Wehrmacht was about to be bloodied’. After the defeat at Stalingrad at the end of January 1942, the Nazi government imposed controls on stock prices for the remainder of the war.
Any investor wishing to sell shares had to offer them to the Reichsbank at December 1941 prices in exchange for government bonds, the prices of which subsequently collapsed. As Biggs puts it, ‘German wealth was being destroyed not only by the allied bombing campaigns but also by edict.’ (Needless to say, some members of the Nazi elite were smuggling gold ‘to Zurich, Madrid, and to bolt-holes in Argentina and Chile’.
The American public did not, at the time, appreciate the significance of their navy’s victory at the Battle of Midway, though the US stock market did. Stocks were remarkably cheap at the April to May 1942 bottom: dividend yields were three times greater than bond yields, while 30 per cent of stocks on the New York Stock Exchange ‘sold at a price-earning multiple of less than four times 1941 profits, and many sold at a discount to net cash’.
In Japan, the significance of Midway was not understood by either the public or the stock market as a whole. Government propaganda continued to promote the notion of Japanese invincibility. However, the Nomura family, owners of Nomura Securities, gleaned gossip in the tea houses frequented by government officials, while geishas told how their distinguished military customers had failed to return after the battles at Midway and the Coral Sea. The Nomura family ‘began gradually to sell its equity holdings, and even sold short’, later converting the proceeds into land and business enterprises which financed its post-war hegemony in the securities business.
Stock markets in Nazi-occupied Europe experienced mixed consequences. Those in Poland and Czechoslovakia vanished. The Amsterdam stock market survived until August 1944, at which point Dutch equities were higher in real terms than at their 1929 peak and during most of the 1930s, although ‘you couldn’t eat stock certificates’ in the ‘Hunger Winter’ of 1944-45.
Danish stocks rose in line with inflation, while Belgian stocks declined in real terms. In France, during the early years of the German occupation, ‘stocks were the place to be and there was a rampant exchange of tips and inside information about German business interests’, but there was a precipitous decline after the fall of Stalingrad. Biggs concedes that ‘there was not much intuition or wisdom demonstrated by the Paris Bourse!’
But wealth preservation means more than just debating the merits of holding equities at different points in history. In France and Italy, holding land and gold was a better strategy than investing in stocks. Yet in France, holding gold in a bank safe-deposit box was no guarantee against depredation.
The Nazi authorities insisted that all banks report the contents of safe deposit boxes and any gold contained therein was shipped to Germany in exchange for a promissory note, which proved worthless once Nazi government records were destroyed during the fall of Berlin.
In Japan, owning farmland in a country where there were huge monopolies of land proved an asset of limited value, since General MacArthur forced the Japanese agricultural elite to sell at huge discounts and capped the amount of land anyone was allowed to own. (This did not apply to commercial land, so it is an irony that a bomb site in a town or city was worth more than prime agricultural land.
By way of advice to those readers seeking to preserve their wealth, Biggs concludes that 75 per cent of it should be held in equities, but he is not impressed by star asset managers and hedge funds, preferring ‘tilted, refreshed index funds, or even just plain vanilla index funds’. He also recommends owning ‘a farm or a ranch somewhere off the beaten track but which you can get to reasonably quickly and easily… Perhaps its purchase price should amount to five per cent of your net worth’.
Barton Biggs admits he is no historian. All his sources are secondary sources. He dwells a little too much on giving blow-by-blow accounts of specific battles and campaigns of World War II, and he delights in repeating anecdotes about Churchill and others that are already widely known.
Some of his assessments are a little off-beam, for example his laughable description of Sir John Wardlaw-Milne, the self-important Tory backbencher who tabled a censure motion against Churchill’s war leadership in 1942, as ‘a highly regarded statesman’.
The perception given in a foreword by David Swensen, chief investment officer of Yale University, that Biggs writes ‘elegant, wonderfully crafted prose’ is not one that I share. Nonetheless, this book contains fascinating insights and should be valuable to all those who are struggling to put the present financial crisis into perspective.