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Equity Nation, Hansa, Commodities, DOGE, LLMS, Recessions, AI, Rhodes, The GFC

Byrne Hobart Byrne Hobart

Longreads

Books

A preposterously wealthy South African magnate achieves unprecedented political influence in the most powerful country on earth, and embarks on risky and highly controversial business/political adventures while flirting with the far right. Everything old is new again, because this is an accurate description of Cecil Rhodes, eponymous founder of both the Rhodes Scholarship and Rhodesia, and organizer of the De Beers' diamond monopoly. A mixed bag.

What's striking in this book is that, at least in Africa, the British Empire was eager to outsource conquest to what was basically the private sector. This was partly a way to ensure that the empire was conquering places that would be lucrative to rule, and partly a way to tamp down international tensions—there was a difference between Her Majesty ordering an incursion into land controlled by Portugal or Germany and a private company sending some well-armed prospectors in the same direction. At the time, there was a sort of two-track diplomacy, where European powers treaded lightly with one another, but tended to treat local governments as being under the personal ownership and control of tribal leaders, whom they could bribe or lie to with impunity. And, given the technology gap, that was basically the case: a private British company could win a war against a local tribe, even if it wasn't the highest-ROI approach.

Rhodes had a simple personal life: no marriage, no kids. There was a young man who worked for his company, shared a house with Rhodes, was the sole beneficiary named in Rhodes' will, etc., a series of decisions that Rhodes' contemporaries politely pretended to find baffling. (That man died in a horse-riding accident, and Rhodes does not seem to have had another relationship like it.) So Rhodes was able to devote all of his time and energy to making money, turning it into opportunities for the British Empire to expand, and then turning these newly-conquered territories into opportunities for further financial gain.

This was often an extremely brutal process. One of the notable incidents in the book is a good example of why trust in elites matters: Rhodes and his Chartered Company have used a pretext to take over the lands of the Ndebele, a tribe they’d previously had a treaty with, and the soldiers Rhodes recruited have been promised cows and land, both of which they expropriate. But around the same time, there’s a disease outbreak among the cattle, and the British, being fairly up-to-date on medical science, start culling herds, both their own and the remaining ones still held by the Ndebele. The Ndebele, of course, see this as a British scheme to kill the cows they haven’t taken in order to make their loot more valuable. Governments at many times in history have been limited in how they can respond to pandemics because they’ve taken reputation-destroying shortcuts.

Semi-privatized empire-building is a model that's shown up at many times in history. Rome's conquests had elements of this, Alexander the Great and Napoleon were constantly conquering places that had enough precious metals to pay their soldiers, and United Fruit works as a more recent example. What tends to happen to this model is that there's an upfront return, but maintaining a mercenary military force over long periods is expensive. So they expand, and use either loot or (more recently) the capitalized value of the returns they expect from their newly-conquered territory as funding. But eventually, the model just runs out of steam.

Diary of a Very Bad Year: Interviews with an Anonymous Hedge Fund Manager: One of the newer entries in the finance book canon, this is a collection of interviews in which a non-financial writer talks to a portfolio manager at a multi-strategy hedge fund, starting during the early rumblings of the financial crisis and extending through the point where markets were recovering and the broader economy was, at least, getting worse more slowly.

One of the questions I like to ask about any business book is: why did this very well-informed source leak so much alpha to a journalist? The null hypothesis is that people love talking about things they're good at to an interested audience (signaling you have alpha is a pretty great way to attract more), and they like to set a narrative where they're not the party responsible for whatever went wrong. But in this book's case, I think another live possibility is that the pseudonymous fund manager in question wanted to get as much practice as possible ahead of chats with limited partners who were pulling capital, and having an opportunity to walk through the mechanics of a financial crisis in terms a less sophisticated person could understand was a valuable one.

The structure of the book is that it’s a series of point-in-time interviews—the author very helpfully includes a few macro stats, including credit spreads, at the start of each chapter. So part of what you’re getting is a look at how someone’s thinking evolves as the crisis gets worse: the hedge fund manager underestimates just how bad the market will get early on, but he does make some prescient calls about things like risks to the euro (he’s worried about Italy rather than Greece, but has the right general worry), and that it takes a while for the credit cycle to restart after a big crisis. And he mentions that one negative scenario is the US’s credit rating getting downgraded, though he imagines this as a much more apocalyptic scenario than it turned out to be. This is always one of the hard things about learning from market history: the easiest way to anchor the start or end of an economic cycle is by looking at big market turns, so it’s very helpful to read someone talking about the market in mid-2009 and wondering whether it’s a bear market rally or a real recovery.

That’s not the only time the book talks about retrospective information gaps. There’s a fun bit about the collapse of Madoff’s fund, where the manager being interviewed wasn’t familiar with Madoff, but the day of the collapse he asks a colleague, who has a similar strategy to the one Madoff claimed, whether a Madoff liquidation will affect the market. That colleague says that Madoff was obviously a ponzi scheme and that there’s nothing to liquidate. “What was incredible was that it was one of those situations where kind of everybody knew except the people who needed to know.”

One of the better digressions in the book is on the question of: where did all the money go? The first crash I was aware of was the dot-coms, and at the time the answer to that question was: most of the trillions of dollars of market value that got wiped out didn't really exist in the first place, except by inference. Companies with low floats can have high theoretical values that in no way reflect what the business would sell for in a private transaction, not to mention where it would trade once the lockup expired. Credit is different, and there isn't a concept of "free float"—every dollar raised in credit markets is a dollar someone once had and no longer does, and that dollar had to pass through some chain of custody resulting in the borrower being unable to return it to the lender later on. The book's interviewee traces all of this and says that it ultimately ended up in the hands of the people who did the work that wouldn't otherwise have gotten done: structuring and selling mortgage-backed securities, sure, but also selling mortgages, selling houses, building houses, extracting the natural resources required to do that. You can't really seize the retrospective consumption of the marginal seller of inputs we turned out not to need. So that's where the money goes: somebody spent it, and they were almost certainly so disconnected from the bad decisions that it doesn't make any sense for them to have to pay.

(Stay tuned for more on Diary of a Very Bad Year.)

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