What is happening?

A lot is happening very quickly.

The initial conditions at the onset of the pandemic — in domestic and international political economy — are quite germane.

And the extraordinary scale, scope, and speed of the monetary and fiscal responses carry a slew of long-term consequences — some known, some unknown; some intended, some not so much.

It’s all quite fluid and the barrage of headlines makes it difficult to turn one’s attention from the immediate to the long term … triply so when schools are closed.

But here are six thoughts I’ve been pondering about the world we may enter after the pandemic subsides and we’re allowed to leave our houses again.


1. The Debt Trap

I don’t think rates will normalize in my lifetime.*

Why?

There is too much debt and there is not enough growth. (These two things are related).

Companies — whether investment grade or junk — can’t afford to pay higher rates, and bondholders can’t absorb downgrades (e.g., pension mandates that require disposals of non-investment grade credit).

It’s a pickle. The Federal Reserve’s response to crises (expanding the assets on its balance sheet) entails the creation of more debt.

We’re sandwiched.

The system cannot function with higher rates.

Companies can’t roll over their debts. The country is going into a deficit, bigly. There is no escape from zero.

* In theory we should see inflation and thus higher rates — particularly if we’re going to monetize government (and potentially commercial) debt. We’ll see …


2. Farewell to Market Pricing

The volume of leverage in the economy inevitably leads to systemic risks. The Fed stepped in with alacrity last month to create markets where no participants were willing to transact, and to establish a floor on pricing.

As the Fed’s actions in the markets become more pervasive and inclusive of more financial instruments (e.g., Treasurys, corporate bonds, MBS, money markets, bridge loans), what happens to price signals?

I think price signals become irrelevant.

The main thing that matters is price stability … as in the price stability of financial assets.

The Fed is putting a floor on pricing because it has to — too much is at stake for market participants and / or market infrastructure to dictate outcomes. The Minsky Moment is on hold … possibly indefinitely.

I think we’re moving away from the era of markets playing a leading role in the flow of funds, to one where the state plays a bigger role.

Beyond the Fed, consider the ~$350B in SBA loans for small businesses that are part of the $2T CARES package. The U.S. Treasury says these loans will be offered at 0.5% interest with a variety of attractive provisions.

Food for thought:

  • Once the infrastructure is in place for the government to underwrite commercial loans, what role will the private banking system play? 
  • Will the SBA turn into something like Brazil’s BNDES (with all the implications that would have)?

3. The Intertwining of Corporate and National Interests

In a world where markets play less of a role in the flow of funds and states play a greater role, corporate managements are likely to decrease their focus on shareholder interests and increase their focus on national interests. (In some cases, the government may be a shareholder). 

In turn, the state is likely to champion chosen corporate objectives.

We’re seeing a clamor to produce PPE, medical equipment, and pharmaceuticals domestically.

But as more people wake up to the diffusion of supply chains for the defense industrial base, I wonder whether aerospace and defense companies’ investment decisions will place less emphasis on NPVs and ROICs, and more on self-sufficiency, resilience, and security of supply.

Or consider the shale complex. There is a confluence of interests amongst the state, producers, labor, and investors to keep shale producers alive. However, the credit intensity of shale injects risks to all parties when oil prices fall below breakeven. Why wouldn’t the Fed or U.S. government backstop shale producers by rolling over their (high yield) debt at concessionary rates, or act as a buyer of last resort to establish a floor on prices?

Food for thought:

  • How will the state use its expanded control over the flow of funds to influence corporate decisions?
  • How will corporations use their ties to the state to shape the markets for labor and capital?
  • Which industries will become “strategic sectors” and / or too big to fail?
  • Is this environment conducive for entrepreneurship, or does it entrench the market position of incumbents?
  • How pervasive would patronage become under this kind of system?

4. Goodbye Globalization, It’s Everyone for Themselves

The financial system is currently organized for globalization and the integration of markets. The dollar is the global currency, and the Fed has become the de facto central bank for the world.

In a world where the United States brings more of its supply chain onshore — and I suspect other countries will do the same — and where the state has greater influence on the flow of funds, does the current system make sense?

I think not.

A shift from specialized production to self-sufficiency would lead to reductions in international trade, FDI, and potentially portfolio capital flows.

Food for thought:

  • Is global dependence on the dollar likely to last in this scenario?
  • What type of financial system will emerge if the world is carved up into trading blocs?
  • How likely are the imposition capital controls and / or tighter restrictions on foreign direct / portfolio investment?

5. Autarky under Anarchy: The Prospects for Peace

The United States can pursue autarky given its resource endowments and scale, but few other countries can. History suggests countries tend to compete for market access and embrace protectionist measures under this scenario.

Food for thought:

  • In recent decades, has the United States supported international institutions or undermined them?
  • Are the relative power positions of large states conducive to peace or conflict?
  • Do the institutions we have for international cooperation — such as the UN — help us to transition from an age of globalization under American leadership to an era of autarky under anarchy?
  • Do the institutions we have for adjudicating trade conflicts — such as the WTO — give us confidence that the world will fairly and / or equitably resolve competitions for market access?

6. The Moment of Maximum Risk

If the casualty projections that the White House shared last night are accurate, then the United States is about to enter the moment of maximum risk.

Many people seem to assume that the United States will have the luxury of dealing with one emergency at a time.

That seems foolish, but it may still be right.

Food for thought:

  • What are the odds of a miscalculation between U.S. and Chinese leadership?
  • What are the odds that a country conducts a cyberattack on U.S. critical infrastructure to hamper Americans’ ability to respond to the disease?
  • How likely is it that a country will use this opportunity to launch an international adventure?
    (There are several hotspots; use your imagination).

What have you been thinking the world might look like after quarantine? I’d love to hear your views. Maybe we could chat over beers on the Zoom? Hit me up.

Regardless, we’re all in this together.

We’re going to need a reservoir of goodwill, and a willingness to find principles of unity on the other side of this.

Stay safe everyone. Peace and health be with you.

Persistence

This originally ran in my company’s monthly-ish newsletter.


A few weeks ago, on a dark, frigid morning, I sat in my car and watched as guys trickled into the Brazilian jiu-jitsu gym where I train.

I didn’t want to be there.

I didn’t want to go inside.

I wanted to go home.

I wanted to hang it all up.

I was so tired … from work, from kids, from a million aggravating and enervating pinpricks that I felt like quitting more than jiu-jitsu.

And in that moment, I thought about the fine line between stamina and stupidity.

It’s right to praise persistence, but shouldn’t we persist in things worth doing?

* * *

Most of the founders who read this newsletter probably started 2020 by defining their goals for the year; and they’re probably throwing themselves at their work with commitment, ingenuity, and optimism.

Honestly, I’ve been stuck in the starting blocks. The near- and long-term objectives are inchoate, and after several years of optimism, the entrepreneurial journey is feeling like a merciless slog through the Sahara. I suspect I’m not alone.

Yes, Portico’s still here, and we’re busy fielding inbound demand. The data suggest we’re on the right track, with visitors to our website growing at a CAGR of 88% since year one, and our audience expanding from 35 to 93 countries.

But still, the azimuth toward a recurring revenue model remains unknown, and the odds of bootstrapping to scale seem long indeed. There’s no discernible Portico Pivot™ on the horizon.

Some people illustrate the benefits of persistence as an exponential growth curve — small efforts compound over time, leading to large returns at time t. As if our lives are money-market funds.

It’s an intuitive concept when applied to one’s own knowledge and capabilities: put in the work, get in the reps, enjoy the gains.

However, it misses the context of industry or market conditions. The latter can dictate the shape and slope of the curve.

For example, you can buy the best surfboard, learn from the best instructors, and have supreme balance and fitness, but there’s no point in surfing on a pond. You need waves.

The tide has been out for a long time in EM private markets. The surf conditions have been poor. I’m scanning the horizon for signs of a swell.

The industry needs an upcycle.

* * *

My dad once gave me framed copies of a prayer and a poem. The prayer was General Douglas MacArthur’s “Build Me a Son” and the poem was John Greenleaf Whittier’s “Don’t Quit.”

Their words become more meaningful as the years tick by and the cinders burn hotter in the furnace of adversity.

My dad injured himself pretty badly when he went through Marine Corps Officer Candidates School. He tried to persist through the program, but he fell during one of the evolutions, tearing most of the ligaments and tendons in his ankle. It was about 10 days before graduation.

He was given a choice: return to civilian life, or wait for the next OCS class and start over from the beginning.

He chose to start over.

One time, he let me in on a secret.

“Buddy, sometimes you have to take it a day at a time, sometimes it’s a meal at a time, and sometimes it’s a step at a time. Just keep taking the next step.”

So, on that cold morning, with an aching body and melancholy in the ascendant, I turned off the ignition, opened the car door, and took the next step.

Globalization in the Age of American Primacy

Four years ago, I drafted a syllabus for a class that I wanted to teach.

It’s a course on international political economy that seeks to tease out how the United States has used its power position to shape the international system — and the states within it — over the last 30 years.

This age of American primacy facilitated a relatively peaceful international environment (at least insofar as there were no wars among great powers), an unprecedented growth in trade and capital flows, and an historic reduction in poverty.

Yet these advancements didn’t proceed without complication:

  • financial crises beset developed and developing countries, alike;
  • questions emerged over the construct of the international system and the suitability of its institutions; and,
  • the exercise of U.S. power alienated numerous countries, all while proving largely ineffective at solving the political and security challenges to the international order.

As the relative power positions were shifting more toward balance than imbalance, the age of American primacy appeared to be coming to an end. As I admonished my hypothetical students in the syllabus:

This matters. The contest for management of the international system will define the conditions in which you build your lives and careers, and it will shape the opportunities available to you in subtle and not-so-subtle ways.

Alas — despite the hours I dedicated to crafting a syllabus — I’ve not yet had the opportunity to teach the course.

(Perhaps I should have spent those hours pitching the idea to more universities instead?)

There’s an outside chance that I could turn this into a book. But rather than sit on the ideas, I thought I’d share them in the hopes of inspiring someone, somewhere to engage in the big questions of our time.

I’ve included an outline of the course below; if you’re keen to peruse the whole syllabus, it’s free to download at the bottom of the post. Let me know what you think!


Outline of the Course

1. Departures / Introduction to the Course

Globalization and American Primacy in a New World Order

2. A New Dawn in Europe — The Reunification of Germany and the Extirpation of Communism in Central & Eastern Europe

3. Democratic Enlargement and the Foundations of a New Global Economy

4. From NAFTA to the Tequila Crisis

Globalization and American Primacy on the March

5. Hot Money — The Asian Financial Crisis, The Ruble Crisis, and The Committee to Save the World

6. 9/11, Operation Iraqi Freedom, and the International System

7. The Rise of China, Emerging Markets, and Bretton Woods II

8. Cracks in the System — The Global Financial Crisis and Its Aftermath

Globalization and American Primacy in Reverse

9. European Disunion — Debt, Austerity, and the End of Unity?

10. China, the Great Rebalancing, and the End of the Commodity Supercycle — From Emerging to Submerging Markets

11. Entropy in the International System

12. Cui bono? Taking Stock of America’s Return on Investment — Who Won, Who Lost, and What It Means for the Future

13. Recap // Key Themes from the Course


Download the syllabus:

Favorite Books of 2019

Is this thing still on?

Fully one year has passed since the last blog post. 

Do people even read blogs anymore? Continue reading “Favorite Books of 2019”

Favorite Books of 2018

I set myself two book-related goals this year: first, I established a target of reading 50 (non-children’s) books. I missed it by some distance. Continue reading “Favorite Books of 2018”

Some Reflections on Entrepreneurship and Life

Two years ago, I quit my job and founded Portico. 

At the time, I questioned the prudence of launching a business catering to an industry in cyclical — and perhaps structural — decline, and markets where fewer and fewer investors seem keen to tread. I mean, all the books say that you’re supposed to ride the wave of a growing industry, or at least choose one in which the customer base isn’t shrinking.

But, the thing about journeys is they start where you’re standing. So, I took the first step with a disregard for the macro and industry cycles. 

Two years later, those founding doubts persist.  Continue reading “Some Reflections on Entrepreneurship and Life”

The Wealth of Nations

Who’s wealthier, a Maasai elder or your average American?

A few years ago, my wife and I enjoyed a marvelous hike through the bush of Tanzania while on safari. After camping in the village of Nainokanoka, we set off early with Moloton, our Maasai guide, and we walked amongst the buffalo, gazelles, wildebeest, and zebra on our way to a campsite at Empakaai, a gorgeous crater lake that legions of flamingos call home.

_DSC0484

It was positively Edenic … I still can’t believe my wife did it while pregnant …

Anyway, as we walked through some of the villages, I noticed an abundance of domesticated animals grazing around the boma— cattle, goats, sheep, chickens.

Since this was a long hike, I had lots of time to get lost in thought. And I kept pondering the question at the top of this page. Continue reading “The Wealth of Nations”

A Reason for Optimism

About four years ago, I wrote a post called “The Reckoning.” In it, I put forward the idea that unsustainable economic trends in the United States would lead to the emergence of populist politics and demagogues.

In the conclusion, I suggested that this incipient “reckoning” was symptomatic of a cleavage between different generations’ perceptions of the world. Basically, (1) that the generation that grew up in the post-World War II era — which by definition is responsible for the state of the union — would be incapable of adapting to a world without American primacy; and, (2) that the generation coming of age in a period of entropy and uncertainty would be willing to take on the shibboleths that have impeded political progress.

I closed with the following: Continue reading “A Reason for Optimism”

Intangible Assets

I’ve been digging through some historical tax receipts data (#NerdAlert) to determine whether investment income — defined as net income from taxable interest, dividends, capital gains, and rent — has been rising as a share of gross income. To my surprise, it has been fairly flat at around 10% in recent years (see Exhibit 1). Continue reading “Intangible Assets”

Favorite Podcast Episodes (2017)

In The Inevitable, Kevin Kelly says that at least 27 new podcasts launch each day. That’s nearly 10,000 per year! And I bet that number has grown since his book was published.

I haven’t looked very hard for a solution, but one of my biggest headaches with podcasts is discovery: finding a new voice / perspective to which I want to listen. Since most podcasts target a niche, then by definition, to each listener, most podcasts are shit. Continue reading “Favorite Podcast Episodes (2017)”