“Manek: How I Beat Everyone During Volatile Summer”
Headline in Investment Week extolling the performance of Jayesh Manek’s Manek Growth Fund, which has so far lost 23.6% during 2011.
This is, at heart, a tale of one tragedy, or two films. Roy Ward Baker’s 1958 classic “A Night To Remember‟ is a simple, heartbreaking gem – an account of the sinking of the Titanic, clearly told, putting on display the culture and ethics of at least one bygone age (1958 and 1912). And it has Kenneth More, who at least in cinematic terms is surely the finest Englishman who ever lived. James Cameron’s 1997 blockbuster is also a product of its time – gaudy but empty spectacle, grotesquely overbudgeted and even more bafflingly materially successful. And it has Leonardo DiCaprio, the fey, cat-faced boy who is almost crushed beneath Kate Winslet in a grotesquely shot coupling sequence devoid of any hint of romanticism.
But the Titanic story also happens to be the perfect encapsulation of our ongoing financial crisis; as The Onion put it, in perhaps its finest ever satirical headline, “WORLD’S LARGEST METAPHOR HITS ICE-BERG”. The “unsinkable” triumph of hubristic faith in (financial) engineering over the natural world sets sail on its maiden voyage buoyed up by mass overconfidence, hits the maritime equivalent of a black swan, and a lot of people end up underwater. A few rich folk get soaked in the process, but it is the lower orders (and the Irish!) that really get stiffed. Plus ça change.
The 1958 version of Titanic is a masterpiece in suspense. It is a rather special achievement to ratchet up the tension in a drama when you already know in advance how it will end. The problem begins with an almost imperceptible shudder. Cutlery gently rattles on a lavishly adorned table. In later sequences oil-stained water idly laps at bedroom doors; dining trolleys slowly wheel away under gravitys pull. The horror of the tragedy lies in its slow, remorseless logic, the lumbering but relentless pace of the nightmare. In Eric Ambler’s superb screenplay, Titanic’s shipbuilder and draughtsman Thomas Andrews Jr. is trying to convey the urgency of the situation to her captain:
Andrews: The pumps are keeping the water down in this boiler room, but the first five compartments are flooding.
Captain Smith: Well, what’s the answer?
Andrews: She’s going to sink, Captain.
Captain Smith: But … She can’t sink. She’s unsinkable.
Andrews: She can’t float. Look … She could float with any three of her first five compartments flooded. She could even float with four of them gone. But she can’t float with all five full up.
Captain Smith: Yes, but …
Andrews: [cuts him off] These watertight bulkheads only go as high as E Deck. The weight of the water in the bow is going to pull her down by the head. So, you’re going to get the fifth compartment overflowing into the sixth; the sixth into the seventh; and so on, as she goes lower. It’s a mathematical certainty. With that amount of underwater damage, she can’t stay afloat … How many people are there on board?
Captain Smith: 2,200 or more. And room in the boats for … ? How many ?
Captain Smith: I don’t think the Board of Trade regulations visualized this situation. Do you ?
Consider that phrase again: It’s a mathematical certainty. For the last forty years, a world economy kept afloat on a bubble of credit has required constant growth, not least to maintain the interest payments on all that debt. Now that the western economies have gone conclusively ex-growth (we would argue), the debt cannot be serviced. Certainly not all of it. It’s a mathematical certainty. If a thing cannot grow exponentially forever, it will not, and it’s only a matter of time. Defining the problem as a euro zone debt problem is somewhat missing the point. It is a global debt problem, and Greece simply looks like being the first nation to be ethnically cleansed from the status quo.
If the behaviour of the stock market is any guide, the current consensus is that Europe’s politicians are still capable of pulling more rabbits out of the hat, and that any Greek default will be an orderly one. The so-called troika of the European Commission, the ECB and the IMF will be able to ring-fence the rest of the euro zone periphery, let alone the core. We’re not so sure. Greece is no more the proximate cause of the crisis than a bucketload of subprime debt was the proximate cause of what transpired in 2008 and has metastasized since. Rather, Greece now, like subprime then, is, in the words of pi Economics’ Tim Lee, “merely the first part of the credit edifice to give way, not the whole story”.
If IMDB is any guide, “A Night To Remember‟ cost an estimated $1,680,000 to make. It is a classic. James Cameron’s iteration cost an estimated $200,000,000 – there’s inflation for you – but took in an even more extraordinary $1.8 billion at the box office. It also won 11 Oscars – proving if nothing else that there really is no accounting for taste, and that William Goldman was right about Hollywood when he suggested that nobody there knows anything. I remember the first time I saw “A Night To Remember”: my brother and I were both kids watching it on TV, but even at a young age, we were capable of appreciating a ripping yarn well made. The film is endlessly rewatchable. I also remember the first and only time I saw “Titanic”, not because of anything that happened on-screen, but for the bizarre reason that during the film, I suddenly noticed, amid the darkness, that my watch had disappeared. (I was probably checking it at intervals, wondering if time had stalled and I had fallen into some kind of movie theatrical purgatory. L’enfer, c’est le Titanic de James Cameron) It transpired that it hadn’t actually been extracted masterfully by the woman in the next seat, but that the strap of my poor Casio G-Shock had had enough of the film and decided to kill itself. I can hardly blame it.
So far, so good. Some good did come of the Titanic disaster. As Roy Ward Baker’s film in its conclusion reminds us, the sacrifice of the 1517 victims was not entirely in vain. There are now lifeboats for all, unceasing radio vigil and the international ice patrol. But as Europe teeters on the brink, what have we learnt about avoiding a catastrophic experience in debt ? Not much, we fear.
But we can wail and gnash our teeth on the sidelines, or we can be proactive. We prefer to be proactive. Our primary objective for our investment clients is capital preservation in real terms. By our thinking, that is today inconsistent with anything close to a 100% allocation to equity markets. Rather we prefer to use other, ideally genuinely uncorrelated, assets, to share the load and to reduce the risk. Amongst them: objectively creditworthy debt (yes, debt), issued by objectively creditworthy countries, quasi-sovereigns and corporates. We can currently own such debt, hedged into a variety of currencies, with an underlying yield to maturity of roughly 8%. With cash rates at zero, who wouldn’t take that yield ? We don’t ignore blue chip or defensive equities, but if there is even the remotest risk of a significant market correction (and if not in the current climate, then when and where ?) we see value in diversification. We also have high conviction in the merits of systematic trend-following funds precisely because they’re not discretionarily managed: the tangible market failure of the so-called “absolute return” sector underlines just how difficult both asset allocation and security selection have become this year. And at the risk of flogging an actually quite lively horse, we see continued merit in the currency- and inflation-insurance attributes of real assets, most notably the monetary metals.
This is not the first time we have cited “A Night To Remember” and the now mythic nature of the Titanic tragedy in the context of our financial markets. It will probably not be the last. Nor are we alone in citing it. The reason is because we’re still trapped in the nightmare, and nobody seems capable of resolving anything, least of all our politicians. A private sector debt disaster morphs into a public sector debt disaster. Economists of various hues engage in a long but futile and essentially binary spat over the pace of returning the state finances toward balance. As we first said at least 18 months ago, anything can now happen. As Second Officer Lightoller remarks at the conclusion of “A Night To Remember”, after an utterly extraordinary human tragedy, this really is different, new territory, for everyone: “Because we were so sure ! Because even though it’s happened, it’s still unbelievable. I don’t think I’ll ever feel sure again, about anything.”
Tim Price is Director of Investment, PFP Wealth Management, London