SVB 'n ESG 'n VCs...
WE HAD heard the phrase "Get woke, go broke" already, writes Tim Price at PriceValuePartners.
But we are nevertheless indebted to el gato malo for highlighting the role of wokery beyond the call of duty in the recent collapse of Silicon Valley Bank:
"SVB was quite probably 'America's wokest bank'.
"Many had levelled accusations of ponzi, circularity, and self-dealing around it as well esp. around the practice of funding 'social goods' in circular fashion. SVB was an LP in many VC funds. Those VC's would then pressure portfolio companies to take out venture loans from SVB and SVB would, in turn, require those companies to keep their funds at the bank as part of the lending agreement.
"Many of the VC's were engaging in 'invest on ESG and then force adoption of the products through lobbying' crony corporatism.
"There was an awful lot of 'flow of funds to non-economic ends'. They all glom onto this derangement of markets. Why compete when you can mandate?
"But it was all ignored and swept under rugs because you had a pile of raging B's and C's swinging their sub-mediocrity glorifying moral code around their heads like a morning star and preventing criticism or even assessment.
"They all loved it. The politicians loved it. The regulators loved it. Because it was all B's and C's, chosen for mediocrity and ideology, not talent, and no one seemed to see the problem. It's positively soviet.
"But it turns out that 'woke' is not great risk management, but they sure did have a lot of it...and perhaps this is why the very VC's that benefitted from the circular back-pat squads so suddenly turned tail and fled causing a run on the bank for fear of what might be under the covers, because the ringmasters knew it was a clownshow and that these non-real measures of 'success' were empty clothes in want of an emperor.
"The whole self-aggrandizing ecosystem is bankrupt."
Back, briefly, to comedy of another vintage.
Harold Ramis' 1993 film 'Groundhog Day' may well be the funniest thing to come out of the 1990s, apart from Vanilla Ice or New Labour. As most readers will know, the film's narrative has Bill Murray's cynical weatherman finding himself trapped in a surreal existential crisis, and forced to live out the same day over and over again. Pretty soon he begins a plot to seduce his boss, Andie MacDowell, which gives rise to the following exchange:
Him: You weren't in broadcasting or journalism?
Her: Uh-uh. Believe it or not, I studied 19th Century French poetry.
Him: What a waste of time!
The year 2011 gave us something that manages to trounce the original Bill Murray response. In the HBO movie version of Andrew Ross Sorkin's 'Too Big To Fail' (a.k.a. The Last Days of Lehman Brothers), Paul Giamatti (playing The Ben Bernank) tells a roomful of politicians that he spent his entire academic career studying the Great Depression.
Him: What a waste of time!
Even by the standards of Economics, which as we have stated before, as per P.J.O'Rourke's definition, is an entire scientific discipline of not knowing what the hell you're talking about – and there's some question over that use of the adjective 'scientific' – you'd have to be going something to devote an entire academic career to studying the Great Depression, and drawing all the wrong conclusions. A little like devoting an entire career to building a scale model of the Great Wall of China out of matchsticks, and then accidentally falling on it one night, and setting fire to it. Whilst being an idiot.
Here is what we think. More specifically, here is what Murray Rothbard wrote in 1963:
"There are other values in deflation, even in bank runs, which should not be overlooked.
"Banks should no more be exempt from paying their obligations than is any other business. Any interference with their comeuppance via bank runs will establish banks as a specifically privileged group, not obligated to pay their debts, and will lead to later inflations, credit expansions, and depressions.
"And if, as we contend, banks are inherently bankrupt and 'runs' simply reveal that bankruptcy, it is beneficial for the economy for the banking system to be reformed, once and for all, by a thorough purge of the fractional reserve banking system. Such a purge would bring home forcefully to the public the dangers of fractional reserve banking, and, more than any academic theorizing, insure against such banking evils in the future."
Contrary to the received wisdom that interventionist government (under the administration of the ill-fated Herbert Hoover for some years before FDR took the presidency) ameliorates and foreshortens a dismal business depression, Rothbard suggests (in 'America's Great Depression') that the very intervention so clamorously called for (both then, and now) actually extends and amplifies it:
"If government wishes to see a depression ended as quickly as possible, and the economy returned to normal prosperity, what course should it adopt?
"The first and clearest injunction is: don't interfere with the market's adjustment process. The more the government intervenes to delay the market's adjustment, the longer and more gruelling the depression will be, and the more difficult will be the road to complete recovery. Government hampering aggravates and perpetuates the depression. Yet, government depression policy has always (and would have even more today) aggravated the very evils it has loudly tried to cure. If, in fact, we list logically the various ways that government could hamper market adjustment, we will find that we have precisely listed the favourite 'anti-depression' arsenal of government policy."
Thus, here are the ways the adjustment process can be hobbled:
- Prevent or delay liquidation. Lend money to shaky businesses, call on banks to lend further, etc;
- Inflate further. Further inflation blocks the necessary fall in prices, thus delaying adjustment and prolonging depression. Further credit expansion creates more malinvestments, which, in their turn, will have to be liquidated in some later depression. A government "easy money" policy prevents the market's return to the necessary higher interest rates;
- Keep wage rates up. Artificial maintenance of wage rates in a depression insures permanent mass unemployment. Furthermore, in a deflation, when prices are falling, keeping the same amount of money wages means that real wage rates have been pushed higher. In the face of falling business demand, this greatly aggravates the unemployment problem;
- Keep prices up. Keeping prices above their free-market levels will create unsaleable surpluses, and prevent a return to prosperity;
- Stimulate consumption and discourage saving. We have seen that more saving and less consumption would speed recovery; more consumption and less saving aggravate the shortage of saved capital even further. Any increase of taxes and government spending will discourage saving and investment and stimulate consumption, since government spending is all consumption.. Any increase in the relative size of government in the economy.. shifts the societal consumption-investment ratio in favour of consumption, and prolongs the depression;
- Subsidize unemployment.
When too much easy money helped provoke a banking crisis, it is difficult to see how even more of the same can help to resolve it. We can say with certainty that printing money is of itself inflationary. And as Rothbard also said,
"Only governmental inflation can generate a boom-and-bust cycle. The depression will be prolonged and aggravated by inflationist and other interventionary measures. In contrast to the myth of laissez-faire, we have shown [in 'America‟s Great Depression'] how government intervention generated the unsound boom of the 1920s, and how Hoover's new departure aggravated the Great Depression by massive measures of interference.
"The guilt for the Great Depression must, at long last, be lifted from the shoulders of the free-market economy, and placed where it properly belongs: at the doors of politicians, bureaucrats, and the mass of 'enlightened' economists. And in any other depression, past and future, the story will be the same."
The rescue of Silicon Valley Bank has undoubtedly accelerated the arrival of the long-awaited Fed 'pivot' back towards easier monetary policy. Cue even more inflationary pressure.
Meanwhile, a growing number of market observers sceptical of the 'PhD standard' believe that the central bankers are on their way to being replaced – by direct market intervention on the part of governments instead.
The world economy is clearly slowing. Confidence in central bankers is rapidly eroding. Stock markets, in the main, have largely decoupled from economic reality – perma-QE means that liquidity now trumps profitability as a driver of market returns.
Adam Smith in 'Supermoney' expressed the sentiment perfectly:
"We are all at a wonderful ball where the champagne sparkles in every glass and soft laughter falls upon the summer air. We know, by the rules, that at some moment the Black Horsemen will come shattering through the great terrace doors, wreaking vengeance and scattering the survivors. Those who leave early are saved, but the ball is so splendid no-one wants to leave while there is still time, so that everyone keeps asking, 'What time is it? What time is it?' But none of the clocks have any hands."
If you elect to own equities, hold defensive, cash-generative, unindebted, geographically unconstrained 'value'.
Hold uncorrelated assets. (We favour systematic trend-following funds.)
Hold gold and silver.
And will somebody please hold unelected central bankers – and elected government finance officials – accountable for the growing chaos they are inflicting on the financial world before the entire global currency system collapses.