Book Review: Niall Ferguson's 'The Cash Nexus' Offers Much Needed Perspective

The best way to invest is to arm oneself with information and perspective. Sadly many make the mistake of developing the wrong taste for financial information, preferring junk food to more quality fare. True financial acumen comes from cultivating a proper palate for economic information.

Being a financial information connoisseur isn’t about being a snob or an effete aesthete as many contemporary observers would have you believe, rather it is about having cultivated a sensibility and taste for only the best information in the appropriate doses and from the appropriate sources, judiciously applied at the right time providing the ability to act uniquely and effectively.

Life is too short and precious to spend consuming the junk food swill that is mostly on offer from CNBC, which has qualities associated with an all you can eat Vegas buffet.

CNBC and FoxBusiness are currently fighting a losing battle to the bottom for TV market share. The weapons of choice are female eye candy, gaudy graphics and sophomoric shouting matches strongly advocating buying low and selling high. These tactics endear CNBC and FoxBusiness to neither serious money managers nor the public according to the latest ratings.

One can only guess that the latest policy initiatives must have the producers rubbing their hands with glee, for without them, there is little to kick and scream about in the world of business.

Pete and Bob from Nebraska don’t heat up the broker’s phone upon learning that the TED spread has returned to 2004 levels as has recently happened. They wait for Cramer to hit a buzzer or yell "back up the truck", for that is surely the time for action.

One could argue that real actionable business news and or thoughtful journalism is truly a limited market and that when the current financial storm blows over, the ratings and associated networks will wash out with the tide like so much flotsam and jetsam.

FoxBusiness' latest reported viewership was around 21k and CNBC’s was around 250k. As media business models go, this looks like the weak chasing the sickly in a rather sad affair akin to two carnies fighting over cigarette butts.

Many investors and money managers are certain that an “edge” is to be had by literally being milliseconds ahead of the competition. Unless you are a high frequency algorithmic trader or former Flash Trader/thug, this is most likely untrue.

Perspective and sound judgment are more important than the latest information hit or tip. The big money doesn’t move in milliseconds; its movements are measured in weeks, months and years.

One’s information diet should be proportionately adjusted to the task at hand. An investor - someone with a horizon longer than a thinly sliced twitter tip - should consider a well rounded diet of information for perspective.

If you are investing for the next 20 years you may wish to look back over 100 years to understand what is going on, for there is a 1:5 chance you will be up against a 100 year storm.

Many investor diets are sadly deficient in historical, political and international perspective. Assumptions about equities or debt based on 30 years of history or a single country's returns are hardly akin to an understanding of how political economy or market forces truly work.

Listening to such people and their homilies is like seeking restaurant suggestions from someone who lives on Cheez whiz and Wonderbread sandwiches. Sadly, most retail brokers and other financial “professionals” exemplify this condition.

I am not advocating a more robust financial diet to help one predict the market, but rather to avoid panicking or over allocating to it in the first place. A well fed/read investor acknowledges and appreciates the foolishness of market predictions and other off-handed punditry. They also eschew those who offer such morsels of advice.

The Cash Nexus by Niall Ferguson is a fantastic baseline with which to gain perspective and makes an excellent pairing with Kindelberger’s Mania’s, Panics & Crashes.

You may not think what happened to the Ottoman or Hapsburg Empires or their debt levels is relevant to you, but it is. You live and act in a political and economic machine. Its fiscal health could determine your own physical health going forward.

This political economic machine (country) you live in is mostly similar to others that have gone before it. Over the centuries the roles of politics, economics, debt, taxes and war are the same, only the actors, names have changed.

Almost every person in every period has thought they were exceptional and unique. History has a way of showing these assumptionד to be mostly wrong. Ethnocentrism and an inflated sense of one’s self or one’s cultural period’s importance appears to be a part of the human condition.

Imagine someone claiming to be a biologist who had studied a single specimen for a portion of its life. Now imagine that specimen was his/her own pet. That person might be considered to have a rather limited expertise and some narrowly biased opinions.

Most economic journalists are just such persons, who are somewhat aware of 10-25 years of their own economy' ups and downs. This isn’t significant as most real reportage does not require depth of knowledge, merely the reporting of fact. But once journalism slips from reporting into punditry, analysis or debate, one requires a bit of expertise and depth.

This is where most of today’s video business journalism falls apart. Serious lack of depth during the commentary is made up for with sophomoric emotional zeal and cheap video effects in an effort to sell more cars, Viagra and hope to the mostly older white male clientele who watch.

My suggestion for those seeking to become investors is to remove the junk video from your diet and replace it with a few carefully selected books or blogs. As a fellow who hasn’t owned a TV in 20 years here is the book suggestion: The Cash Nexus by Niall Ferguson.

The Cash Nexus is broken into 4 sections covering “Money and Power in the Modern World 1700-2000”:

1. Spending and Taxation
2. Promises to Pay “i.e. public debt”
3. Economic Politics
4. Global Power

If one is serious about investing, then one should study and understand the game that is economic politics. Money/economy is a useful collectively shared political fiction, i.e. a created social convention, not a physical reality or science.

Studying money/economy as a cultural behavioural belief system with many historical precedents allows one to see how others have built and lost empires with the tools of politics, central banks, war, taxes and debt. The Cash Nexus is an excellent introduction and provides deep sampling of many economic issues, bubbles and behaviors which were all “different this time” to their participants, but strikingly similar in retrospect.

If this book were a wine it would be heavy and complicated, not as dry as an academic paper, but rather robust and hearty, best consumed over a few meals and then revisited from time to time for further appreciation.

If you wish to become an economic information connoisseur you may find you have to make time by giving up CNBC etc. Most TV information sources are the sommeliers equivalent of a sickeningly sweet White Zinfandel, best suited for clueless relatives, teenagers or unwanted house guests.

A few samples from The Cash Nexus:

• Major Western country bond yields from 1700-1999 have averaged 5-6% with one of the more interesting spikes occurring in the early 1970’s. This includes the US only back to 1804. The biggest decline in yields since 1700 for the UK was in 1998. Pg 177
• Interestingly the relationship between debt markets is more related to politics than economics. The rise of the Napoleonic empire is quite interesting when seen through the eyes of the French bond market, whether it be the Crimean, Prussian or other wars. This may seem pedantic, but interesting to know the next time a blaring “war/terror” event hits the news. The debt investor needs to know the difference between panic as a considered and wise allocation move and “a panic” which could be a buying opportunity in sovereign debts.
• Tom Freidman aside, Globalisation is modern in the sense that it has been going on for hundreds of years.
• In 1890 British foreign investment was 9.3% of GNP, a level not surpassed until the 1990’s. On the eve of the first world war 1/4^th of the World’s population, 444m people, lived under some form of British rule. Pg 278
• Merchandise exports were 27% of GDP in the UK in 1870. Pg 294
• The Ottoman Empire got into trouble when debt went from 130% of GNP to 1,500% of GNP leading to Turkish bankruptcy in 1874. Pg 280
• Current US debt estimated at $11 Trillion (disregarding future liabilities) would be about 78% of GNP, serious concern and action is in order but not outright panic. Getting into the Euro required a government's debt to be below 60% of GDP. Current global debt is 64% of Gross World Product.
• There is a great table on bond risk premiums for (Brazil, Chile, Mexico, Egypt, Japan, Argentina) on page 284. The dates range from 1850-1993, the concept of debt and risk isn’t new and neither are global capital flows.
• The US was a net creditor from 1914-1918 (9% of GNP) and by some measures represented the peak of international lending and capital outflows. Pg.288
• In terms of globalization and contagion, 1931 saw national defaults by Turkey, China, most of Eastern Europe and all of Latin America. Pg 289
• Global Merchandise exports as a function of GDP were 9% in 1913. In 1990 they were 13% of global GDP. Foreign assets were 18% of world GDP in 1913. Pg 291 This is in contrast to an era in 1997 when 144 countries had capital controls according to the IMF.
• We were so much more global then in some ways.
• Net emigration from the UK between 1881-1890 was 7% of the entire population.
  
• The decade from 1900-1910 saw US immigration peak at 10% of population a level not matched since. In 1990 it was 2.2% Pg 292-294 The equivalent today would be about 30m people showing up in 10 years.
• A great chart showing the UK equity risk premium vs. bonds from 1700-1999 shows it ranging from -5% to 10% with an average of about 1%. Pg 303
• There is a great discussion about the rise of government debt markets in Venice and the Netherlands in the period from 1600-1800 and how this allowed for growth in war and trade. Pg 305-312
• The famous South Sea and Mississippi Bubbles and the remarkable story of John Law is briefly introduced. This is the bubble that suckered Sir Isaac Newton in twice. Pg 312-315. I wish they would make a movie about this as it is a truly incredible story, something along the lines of Stanley Kubrick’s masterpiece Barry Lyndon (youtube) would be good.
• For those who believe Goldman Sachs (GS) owns the treasury, consider the following.
• The bank of England was owned by the Whig Party in 1694 and the South Sea company was owned by the Tory Party in 1711. That is some great crony capitalism and amazing intrigue.
• In 1720 the South Sea Company offered to take over the entire UK National Debt. Pg. 316. And we think we live in interesting times. Perhaps America should put all its debt on a credit card and then take a vacation with the air miles earned, or perhaps one of the esteemed political parties would like to take on the national debt, it would provide an interesting degree of accountability.
• A brilliant quote from Financial journalist Anatole Kaletsky in 1999, “The entire US economy has in effect become a sort of gigantic investment fund, borrowing money cheaply from financially unsophisticated foreigners (especially the Japanese) and then reaping the profits for investing it more imaginatively in riskier ventures at home and abroad.” The 18^th century suggests that a shift in sentiment of foreign investors could have dire consequences. Pg. 318
• A great table showing average global inflation defined as the annual mean of the GDP deflator between 1871-1938 as 0.2-1.2%. Under Bretton Woods (1946-1970) it was 7.3%. Under floating regimes the global average of inflation from 1974-1990 was 19%. Pg 330

This presentation of data as averages is suspect but interesting to me nonetheless.

I don't want to tout the book more but rather the experience that may come from digesting and appreciating it.

On a personal note I consider gold an interesting place for cash allocation right now with a 3 year time horizon and an estimated 2:1 risk reward ratio $600 sell, $1,800 upside. Gold is a horrible investment as it has a long term negative real yield, but as a hiding place from a weakened dollar it may work well.

Knowing history means I don’t consider gold as a serious long term investment. Knowing history also means I trust politicians with urgent fiscal problems, a willing market and a printing press even less.

Comments

[Roger Knights:]

"I consider gold an interesting place for cash allocation right now with a 3 year time horizon and an estimated 2:1 risk reward ratio $600 sell, $1,800 upside. Gold is a horrible investment as it has a long term negative real yield, but as a hiding place from a weakened dollar it may work well."

Very good. Gold isn't for all seasons. But there is a time for it.

Sep 21 08:35 AM

[kebu77:]

"The biggest decline in [gov't bond] yields since 1700 for the UK was in 1998."

The UK had booming oil exports from the North Sea up to 1999. In 1998 crude dropped to $10 a barrel and the Economist suggested that it might fall to $5. The UK had a strong balance of payments surplus. North sea oil production peaked in 1999.

Both the trade surplus and oil exports went into decline in the early 2000s and the country now is in deficit and imports oil.

Not the whole story of course, but an interesting back drop...

Sep 21 01:46 PM

[pdtor:]

going to get the book. I would suggest an other book wiith a greater time line. The great wave by Hackket Fisher, a very good read.

Sep 26 10:50 AM

[roy piper:]

I liked Niaal's "Ascent of Money," so I will get this. But your critique is contradictory. You say there are all these discussions about what happens to a country when foreign investors drop out, or when debt reaches X%, or when they default. Then you say gold is an awful investment. What you failed to do was put 2 and 2 together and realize what happens to gold when those events occur. It does not go up 50-100%, it goes up thousands of percent (in local currency.) Gold is all that is left when those events occur, and it appears the USA is primed to see this scenario. Maybe the world.

Sep 26 12:03 PM

[Ricard:]

I've had this book on my shelf for a very long time...I need to make time to finish it.

Sep 26 03:32 PM

[jpcflyer:]

Is the book the same as published in 2002, or has it been updated?
I wish you would just come out and tell us what you really think about CNBC.

Sep 26 06:29 PM

[jpcflyer:]

Is this the same as published in 2002, or has it been updated?
(I wish you would just come out and tell us what you really think about CNBC.)

Sep 26 06:31 PM

[marketstudent:]

The bigggg problem with historical analysis is that our current situation with humongous debt and coming humongous taxes doesn't have any relevant historical parallel. Of course, the humongous govt. intervention does have a parallel in the '30s. Now, in order to be successful, you have to make investment and trading decisions based on sound principles, since there is no relevant empirical evidence.

Sep 26 10:31 PM

[JudeJin:]

niall discredit gold. i discredit him.

Sep 26 10:43 PM

[chap08:]

I agree with your view on gold. History shows it to be a horrible investment in comparison to stocks and bonds. But right now, it makes sense and I own it. As for bonds, the oppostite applies. As you say "Major Western country bond yields from 1700-1999 have averaged 5-6%". I note that very little of that period covers the inflationary Bretton Woods, or post Bretton Woods era.

Sep 27 11:27 AM

[goodasgold:]

The argument that a gold standard made possible low, reliable bond yields and low inflation for Brithish empire for over 200 years (Gold, the One and Future Money) seems pretty convincing to me and, taken with the fact that fiat currencies never endure, suggests to me
that gold is best basis for money. As for return, of course it is not always the highest, however, I am one of those now concerned with the preservation of my capital first and secondly the return. An average return of over 16% for the past eight years is not exactly shabby either and I think that precious metals will be the last men standing. To call gold "awful" reflects an abysmal ignorance or lack of analytic capacity. lawrence

Sep 27 05:39 PM

[James Davis:]

Hey, you forgot to add imbecilic sound effects to the list of attributes CNB(S) and the others use. Even Bloomberg is doing it .

We are watching for the info guys, not to hear video game sounds.

Sep 28 01:01 AM