An innocent among investment bankers

Beddard in the City

On Wednesday I attended a conference hosted by Soc Gen’s much quoted Analysts Albert Edwards and Dylan Grice. It’s a New Year ritual for many investment banks, and since Edwards has a formidable reputation, and I’ve learned much from reading Grice and his predecessor James Montier, I thought I’d emerge from my private investor bolt-hole and experience three hours in the lives of these analysts and the assorted City throng that follow them.

The theme is ’2012: The final year of pain and disappointment’, which I presume is a reference to Albert Edward’s ‘Ice Age’ moniker for the times we’re in. If you haven’t come across it before, bonds have been doing better than shares for so long you could measure it on a geological timescale (well, since about 1990), and Edwards has been predicting the continuation of the ice age with tectonic relentlessness.

It will be a memorable day if Edwards were to announce an interglacial.

He doesn’t. Although he thinks bond yields are so low they cannot be a good long-term investment any more, the rest of the story is intact. With the economy at stall-speed, the public sector barely above water, the private sector underwater, household spending under pressure because we’ve got no more savings left to spend and recession in the US likely, the actual meaning of ‘the final year of pain and disappointment’ is disappointment is the new norm. Now people accept we’re in an ice age, we have no reason to be disappointed. Or perhaps this is the year we despair.

During his time at Soc Gen, Edward’s partner, Montier, was a ruthless critic of efficient markets but Grice has chosen a different target, “crackpot central bankers”. Quoting Richard Feynman on quacks, experts, and social scientists, he says:

I might be quite wrong, maybe they do know all this… but I don’t think I’m wrong. You see, I have the advantage of having found out how difficult it is to really know something, how careful you have to be about checking the experiments, how easy it is to make mistakes and fool yourself. I know what it means to know something. And therefore, I see how they get their information and I can’t believe that they know it. They haven’t done the checks necessary, they haven’t taken the care necessary. I have a great suspicion that they don’t know…

Grice, whose humility makes Clark Kent seem a little egotistical, thinks historians and economists don’t know what caused economic events from the decline of Rome to the Great Depression to the current crisis, but the economists running the economy think they know how to get us out of it.

With deluded central bankers printing money, he says there’s a much higher risk of inflation than is widely believed in the markets.

So what do we know? For Grice and Andrew Lapthorne, the quant who “opens Albert’s spreadsheets for him”  it’s back to value investing basics. When shares are expensive, subsequent returns are poor. When they’re cheap, returns are good, and the good news is the number of stocks on world indices meeting ‘cheap’ and ‘safe’ criteria is increasing. Backtesting shows that buying value works, and buying strong balance sheets reduces volatility but not returns.

A guest speaker, economic historian Edward Chancellor takes the stage and timidly suggests he might know something about bubbles. He rattles through a ten point list of characteristics of a great mania, most of which which will be familiar to anyone who has read his book, Devil Takes the Hindmost, or Kindleberger, or Shiller. He’s going to apply them to China.

I flick through the last few pages of the book of slides I’ve been handed because the screens they’re projected onto in this cavernous conference room somewhere in the guts of the Marriott Hotel on Grosvenor Square are so far away I can’t read them. Buttonwood tells me Edwards was wearing a floral shirt. He might as well have been wearing a mankini.

Chancellor is going to apply his list to China, an uncritically assumed growth story in which investors have too much confidence in the authorities. There’s easy credit, an investment boom with money wasted on projects that have little chance of earning a return, frauds are proliferating, people will pay $1m for a dog. and the stock of housing is worth more than four times GDP, the same as it was in Ireland and Japan at the peak of their housing bubbles.

Some of the charts look scary, but I take my leave, pausing to take in the most impressive aspect of an afternoon that was like a rock band playing its greatest hits to a really polite crowd. Or a scruffy band of Jedi Knights lecturing massed ranks of strangely compliant storm troopers on the virtues of The Force.

There’s nothing really new or awesome for those who read Soc Gen’s research notes, but the scale of the event surpasses my expectations. Men and women in perfectly tailored suits met by ranks of greeters and ushered to seats by manicured ladies. A hall so vast the banks of screens down each side are insufficient for those sat in the middle. Enough Blackberries to down a fleet of aircraft. The bloke next to me asks his mate if the price of oil is going down.  I count two rows of 30 seats going forward as far as I can see.

I wonder why so many brokers, fund managers, analysts, and, well, people not dressed like me (or the guys on stage) come every year to be told how little they know, that they may not know what they think they know, and that Ben Graham had worked most of it out seventy years ago. Oh, and things are really, really bad.

Maybe it’s a kind of New Year detox.