Wealth, War and Wisdom (Barton Biggs) 2 comments

I have covered an earlier book of Barton Biggs ("Hedgehogging") and his latest one is about a totally different subject (albeit still linked to investing). WWW (for short) deals with World War 2 and its effects on investments in the buildup, the course of the war, and in the aftermath.

Barton Biggs is a closet war historian, although his multi-decade career (before his turn to running a hedge fund) was as much-revered global market strategist for Morgan Stanley. This is very clear given his choice of subject for this new book, and the meticulous way he deals with the warring parties, the course of the war, the various narratories on the war on both the Allied and Axis sides, through to the various war anecdotes that makes one wonder how many volumes of World War 2 tomes he must have read to distill all these commentaries.

I personally have read many books on World War 2, many of them thicker than this 300-page volume. But Barton Biggs' approach on how World War 2 affected stock markets in the various warring countries offers a fresh perspective. The two broad themes in the book are:
(1) An uncanny ability of stock markets in general to anticipate turns in military fortune during the war, such as the market bottom in the UK markets at the 1940 Dunkirk evacuation, the market bottom in the US markets formed at Midway 1942, the market top in Germany at Stalingrad 1942. All this despite strict propaganda control, especially on the Axis sides, during the war.
(2) How wars can cause great wealth destruction and transfers between various classes of society. Biggs also examines the wealth-preserving power of the various asset classes, such as stocks, bonds, real estate, gold/jewellery, even art, in the chaotic and often hyper-inflationary environment generated by war and its aftermath (especially for the losers). His conclusion is that land ownership (but not the buildings, which were often bombed out) turned out to be the best assets to hold in most cases for the loser countries, while for the victors like the US, stocks did superbly, especially in the long term, if bought at the bottom. Asset performance was also a function of the political environment; where the authorities in power were liable to looting/plunder eg. Nazi Germany in its occupied territories, the wealth-preserving power of the various assets was simply a matter of luck (eg. whether the jewels could be successfully hidden from the looters or not). Generally, bonds proved to be the worst investment in the loser countries, as inflation soared.

To an investor who reads this book, the value of it is in providing a historical perspective to probably the most significant event of the 20th century, and not just from the viewpoint of investments. Too often, people eyeball the stock prices on their screen from day to day, churning and arbitraging and scalping, attempting to earn "kopi-money" and some even engaging in the petty mudslinging and fear-mongering that is so easily facilitated in today's online world. But the real money is made in the big movements and the secular trends happening in the world around us; miss the forest for the trees and you will be penny-wise pound-foolish. Many great fortunes were lost in the war and new ones made in the great asset redistribution following the war (a significant example being Japan where General MacArthur as occupying commander-in-chief ordered the redistribution of farmland and taxed inheritance heavily). And indeed, once one reads about the sufferings and sacrifices made by our fellow human-beings about 1-2 generations before us, investing and making money seem a trivial, almost coarse, topic, in comparison.

Too often nowadays the popular topic is America-bashing (me also a guilty party) in the wake of the subprime crisis which originated from Wall Street. However, the tremendous soft power that it still wields globally is probably a result of the enormous goodwill it generated from its participation in two world wars, and in particular its handling of the loser countries in the aftermath. America's liberal approach towards Japanese rebuilding allowed the latter to swiftly pick itself up to become the world's second biggest economy, and the latter is unlikely to ever forget it. It also saved South Korea from communism in the Korean War. This political goodwill is part of the reason why in its time of need, the world is likely to be ready to sink its funds back into an ailing US economy.