January 7, 2015
The divergent tales of Syria and Lebanon demonstrate that the best early warning signs of instability are found not in historical data but in underlying structural properties. Past experience can be extremely effective when it comes to detecting risks of cancer, crime, and earthquakes. But it is a bad bellwether of complex political and economic events, particularly so-called tail risks—events, such as coups and financial crises, that are highly unlikely but enormously consequential. For those, the evidence of risk comes too late to do anything about it, and a more sophisticated approach is required. ... Thus, instead of trying in vain to predict such “Black Swan” events, it’s much more fruitful to focus on how systems can handle disorder—in other words, to study how fragile they are. Although one cannot predict what events will befall a country, one can predict how events will affect a country. Some political systems can sustain an extraordinary amount of stress, while others fall apart at the onset of the slightest trouble. The good news is that it’s possible to tell which are which by relying on the theory of fragility. ... The first marker of a fragile state is a concentrated decision-making system. On its face, centralization seems to make governments more efficient and thus more stable. But that stability is an illusion. Apart from in the military—the only sector that needs to be unified into a single structure—centralization contributes to fragility. ... The second soft spot is the absence of economic diversity. Economic concentration can be even more harmful than political centralization. Economists since David Ricardo have touted the gains in efficiency to be had if countries specialize in the sectors in which they hold a comparative advantage. But specialization makes a state more vulnerable in the face of random events. ... The third source of fragility is also economic in nature: being highly indebted and highly leveraged. Debt is perhaps the single most critical source of fragility. It makes an entity more sensitive to shortfalls in revenue, and all the more so as those shortfalls accelerate. ... The fourth source of fragility is a lack of political variability. Contrary to conventional wisdom, genuinely stable countries experience moderate political changes, continually switching governments and reversing their political orientations. ... The fifth marker of fragility takes the proposition that there is no stability without volatility a step further: it is the lack of a record of surviving big shocks. States that have experienced a worst-case scenario in the recent past (say, around the previous two decades) and recovered from it are likely to be more stable than those that haven’t.
Beware the Ides of March, or the Ides of any month in 2015 for that matter. When the year is done, there will be minus signs in front of returns for many asset classes. The good times are over. ... Timing the end of an asset bull market is nearly always an impossible task, and that is one reason why most market observers don’t do it. The other reason is that most investors are optimists by historical experience or simply human nature, and it never serves their business interests to forecast a decline in the price of the product that they sell. Nevertheless, there comes a time when common sense must recognize that the king has no clothes, or at least that he is down to his Fruit of the Loom briefs, when it comes to future expectations for asset returns. Now is that time and hopefully the next 12 monthly “Ides” will provide some air cover for me in terms of an inflection point. ... Even with the recognition of the Minsky Moment in 2008 and his commonsensical reflection that “stability ultimately leads to instability,” investors have continued to assume that monetary (and at times fiscal) policy could contain the long-term business cycle and produce continuing prosperity for investors in a multitude of asset classes both domestically and externally in emerging markets. ... If real growth in most developed and highly levered economies cannot be normalized with monetary policy at the zero bound, then investors will ultimately seek alternative havens. Not immediately, but at the margin, credit and assets are exchanged for figurative and sometimes literal money in a mattress. As it does, the system delevers, as cash at the core or real assets at the exterior become the more desirable holding. The secular fertilization of credit creation and the wonders of the debt supercycle may cease to work as intended at the zero bound.
It has been a year since the guards at a prison camp just below the Arctic Circle told Mikhail Khodorkovsky, a former oil tycoon and once the richest man in Russia, to pack his things. They put him on a plane to St. Petersburg; there they handed him a parka and a passport and put him on a flight to Berlin. Since that day of release and exile, Khodorkovsky has been living outside Zurich and travelling to capitals throughout the West, making speeches, accepting awards, and hinting broadly at a return to Russia. He will tell anyone who asks that, after a decade in various prison camps, he would not mind displacing the man who sent him there—Vladimir Putin. ... He is fifty-one now; he’s become stockier since his release, and his graying hair has grown out of the prison buzz cut. He was dressed casually, as always, in jeans and a sweater, and spoke in a quiet, well-mannered voice. Still, as he took questions onstage from a journalist from Le Monde, he displayed none of the modesty of his forebears in dissent. Andrei Sakharov would never have spoken of taking up residence in the Kremlin. “It wouldn’t be interesting for me to be President of the country when the country is developing normally,” Khodorkovsky said. “But if the issue becomes that the country needs to overcome a crisis and undergo constitutional reforms, the main aspect of which is the redistribution of Presidential power to the courts, parliament, and civil society, that part of the job I would be willing to do.” ... When it came to Putin, his remarks were sly, glancing. “It’s hard for me to say that I’m thankful,” he said of his release. “But I am glad.” It was quite the understatement from a man who, once estimated by Forbes to be worth more than fifteen billion dollars, had been reduced to a life of manual labor. In the camps, Khodorkovsky never knew if he would ever be released. And when he finally was, in December, 2013, it was as a public-relations gesture before the Sochi Olympics—when Putin still cared about the West’s opinion of him. ... The way forward, Khodorkovsky said, was to form a horizontal network among like-minded, Western-leaning Russians—Western “adaptants”—which the state could not easily destroy. He was counting on the ten or fifteen per cent of Russians who fit this category. In some cities, like Moscow and St. Petersburg, he believed, it could be as high as a third. This amounted to a “minority within a minority,” he conceded, but in Russia a progressive, or radical, minority has always been the engine of political change.
Byron Trott has long been a trusted advisor to clients with names like Buffett, Walton, and Pritzker. Now the ultra-discreet financier is raising his profile by investing alongside them. ... “Not a lot usually shakes me, but I was scared to death when I walked in,” says Trott, who prepared for the meeting by reading all of Berkshire Hathaway’s annual reports. The two hit it off, and the get-to-know-each-other session, scheduled for an hour, ran to three. Before it was over, Trott had a fee-generating assignment from Buffett, who is notoriously stingy about paying investment bankers. “I did what I do with most clients for the first time,” says Trott. “I say, ‘Give me your toughest problem. What have you not been able to accomplish?’ ” ... “Let us understand you, your company, your long-term objectives, and let us help you by being a true solutions-based adviser on your side of the table, not the kind of idea-of-the-day, dialing-for-dollars banker,” he says, summarizing his approach. ... What sets Trott apart, along with his unique clientele, is his ability to sit on every side of the table. By stressing discretion, confidentiality, and patience, Trott and his colleagues repeatedly do what few other bankers can: They advise multiple parties to the same transaction—and then invest capital in some of the deals they’ve just brokered. In this fashion BDT has raised two funds, worth $8 billion, in five years and acquired stakes in companies that include Tory Burch, Peet’s Coffee, and the Pilot Flying J truck stop business. The capital comes largely from BDT’s own employees and the families in its network, who essentially are providing patient investment dollars to one another.
A conglomerate on the order of the old Gulf + Western, China National runs more than 160 cigarette brands, manufactured in about 100 factories across the country, and uses its earnings to invest in banks, luxury hotels, a hydroelectric plant, a golf course, and even drugmakers. Most of its money goes to its owner, the Chinese government; the tobacco industry accounts for about 7 percent of the state’s revenue each year, and China National controls as much as 98 percent of the market. All told, the industry in China employs more than 500,000 Chinese. They are among roughly 20 million people who get some income from tobacco, including members of 1.3 million farming households and workers at 5 million retailers, according to government figures. The extent to which the government is interlocked with the fortunes of China National might best be described by the company’s presence in schools. Slogans over the entrances to sponsored elementary schools read, “Genius comes from hard work. Tobacco helps you become talented.” ... While the growth of its cigarette production has slowed, the company is making more money than ever in the same ways its Western competitors do: by pushing premium brands. Some are low-tar, some are organic, and some feature tobacco from American farmers, whose fortunes have risen along with the demand from China. But China National is being challenged as never before. Faced with a mounting death toll from smoking-related diseases, the Chinese government in the last year has issued a flurry of anti-tobacco edicts and proposed reforms.
For most of my life, if I’ve thought at all about the bacteria living on my skin, it has been while trying to scrub them away. But recently I spent four weeks rubbing them in. I was Subject 26 in testing a living bacterial skin tonic, developed by AOBiome, a biotech start-up in Cambridge, Mass. The tonic looks, feels and tastes like water, but each spray bottle of AO+ Refreshing Cosmetic Mist contains billions of cultivated Nitrosomonas eutropha, an ammonia-oxidizing bacteria (AOB) that is most commonly found in dirt and untreated water. AOBiome scientists hypothesize that it once lived happily on us too — before we started washing it away with soap and shampoo — acting as a built-in cleanser, deodorant, anti-inflammatory and immune booster by feeding on the ammonia in our sweat and converting it into nitrite and nitric oxide. ... While most microbiome studies have focused on the health implications of what’s found deep in the gut, companies like AOBiome are interested in how we can manipulate the hidden universe of organisms (bacteria, viruses and fungi) teeming throughout our glands, hair follicles and epidermis. ... AOBiome does not market its product as an alternative to conventional cleansers, but it notes that some regular users may find themselves less reliant on soaps, moisturizers and deodorants after as little as a month. Jamas, a quiet, serial entrepreneur with a doctorate in biotechnology, incorporated N. eutropha into his hygiene routine years ago; today he uses soap just twice a week. The chairman of the company’s board of directors, Jamie Heywood, lathers up once or twice a month and shampoos just three times a year. The most extreme case is David Whitlock, the M.I.T.-trained chemical engineer who invented AO+. He has not showered for the past 12 years. ... I got close enough to shake their hands, engage in casual conversation and note that they in no way conveyed a sense of being “unclean” in either the visual or olfactory sense.
The ambition behind it far exceeds the two- or four- or even six-year terms of any politician. Here we were trying to build a structure that would last longer than the Great Pyramids of Egypt, longer than any man-made structure, longer than any language. When forced to adopt a long view of human existence—when looking back on today from 10,000 years into the future—it’s hard not to view Yucca Mountain in near-mythical terms. We can imagine future earthlings pondering it the way we ponder the Parthenon or Stonehenge today—massive structures imbued with an alien spirituality. ... Ten thousand years may be the time scale of legends, but nuclear waste storage is a very real and practical problem for humans. It is a problem where incomprehensibly long time scales clash with human ones, where grand visions run up against forces utterly mundane and petty.
In 1976, Muhammad Ali and Ken Norton met inside the ring at Yankee Stadium. The conclusion of the fight would go down as one of the most controversial decisions in boxing. But the civil unrest around Yankee Stadium in the Bronx — and in New York City as a whole — became the story of the evening. ... And it’s also what makes this documentary short topical, which shouldn’t come as a surprise. Because history always repeats itself.