Paul Auster: Sunset Park (2010)

My one liner: Paul Auster is my favourite American author.  As with much of his work, appeals to NYC-lovers.  An abandoned house in Sunset Park, Brooklyn provides Miles Heller the setting to work through his tormented past.  A vignette of financial-crisis-ridden America.
 
Miles Heller, 28, has run away from a sad past, and finds himself washed up in a dead-end job in the middle of recession-plagued Florida.

“The work is called trashing out, and he belongs to a four-man crew employed by the Dunbar Realty Corporation, which subcontracts its “home preservation” services to the local banks that now own the properties in question.  The sprawling flatlands of south Florida are filled with these orphaned structures, and because it is in the interests of the banks to resell them as quickly as possible, the vacated houses must be cleaned, repaired, and made ready to be shown to prospective buyers.”

A roadside teenage bust-up that led to the death of his step-brother, eventually made him quit his degree and his New York home seven years ago, and he has not spoken to his father or step-mother since. His mother, an actress, left home when he was young, and although throughout the story he maintains some contact with her, it is a relationship of exceptionally low quality. 
 
In Florida he “adopts” teenage lover Pilar Sanchez, a girl from a working class and somewhat unsettled Latino family, and encourages her to fulfil her academic potential and apply to Ivy League schools.  You feel that he is using her to fill a missing piece of his own life.  Then the bombshell. A blackmail threat by Pilar’s big sister to Miles. Forcing Miles to go on the run again.  

Heller and his father are both baseball fanatics, and the book is peppered with baseball stats which to the non-afficionado can be a little bewildering. But there is a point that Auster wants to make.  Baseball player Herb Score’s obituary appears in the paper – his career was cut short in 1957 by an on-field injury, and the obituary says that his whole life was plagued by one unfortunate incident after another.  Contrast another player “Lucky Lohrke” who, still alive, has survived the most unbelievable accidents both during and after the war.  Auster is telling us that life is as much fate as it is will.

Nathan Bing is the ever-present character who is the connector of the plot. Miles’ childhood friend, still living in NYC, proprietor of the bric-a-brac store “Hospital for Broken Things ”, and provider to Miles of regular updates about his father and step-mother.  

“He is the warrior of outrage, the champion of discontent, the militant debunker of contemporary life who dreams of forging a new reality from the ruins of a failed world.  Unlike most contrarians of his ilk, he does not believe in political action.”. 

Forced by economic reality to look for a new apartment he comes across an abandoned house in Sunset Park, and persuades Ellen the real estate agent who shows it to him to squat with him there.  All they need to do is find
two more “tenants”.  And given Miles’ need to leave Florida, the timing is perfect for Miles to join the squat. He will be back for Pilar when the time is right, he assures her.
 
The story takes us to Brooklyn, the inhabitants of the house in Sunset Park, and their inter-relationships, including the inevitable amorous liaisons.  And of course it takes Miles geographically closer to his father, who is having his own marital issues and other personal and professional setbacks.    Will he be able to reconcile with his father ? Will he confess to what happened on that fateful night of the death of his step-brother ? Will he be able to find happiness with Pilar ? Even if you do believe that life is mostly fate, does that really give you a licence to opt out entirely ?

Auster’s characters are always real.  Even the peripheral ones have substance, which means that the digressions into their lives are also worth making, even when this does not directly move the plot forward.  A short and easy read book, but you feel like you have covered alot of ground by the end, and you have a
better insight into contemporary America.

The wikipedia link to the book is here.

My one liner: A commonsense overview of post-crisis world economic trends. A global macro handbook for an international investor, and a basic primer for a non-specialist looking to understand what the future holds for the world economy.

I am surprised this book has not received more attention. This was another of the books I bought during the summer at the closing-down sale of England’s Lane books that I have referred to in various previous postings.  A reminder of the rightful place that local  independent bookstores should be playing but no longer can in this age of e-books (yes, I do own a Kindle)  and online shopping.  We are being fed content through our electronic networks, and perhaps we are forgetting how to seek out nice things in the physical world. But that is a topic for another posting.

When the global financial crisis began in 2008, we all started to (re-??) learn some fundamental truths, most of which were of the nature of “not everything can keep going up forever”. In the Impoverishment of Nations, author Leigh Skene introduces us to some further fundamental truths, which are also fairly obvious, but which still don’t seem to be grasped by many policy-makers. This is what can give this book wide appeal.  To the layman it can provide a roadmap of where our economies are likely to head over the next few years, and we can draw our own conclusions about what that might mean for us personally.   

There is also, I believe, much to digest in this book for the professional investor, since if some of Skene’s global macro predictions are true, then one could use them to construct an international investment portfolio.

Take for example, Skene’s Fifth Basic Truth (he has 10, which appear in a nice
one-page list at the end): We can’t borrow our way out of debt. Blindingly obvious if you put it like that, and yet, governments (or their Central Banks) are engaging in what is referred to as Quantitative Easing (QE).  Basically, this involves a Central Bank printing money which it then uses to purchase financial assets (typically government bonds) from banks. QE is supposed to stimulate economic activity because it increases the excess reserves of banks, so that they can lend this cash out to individuals and companies (particularly small companies). The problem is that this won’t work according to Skene.  That is because there is too much private debt already in the economy.  The man in the street already has a mortgage and other loans and credit card debt.  Hence, a polite “Thanks, but no thanks,” to the offer of additional credit. The chart below which I have hand-copied from Skene’s book illustrates this quite nicely. And if you want to follow up on what has happened in the last three years (more of the same, basically), then take a look at the latest NY Fed Household Debt and Credit Report Q2 2012.

An additional effect, only peripherally addressed by Skene, is the move towards capital  tightening via the new Basel III Capital Adequacy rules.  In a nutshell, these are requiring banks to hold more “Tier 1” (allegedly  high quality) capital against their liabilities.  Which means that the supply of credit from banks is possibly tightening also. And with bond yields at all time lows, the“velocity” of money, or speed with which money goes round the economy may well have slowed down significantly as people hoard cash. May I be so bold as to suggest (as Skene indeed does) that now is in fact time to break the world’s habit of pro-cyclicality. Surely now is the time to be loosening regulations, capital requirements and barriers to business, and tightening them when economic activity eventually starts to pick up.  Yes, some allegedly “systemically important”institutions will then topple, but I would suggest that after 2008, this possibility is already “priced in” anyway.
 
I digress.  Back to the book.  Where are the upcoming battlegrounds for natural resources ? Well, some interesting perspectives from Skene. First, the world will not run out of oil.  Reserves from tar sands and shale gas will provide our energy needs for decades if not centuries to come. That said, this doesn’t mean energy prices fall. Indeed, quite the opposite, geo-political forces are the prime driver of energy prices and are pushing them upwards.  Developed-world consumers will adjust by consuming less energy, and hence will have lower living standards.  My own view, for what its worth, is that the newly accessible shale gas and tar sands reserves and fracking etc will constitute an in-built stabiliser on the oil price, both upwards and downwards.  It is hard to see $200
per barrel without a concomitant large infrastructure investment in new types of extraction.  Likewise, you wouldn’t think that much of this new investment would be sanctioned (unless by  a government with deep pockets) at $50/barrel-oil.  Sounds like a collar on the oil price to me.

Skene thinks, and I  sort of agree, that the elephant in the room is Water. Which is a little bit of a mixed metaphor. May I quote from the book, because I can’t express this any better:

“The world’s population has doubled since 1950, but global demand for water is doubling every 21 years.  Only 2.5% of the world’s water is fit for human consumption, and two-thirds of that is locked away in icecaps and glaciers. Unlike other commodities, no new water reserves will suddenly be discovered, there is no substitute for water and just about everything and everyone relies on it....Big reserves of fresh potable water lie in underground aquifers that provide more than half of the water in America, up to 80% in Europe and Russia and 25% worldwide.  They contain 30 times more water than all the world’s lakes, and hundreds of times more than all the world’s reservoirs...[T]he vast aquifers took millions of years to form and replace themselves extremely slowly...Depletion of global groundwater supplies by an estimated 4% annually...One in ten of the world’s major rivers fail to reach the sea for part of the year, including the Colorado, Yellow, Indus and Ganges...Agriculture uses 70% of the world’s water.”

Consequence: water shortages, food shortages and a much more potent brake on rising living standards than rising energy prices.  Desalination and other infrastructure improvement help a little, particularly for the 30% of demand that is industrial and residential. But it won’t impact on the 70% needed for agriculture.  And irrigation is becoming more difficult because of lack of access to water.

A couple of slightly negative comments. First, the author then gets all Malthusian on us. He starts by referring to Malthus, and saying that in 1798 Malthus predicted that population growth would outstrip food growth, but didn’t factor in the arrival of the industrial revolution. But then Skene falls into the same trap of suggesting that Malthus’prediction will now come to pass as the world’s population grows to 9 billion.  

But who is to say that we are not in the midst of a second, or third or whatever, industrial revolution already ? And anyway population is according to data cited by the author, predicted to peak at 9 – 9.5 billion by 2070. Or maybe we will eat less meat, which is the largest consumer of water.  Self correcting mechanisms again ? Second, I wish this item had been included in the list of Ten Basic Truths, as it is an extremely important issue.

The essence of the book is that advanced developed nations have a long period of adjustment to go through which will likely lead to lower living standards after six decades of rising ones. Having borrowed largely for consumption over the last century or so, rather than investing savings into productive assets (Basic Truth 8), advanced nations now find that they cannot borrow more, either at a personal or a national level.  

These fiscal burdens will only increase as populations get older in advanced
countries.  The number of people of working age available to support each pensioner is dwindling, so either the shoulders of each worker will have to support more burden, or pensioners will need to receive less state assistance. Interestingly, China has a similar problem, whereas India remains in fairly good shape for the rest of the century (see my reproduced chart below).

Essentially, the forces could have pulled us out of the deflationary trap, such as Keynesian fiscal deficits, or monetarist QE are either unavailable or ineffective (Basic Truths 3-5). Rising energy prices and food and water shortages lower real standards of living.  Wage rises are unlikely to rescue people in advanced countries because globalisation is unleashing cheap labour onto the markets (Basic Truth 7).  And commodities and real estate are still overvalued and have further to fall, hence eroding personal wealth and balance sheets (Basic Truth 2).  A similar argument is also put forward for stock markets, although they have risen since the book was written.  Query however how much further they can go unless you believe predicted earnings growth (the “E” in P/E) will actually transpire. Assets will eventually have to be re-priced at fair value removes the effect of decades of leverage. Fiat money systems have been largely to blame for this.

I would broadly agree with the above analysis, with two exceptions.  Advanced economies have one huge “balance-sheet” item which is mostly ignored by economists’ appraisals. That is the Rule of Law.  Western legal systems have evolved over many centuries to the point where comprehensive property and legal rights exist with confidence. They are far from perfect (as this previous blog post of mine illustrates), but they do provide a basic foundation for widespread economic and social activity. This gives these  countries safe-haven status and will make them a favoured FDI destination.  
 
Which brings me on to why I think this book is of practical relevance.  If (as I do) you agree broadly with the conclusions, then it can also inform an appropriate  investment thesis.  There are many  possible investment conclusions one can draw. Here are  mine:

1. We are no longer in a period where financial engineering and in particular leveraged finance are the primary source of investment returns. Where bonds are low yielding and equities are volatile, don’t be afraid of unlevered equity-only investments in high-quality projects. Be happy with a yield of 4-6%.  You always have an option to raise debt in the future to leverage your returns. So what counts as a “high quality project”? Depends on many factors including time horizon and liquidity preference, but an example could be commercial real estate with high quality long-term tenants such as governments or highly rated corporates.


2. Infrastructure projects, particularly in the food and water sectors.  But pick countries where the off-taker is likely to pay up for duration of the project. For example renewable energy projects in southern Europe came a cropper, because many relied on government subsidies for the duration of the project, and these subsidies were pulled when deficits needed to be cut. So, a good test would be “does the government or other off-taker really  need the relevant infrastructure to be operational for its whole life ?”.  Less important in advanced countries, where contracts tend by and large to be honoured.

3. And this leads us nicely to geographical considerations. Falling living standards in advanced economies does not translate into  “don’t invest there”. Remember that big asset: the Rule of Law.  And following Skene’s thesis, with banks pulling out of corporate  lending, the opportunities for cash investors could be interesting. SMEs, perhaps listed on the smaller stock markets, may have a high amount of leverage on the books, find it hard to access primary equity capital, but have fundamentally strong operational cashflows. The opportunity for a cash buyer would be to take the company private, take the debt of the books and hopefully increase the efficiency and scale of the business with expansion capital. Exit by re-floating.  Many such opportunities abound, particularly in Europe. Private Equity investing will mean what it used to, ie, taking over companies and managing or operating them better.

4. In terms of emerging economies, BRICs have been in and out of vogue over the past ten years. Continuing with the theme of fiscal strength driving economic strength, I would be looking at countries which growing populations from an already large based, strong fiscal positions and are capable of being a “self-sustained eco-system”, and some semblance of an industrial base. Within advanced economies, Australia looks interesting.  The Gulf countries, (including, in the future, Iraq) are natural-resource backed economies with existing infrastructure and very little need to access international debt markets. There are some other examples in Africa, Latin America and Central Europe. A good starting point is the projected Debt/GDP ratios, which can be
found here.

I shall be developing these themes in future posts, but I would be very happy to engage in discussion, either via the comments section here, via email in private or through the various social media, Twitter and LinkedIn. 

There is no Wikipedia link for this book.  The Google Books link for the book is
here.

My one liner: Subtitled "Why the Right and Left are Both Wrong - Commonsense 101 Solutions to the Economic Crises." Although it has some flaws, this book is a rarity in the post-financial crisis literature, as it heavily emphasises first principles rather than over-analysing with macro data. Highly accessible to the layman.

The Oprah Winfrey Book Club Lottery: 

“Suppose you and I are both accomplished writers of exactly the same age and reputation. We have both sold about the same number of books, yet we both only make $75,000 per year because we write “serious” books.  Now, suppose a random event occurs: Oprah Winfrey opens up her book club. We both now face an equal chance that she might notice one of our next two books when they are published, read the book, and recommend it strongly to her audience.  If I am the lucky one, then my income will soar from $75,000 to $5,000,000, and likewise for you if you are the lucky one.”  

Well, let’s just do a deal.  Let’s just enter into a contract whereby we agree to split the earnings 50/50, whoever gets the book deal. That way we both lock in a profit of $2,500,000. Pure free market economics right ? 
 
At the end of this review, you can find how the author H. Woody Brock, (Harvard then Princeton PhD, uses this example to show us why progressive income taxes are
fair.
 
Elsewhere, the part I like most in this book is the analysis entitled “Must there be a Lost Decade ?”, largely I suppose because it is the part that has most relevance internationally in terms of ameliorating fiscal deficits. Brock demonstrates how we can have our cake and eat it, by increasing GDP growth and at the same time reduce long term fiscal deficits, hence preventing a Lost Decade 2010-2020. The answer lies in ensuring Government Spending is redirected towards “productive spending” on profitable investments (human capital and infrastructure). A new Marshall Plan.  
 
Under conventional thinking it is most unlikely that these two goals can be achieved.  First principles tell us:
 
Government Deficit = Net Private Savings + Net Foreign Capital Inflows. 
 
Or, for the  non-equation-minded, a government deficit must be funded either by (1) the domestic private sector, or (2) by foreign capital.  That’s it. The late Wynne Godley of Cambridge University and the late Professor James Tobin of Yale were both proponents of this approach. So, if a government wants, say, to increase GDP growth by 2% (from the current 2% to 4%) and simultaneously reduce the government deficit by 7% (from an unsustainable 10% of GDP to a more sustainable 3%), then Net Private Savings must fall by 9%, as per the above equation.  Simple. 
 
Except that this is more or less impossible in current circumstances.  Households are overly indebted, business investment confidence is low, and unemployment is rising, so the chances of a boom in overall investment spending from the private sector are...b**ger-all.
 
But, the insight from Brock is to focus on what we mean exactly by Government Deficit”.  He engages in a Socratic Dialogue with President Obama, in order to propose a massive increase in Productive Spending.  
 
So, out of a $4 trillion budget, $1 trillion should be invested in investments which generate positive returns, and the remaining $3 trillion (matched by tax receipts of $3 trillion) on “unproductive” spending (defence, interest payments, administrative costs, social and medical care etc).  

Bond markets like this because this because the country is not running up
a structural deficit which must be serviced by future generations. 
 
What does  “productive”investment mean ? It means that an independent body would certify whether an investment is forecast to earn a positive return. It would take into account positive externalities, so that for example an interstate rail link would qualify because it generates employment opportunities in the areas which it services.  

Brock draws the analogy with private accounting, where investment expenditure is not expensed, but is capitalised on the balance sheet and only the amortised portion is expensed.  
 
There are a number of problems with Brock’s proposal. How you measure returns to take into account all those positive side effects ? Would, as proposed, international sovereign funds such as Norway or Abu Dhabi really come to the investment party, based on earning “social returns”? How do you prevent “Vested Interest Capture” of the Agency which is certifying new investments ? 
And the potential for trampling over private property rights would be
worrying.  
 
But, overall the proposal deserves serious consideration, (a) because it is of global relevance for those G20 countries (most of them) running enormous deficits and (b) because the reality is that those governments are going to spend the money anyway.
 
Brock’s book addresses four other Big Challenges facing the USA. Two of them are very US-centric, and in my opinion not addressed rigorously enough.  One is the Entitlements Crisis as exemplified by Medicare and Medicaid. Brock’s use of first principles is again to be admired, e.g. driving down the price of provision by shifting outwards the supply-curve of medical services (essentially, train more doctors and nurses).  Practical ? Hmm.  Of relevance to an international readership ? Limited.  And even worse on China-bashing.  Or, as Brock puts it: “The Need to Learn How to Bargain Effectively with Thugocracies”, in reference to China’s repeated outsmarting of the USA in
international policy matters.  Yes, but China is on a much much longer time-cycle of strategic decision-making, with which 4-5 year Western electoral cycles can never hope to compete.  Live with it. Democracy has some upsides too.  And global geo-politics is a bit more complex than USA v China, I’m
afraid. I'd suggest non-Americans skip these chapters.
 
Another issue which Brock addresses is “The Risk of Future Financial Market Meltdowns”.  On identifying the causes, his analysis is exceptional. Excess leverage in all sectors. An overreliance on classical economic theory over the last few decades had led decision-makers (public and private) to assume that there is no such thing as “excess” leverage, since investors will optimally leverage their positions in accordance with their own risk tolerances.  Mordecai Kurz of Stanford University has developed a theory of “Endogenous Risk” which shows that when some members of society indulge in leverage over and above what is optimal, this increases the volatility of the business cycle for the entire economy, hence making everybody worse off in terms of increased risk, for little or no gain as to how much society as a whole ends up with.  The policy prescriptions therefore, not surprisingly, reflect this.  
 
A “Leverage Czar” would be appointed to monitor leverage in different asset markets, with strict penalties for contravention.  I am very sceptical of the ability of a top-down agency to cope with this.  And he should address the question of what the effects would be today of a one-off deleveraging within Eurozone banks in order to bring their equity into line with US banks.  Brock is on surer ground in calling for bank break ups. In particular, the speculative parts of banks should not benefit from government guarantees.  And I would have liked to see something on the merits of counter-cyclical fiscal policy, as sending a strong signal to the market.
 
Finally, Brock addresses notions of Distributive Justice. This is useful as it reminds us that the discipline of Economics is essentially driven by Politics, whether we like it or not.  And whether you agree or not, Brock presents some compelling theory from the classical school (Leonid Hurwicz, Kenneth Arrow, Harvard) to demonstrate that redistribution through progressive taxes is indeed fair from a free-market perspective also. For the Economists, remember those theoretical “Arrow Securities” which allow you to hedge all risks in your life.  Now, recall the Oprah Winfrey example at the beginning.  Well, the  insurance contract we entered into would be an example of an “Arrow Security”.  But given that markets don’t operate fully efficiently to allow us to have enough information for these contracts, redistributive taxes do the job.  They re-transfer wealth back to less wealthy individuals, and therefore play the role of the payout of the insurance contracts.

Overall I like this book, despite some flaws. The reason being that it is always clear and consistent, and is accessible to the layman, as the complicated theory is, rightly, shoved into appendices.  And it is good at identifying much of what is wrong with today’s society. 

The absence of Socratic dialogues (à la Plato) in which people debate logically in order reach mutually beneficial conclusions rather than bandying around soundbites and tweeting (“The Dialogue of the Deaf”).  The overreliance on number crunching and data mining (“Students today believe that if they are equipped with a powerful database and the  appropriate spreadsheet program, the truth will reveal itself”).  And the mendacity of politicians (aided and abetted by a scandal-driven press) who are not subject to “irrationality scrutiny”when they introduce policies that are clearly against public benefit.

There is no Wikipedia link for this book.  The facebook link is here.