Book Club Update (2010)

The Grifphon research team has a reading list. In order to remain abreast of the realities of business and geopolitics around the world, we read authoritative and in-depth studies that may pertain to regions, sectors, or issues that inform our investment thesis. We also read for fun, though, and we'll post about those as well. We decided that it might be helpful to rate the research books (out of 5) and provide a brief description of what we took away from each book.

Eric Margolis American Raj: Liberation or Domination? Resolving the Conflict Between the West and the Muslim World Grifphon Rating: 4.5
Having already read Margolis' War at the Top of the World: The Struggle for Afghanistan, Kashmir and Tibet, we were excited to tackle this late-2008 compendium of the history of conflicts between Western and Muslim societies. The author replays the numerous clashes, both military and cultural, which are the context in which current animosities exist. Repeated at points throughout the book is Hilaire Belloc's verse "Whatever happens, we have got / the Maxim gun, and they have not." The imagery of technological superiority and domination and subjugation conjured by the 19th-century British innovation is instructive for reading the histories presented from the perspective of Muslim society. In providing this history, Margolis speaks often from first-hand experience, and when that's not the case he has done thorough research. While the title's stated claim to "resolve" the conflict between the West and the Muslim world may be too tall an order for any one study, Margolis capably identifies and seeks to resolve the conflicts of perspective borne from our intertwined historical, political, and religious pasts. Informing the Western reader of the modern Muslim zeitgeist is a laudable undertaking, and may - hopefully - help to assuage the animosity between societies.

Ben Simpfendorfer The New Silk Road: How a Rising Arab World Is Turning Away From the West and Rediscovering China Grifphon Rating: 3.25
As Chief China Economist for the Royal Bank of Scotland, it is unsurprising that he has a timely and sound analysis of the way in which China is interacting with the world. The New Silk Road outlines what is at its heart a very simple idea: as China's growth has sped to astounding level's in the last few decades, and their manufactures have nearly saturated the American and European markets, they have more recently begun to look to trading partners over land to the West, along the corridor that has long been known as "the Silk Road." Simpfendorfer gives excellent anecdotal and some analytical evidence for the increasingly strong economic and cultural ties between China and the Islamic world. While occasionally the analysis is shoddily argued, and there are a very disappointing number of typos in the book, this is certainly a suggested reading for any global macro-focused analyst.

Thomas Sowell The Housing Boom and Bust Grifphon Rating: 2.25
Essentially intended as a follow-up read to Mark Zandi's Financial Shock: A 360 degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis, Sowell's book is a quick read, and not particularly high in analysis. Contrary to much of the discussion surrounding the en masse collapse of subprime mortgages in America, Sowell chiefly blames the US government for pressuring banks to lower lending standards, arguing that "government agencies not only approved the more lax standards for mortgage loan applicants, government officials were in fact the driving force behind the loosening of mortgage loan requirements." (p. 30) It is important to note, however, that the fact that private stockholder-owned companies -- in addition to Fannie and Freddie themselves, which were stockholder owned until the crisis -- lent to high-risk borrowers while government actors were arguing for an expansion of home ownership does not constitute proof of causality, and Mr. Sowell does not present a convincing mechanism. It seems much more likely, then, that the private financial institutions were motivated mostly by the large profits they received through expanding their business by making more loans and then offloading the risks of the loans through structured asset backed securities (ABSs), and were perhaps encouraged by the supportive tone of Washington. It is an ambitious goal to suggest a mechanism which would trump the profit motive for a private company, and Mr. Sowell does not seem to have met the burden of proof required to convincingly advance his case.

Robert Baer The Devil We Know: Dealing with the New Iranian Superpower Grifphon Rating: 4
Robert Baer, an ex-CIA operative who was active across the Middle East, shares a range of insights into the culture of what are commonly called in America, terrorist groups. He engaged for decades in relationships with those very groups that, and gives personal as well as social texture to groups that are generally viewed a mere bogeymen in the West. Drawing from his experience, he shows the network of power that Iran has built in the Gulf and beyond, and the potential threat that is posed by the sway that Islamic country holds. He argues, in language particularly suited to a more conservative audience, that America must engage Iran diplomatically instead of through sabre-rattling. The case is well argued. While there are some short-falls (notably his inability to source some information and his unlikely claim that Iran's Shia faith is not a major hindrance to its persuasion of Sunni Muslims), Baer's book is a must-read for those interested in Middle East politics.

Bite the Hand That Feeds You: Essays and Provocations

Henry Fairlie

Fairlie was a celebrated political columnist in England who became a celebrated political columnist in America. The hallmark of his writing is the vicious, effective attack piece. These were primarily directed at anything he perceived to be politically dishonest or destructive, or that which could impede the independence of the press. For this reason, he did not ingratiate himself to editors, hence the name of this book. The book is really a collection of republished essays and columns, which appeared in many journals and papers of note including the Observer, The Times, and The Spectator in London and The Washington Post, The New Yorker, and The New Republic in America. After being a head writer at The Times, Fairlie worked as a freelance writer, retaining his independence.

Andrew Sullivan, editor of The Atlantic, said that Fairlie "cared more about America than most Americans." This book shows that to be almost irrefutably true. As Fairlie applies his Tory politics to American issues - despite the lack of a King - he ends up with more fury for Republicans than for Democrats. While this might normally be attributed to a visceral disagreement with what he perceives as a misunderstanding of his own philosophy, Fairlie clearly states his grievances (again and again). He held that "the fundamental and persistent weakness of American conservatism is that it is not nourished by any distinct Tory spirit," meaning that he felt American conservatives were betraying their duty to tradition and order by so wholeheartedly supporting commercial interests (Harpers, 1984). Fairlie believed that the true conservative must stand against the capitalists, since the accumulation of great wealth in private hands - which is the natural conclusion of well-practiced capitalism - would necessarily undermine the authority of the government - an outcome which the true conservative should staunchly oppose. Fairlie's essays show great disconnects between his own views and those of the GOP. For instance, the essay "In Defense of Big Government" appears immediately after "A Cheer for American Imperialism." Fairlie's conservatism, then, is much different from what American Republicans practice, and so one can see how he would be so maligned by their use of his chosen self-description.

This book is particularly timely. The current talk of the "death" of the Republican party in America following the 2008 election - often issuing from relatively conservative sources - is much better understood within the context of these essays. Fairlie's arguments forecast the ways in which the Republican party might improve itself, and highlight the ways in which it has disconnected from what (he says) should be its values. In Bite the Hand That Feeds You, grievances are clear, and a picture emerges of what a Tory would envision as an appealing conservative politics in America.

Book Club (2008)

The Grifphon research team has a reading list. In order to remain abreast of the realities of business and geopolitics around the world, we read authoritative and in-depth studies that may pertain to regions, sectors, or issues that inform our investment thesis. We also read for fun, though, and we'll post about those as well. We decided that it might be helpful to rate them (out of 5) and provide a brief description of what we took away from each book.

Research books:

Fareed Zakaria The Post-American World
Grifphon Rating: 3.4
We liked Mr. Zakaria's treatment of the changing nature of global politics as we move into the 21st century. Zakaria's perspective is not that America is no longer great, nor that there is something we've done terribly wrong. As he says to begin his essay, "This is not a book about the decline of America, but rather about the rise of everyone else." The book was a modern treatment of the roles that countries like China and India will play going forward, and a debunking of myths common in our discourse.

Olivier Roy The Politics of Chaos in the Middle East
Grifphon Rating: 4.75
The Politics of Chaos was widely liked by the Grifphon team. Although it was dense, the book provided, we felt, a very insightful primer on the current difficulties of diplomacy and integration in the Middle East. We felt that this book was thoroughly educational, insightful, and engagingly argued.

Robert Bryce Gusher of Lies: The Dangerous Delusions of Energy Independence Grifphon Rating: 3.8
The book read a bit too much like a newspaper article for the taste of some readers, but was a quick read as a result. If you think that we can and should achieve energy independence, that ethanol is a big part of the solution, and that the countries from which we currently buy our oil hate us and are unstable, Mr. Bryce begs to differ. An interesting perspective which, regardless of one's views, must be engaged.

Jim Rogers Hot Commodities
Grifphon Rating: 3.8
A fascinating and relatively quick primer in the world of commodities trading, this half-textbook, half-missive by George Soros' former business partner is a great first step for someone curious about futures. Rogers admits often that he is not a great trader, but his analysis is compelling and he has been right quite a lot.

Peter L. Bernstein The Power of Gold: The History of an Obsession
Grifphon Rating: 4.7
This book is not for those who lack patience. It is truly a history of an obsession, beginning in antiquity and covering, exhaustively, the evolution of gold in monetary, religious/ceremonial, and cultural contexts. It's narrative is cohesive, and goes a long way towards comprising a complete history of the role of gold in the history of civilization.

Emmanuel Todd After the Empire: The Breakdown of the American Order. Grifphon Rating:4
A compelling read, Todd provides a European perspective on shifting global power structure and the American role in the 21st century, both thus far and moving forward. An educational and insightful read for anyone dealing with international perspectives in business or culture, this book reads like a short essay.

Bjorn Lomborg Cool It: The Skeptical Environmentalist's Guide to Global Warming
Grifphon Rating: 3.4
A little bit repetitive, this treatise nevertheless provides a level-headed (hence the name) approach to the climate-change debate. The book concludes that most spending to fight global warming has been economically irrational when the goals of the movement are considered more broadly. The book is essentially an admonition of Kyoto and a plea for international spending on pressing issues like malaria, AIDS, malnutrition, and lack of fresh water in order to save more people than anti-warming efforts.

T. Boone Pickens The First Billion is the Hardest: Reflections on a Life of Comebacks and America's Energy Future
Grifphon Rating: 3
T. Boone Pickens is very proud of what he's done in his life, and with good reason. A very accomplished man, his book walks the reader through business deals and energy analysis in a conversational style that makes it easy to read. This book would essentially qualify as edu-tainment. Pickens' engaging style and insightful stories and analysis provide a narrative for the energy options in America's portfolio.

Mark Zandi Financial Shock: A 360 degree Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis
Grifphon Rating: 3.5
As concise as its title, this somewhat repetitive book must be excused in that regard because the events it describes were roughly two months past at the time of publication. The book is full of excellent analysis of the financial meltdown caused by toxic assets and how to have seen it coming. The lack of accountability and the unrealistic expectations of ever-increasing house prices put America in a situation where our system could withstand no drawdowns in the housing market, and simultaneously, the structure of the market would make such drawdowns self-reinforcing.

Tariq Ali The Duel: Pakistan on the Flight Path of American Power
Grifphon Rating: 4.7
This book is an excellent exposition of the evolution of the Pakistani state. Ali addresses the history of Pakistan without (much) bias, and explains in detail--and often seemingly from a first-hand perspective--the contexts and personalities that have molded the current reality. Insightful, educational, and well-written, this book was a favorite. Upon reading this book cover to cover, the reader instantly becomes something of an expert on Pakistani politics.

Eric Margolis War at the Top of the World: The Struggle for Afghanistan, Kashmir and Tibet
Grifphon Rating: 4.5
Written in a style that seems to cross those of National Geographic, The Duel, and For Whom the Bell Tolls, Margolis' story is an easy read that is at once incredibly informative, entertaining, and shows the author's engagement with the subject and the people involved. The book explains that what is widely perceived as a collection of unrelated struggles between small nations and large states destined to absorb them is actually a collection of connected manifestations of the conflict between three nuclear states of Asia. Afghanistan's mountains, Kashmir, and Tibet lie in what might be called the "buffer zones" between Russia, China and India. The borders in the regions are ill-defined, as no one anticipated conflict over such desolate mountaintops. However, the three countries are constantly bumping into each others' spheres of influence in these all but uninhabitable border regions. Margolis predicts that these conflicts will shape and indicate the state of international relations between the three nations as they all test their power and flex their muscles.

Juan Enriquez The Untied States of America: Polarization, Fracturing, and Our Future
Grifphon Rating: 3.8
Enriquez explores the nature of sovereignty and the cohesion of nations in the modern era of globalization. The book reads more like a speech or a lecture, and the reader is immersed in Enriquez' intriguing worldview. The author envisions a world in which the forces holding states together are constantly at odds with forces trying to tear them apart. He contends that perhaps the age of American expansionism is over, and that American politicians would do well to turn inward, addressing the very real grievances of their constituencies rather than embarking on external missions. Enriquez supports the EU model as more realistic, although he seems to decry the 'watering-down' of sovereignty demanded by submission to an extra-governmental authority. Some of the facts used to support this narrative, however, may be surprising. If this is so, you should consider yourself well informed, because Enriquez is not always exactly correct. A quick internet search will sometimes yield more plausible numbers when something seems outrageous, but the qualitative aspects of the evidence presented are largely sound. Overall, this was a well received (if eccentrically written) treatise on the changing roles of civic society and national identity in global politics.

The Trillion Dollar Meltdown

The Trillion Dollar Meltdown
By Charles R. Morris

Charles Morris’s book, The Trillion Dollar Meltdown, is a forensic look at the catastrophe that is subprime and other dangerous liabilities on corporate America’s balance sheet. The book is insightful, packed with interesting figures, and the arguments sit within a well-constructed historical context. The premise of the book is simple, if the title hasn’t already given it away: “In this book, I lay out, on quite moderate assumptions, the likely course of writedowns and defaults on the whole asset gamut—residential mortgages, commercial mortgages, high-yield bonds, leveraged loans, credit cards, and the complex bond structures that sit atop them. It comes out to about 1 trillion.” Here’s my qualm, I don’t think his assumptions are all so moderate. Of course, as a percentage of each class the writedowns he proposes do look tame—except the subprime writedowns should be less than the 20% he postulates—but this assumes a spillover effect from one debt instrument to another, ultimately affecting everything. I see this as unlikely. In an alternate universe where we could Ceteris Paribus anything, then sure, we could hold many variables constant and the spillover would not abate. A more likely course of events, the one we see unfolding now for instance, has a scared Fed throwing gobs of money at a financial system that whimpers at the slightest pain. This will salvage many debt groups. It will also create the necessary moral haphazard for our next bubble.
I say all of this, of course, with the benefit of hindsight, something not afforded to Morris who wrote this book before the credit crises exploded in true form. Mr. Morris wrote this book between mid and late 2007, after the collapse of the Bear Stearns hedge funds (the spark that lit the fire of the credit crisis) but before the majority of writedowns, the stock market meltdown, and the Bear Stearns bailout. Morris was more right than wrong; I only find fault with his overblown estimates. My bet is this: 400 billion. That’s it. Here are some quotations from his book that I found insightful:
How big investors express their risk appetites: “Big investors were never completely delighted with mortgage pass-throughs. One problem is the ‘barbelled’ nature of many institutions investment appetites—they tend to invest on either extreme of the risk spectrum, putting most of their assets into super-safe instruments and a smaller allocation to high yield/high-risk paper.”
Who can fail: “As a general rule, only the very smartest people can make truly catastrophic mistakes.”
Why models break down: “For shares truly to mirror gas molecules [price movement as heat diffusion model], trading would have to be costless, instantaneous, and continuous. In fact, it is lumpy, expensive, and intermittent. Trading is also driven by human choices that often make no sense in terms models understand.”
Why the credit crisis is actually the result of rational behavior: “When money is free, and lending is costless, the rational lender will keep on lending until there is no one else to lend to.” The Agency problem: “There has never been a starker demonstration of the Agency problem—if loan originators have not stake in a borrowers continued solvency, the competition for fees will inevitably degrade the average quality of loans.”
On OPEC’s oil embargo: “The fire-house blast of dollars during the Nixon-Carter years brought the whole system to the brink of collapse. The tenfold run-up in oil prices mostly reflected OPEC’s implicit switch from the dollar to gold as its pricing standard.”
Bernanke’s explains away the current account deficit: “Ben Bernanke created a minor academic industry with a 2005 lecture that suggested that the persistent, and growing, current account deficit of the United States was…a natural consequence of a ‘global savings gluts’. The headline argument went like this. A big emerging country like China had no choice but to adopt an export-led growth strategy, for it lacks the basic banking and credit infrastructure required for an internal consumption-led boom. During the long transition to modernity, it would need to keep industrial wages low to dampen inflation and to moderate the internal stampede to industrial cities. Over time, the build-up of export earnings would provide the capital base for its own modern banking system, while also protecting against the kind of currency and bank runs that hit East Asia in 1997 and 1998. In the meantime, its dollar investments would benefit from the world’s deepest, most liquid security and trading markets. The upshot was that for the foreseeable future, China, India, the smaller Asian tigers, and the oil exporters would have to absorb dollars. Even if the dollar fell steeply, the broader development gains would be worth it.”
Morris offers the reader a delicious morsel on nearly every page. The historical context alone is worth many times the price of this book.

Saving the Americas

Saving the Americas by Andres Oppenheimer

Andes Oppenheimer does yeoman’s work in Saving the Americas, his rollicking socio-political treatise on US-Latin American relations. Oppenheimer’s story is not necessarily a sad one, though he does convincingly portray Latin America as an increasingly irrelevant global player; it is the story of a host of characters who face a forked path, one way which leads to prosperity and the other which leads to slow ruin. And while these characters linger at the crossroad, biding time or quarreling with one another, Oppenheimer reminds the readers that the decision of which path to take has been made before, to the success of some and the detriment of others. These characters are clearly the leadership of Latin America, and their option is to clean up their internal violence, reinvest in themselves, and compete in the world economy or to wallow in complacency and to hold the ludicrous fantasy that commodity borne wealth will last indefinitely. For Oppenheimer’s taste, too many Latin countries have been stalling or choosing complacency. To be sure, these questions have been raised before. In a defining touch, Oppenheimer rises above the simple criticisms and offers solutions, real solutions, solutions which have been implemented before and were used to drive the success of Ireland and China. Perhaps Oppenheimer’s most trenchant observation is that success often depends on making decisions that will cause suffering to increase at first until things begin to get better. “Many countries in the region have yet to break out of their peripheral blindness and realize that while they are blinkered by ideology and obsessed with the past, rapidly-growing Asian and Eastern European countries are driven by pragmatism and committed to the future.” To be taken in equal doses, Oppenheimer prescribes:

1.) Get into free trade agreements and give up the stronghold on stodgy industries. Just because these industries offer jobs immediately does not make them the wise place to allocate ones resources.
2.) Stop making it easy for people to major in sociology. Latin America needs more engineers.
3.) Create incentives for universities to pursue commercially viable technologies.
4.) Create incentives for nationals to repatriate money they keep offshore.
5.) Create a rock-solid legal framework that protects foreign investments.
6.) Regional trade agreements must include the creation of agencies that enforce the trade contract. There must be real accountability.