Liz Hecht, February 2024

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“The devil never sleeps. But he only wins if we don’t do better next time.”

―Jane Cage, Tornado Survivor¹

I worry about everything all the time. I often worry that I’m not worrying enough. So of course I had to read The Devil Never Sleeps: Learning to Live in an Age of Disasters.

A leader in crisis management, disaster response and homeland security, Ms. Kayyem is on the faculty of Harvard’s Kennedy School of Government and serves as an advisor to governors, mayors and corporations. The Devil is based on fieldwork, interviews with experts and practitioners, reports, commission findings and the legacy/lessons of past disasters.

Black Swans and Gray Rhinos

Ms. Kayyem writes early in the book, “So much of our discourse about disasters focuses on the past and why we didn’t prevent them or on the future and how to prevent them from happening again. But we need to stop being surprised. If we can structure ourselves around the probability, not the mere possibility of disasters, then we will better invest in the skills that can minimize harm.” Unlike black swans (surprising, low-probability, high-consequence events), disasters have become gray rhinos (obvious, high-probability events that are always looming).²

The Devil Never Sleeps provides a clear-eyed look at how governments, companies and individuals can minimize the harm caused by disasters. The Devil covers eight lessons about how to limit negative effects during and after a disaster. Here is a brief summary of three key lessons:³

Lesson #1: Learn from Near Misses

How companies learn from potential disasters says a lot about how they will respond when confronted with a real disaster. Near misses should be considered a blessing―a wakeup call to improve disaster response. “Since the disaster didn’t happen,” the author writes, it affords a bit of luxury. Why squander it?”

Consider the fast food company Chipotle. Chipotle had always treated every customer complaint or sick employee as a potential catastrophic incident. So when the company confronted a real, potentially reputation-ruining challenge, it was ready.

In 2015, a significant number of E. coli cases were linked to Chipotle’s lettuce. But while Chipotle tripped, it did not fall. The company made massive changes to its food safety protocols and went public with those changes while addressing past vulnerabilities. Before losing 30% of its value in 2015, Chipotle’s market cap was nearly $24 billion. As of this writing, it is $72 billion. Chipotle protected its brand by learning from near misses and by communicating rigorously during the crisis.

Lesson #2: Spread the Word

Communicating rigorously is critical.

Sometimes the powers that be seek to prevent panic by hiding vital information. But without clear communications, the consequences during and after a disaster can worsen dramatically. Information should be shared with everyone and welcome from anyone (not subject to “need-to-know” restrictions or dismissed without consideration based on the source).

During a 1702-1703 smallpox outbreak in Boston, the city leaders prohibited churches from ringing bells to memorialize the dead. As the death count steadily rose, the city continued to forbid the bells. Several centuries later, under similar circumstances, denial led to delay that exponentially magnified the consequences of COVID-19.

The Devil provides many such examples of situations where the results of a tragedy are made much worse by a gap in communications. Ms. Kayyem takes care to note, however, that sometimes vital intelligence is available and communicated yet not acted on, as was the case during the September 11, 2001 terrorist attack, the Capitol riot on January 6, 2021―and, most recently, the October 6, 2023 Hamas attack on Israel.

Lesson #3: Avoid the Last Line of Defense Trap

BP’s Deepwater Horizon oil rig explosion in early 2010 caused the death of 11 workers and an oil spill from Texas to the Florida panhandle, impacting the ecosystem, tourism and the food supply chain for the entire U.S. How had BP planned to prevent such an outcome? While capturing oil beneath the seabed, if anything went wrong, a single blowout preventer (BOP) was supposed to take charge, automatically shutting down the system. In other words, one last line of defense was supposed to save the day.

Ms. Kayyem details three reasons why the last line of defense concept is a dangerous myth: (1) people blindly rely on it as some form of guarantee, (2) too much pressure is put on one defense and (3) as a result, organizations fail to create “layered responses” to prevent/limit the impact of a catastrophic event. She urges readers to consider the BP scenario differently given reliance on more than one defense mechanism: “Imagine a ten-day spill, not one that lasts more than a hundred days. The most obvious investment would be a second on-hand BOP. It would have been expensive, but not $68 billion expensive … The offshore oil industry fought backup blowout preventers as a condition of drilling. The blowout preventers don’t always work, but you increase your chances a lot by having more than one.”

The author often uses the word “layered” in describing disaster prevention/mitigation responses that build in multiple prevention mechanisms as opposed to relying on just one. But she notes that it’s not only about “one device or instrument but a series of investments, procedures and training” and also pays deference to a culture of preparedness in mitigating negative consequences.

Investment Company Implications

The Devil Never Sleeps compels consideration of important questions affecting investment companies:

• How does an asset manager prepare for potential disaster not only affecting its own company but also portfolio companies? Is disaster consequence mitigation considered an important part of portfolio risk management?
• What is the potential for disaster based on a company’s physical location, product(s) and supply chain network? What disaster preparedness/mitigation protocols are needed and are they already in place?
• What does the culture of a current or potential portfolio company say about its ability to prevent or minimize the impact of a disaster? Does a company react to a near-miss by saying, in effect, “Phew!” and then back to business as usual? Is a company with ongoing safety issues merely experiencing serial misfortune? Or is company culture the culprit?
• What role do security professionals play within a company? Are they mainly for show or do they have a real seat at the table? (Ms. Kayyem notes that “few boards of directors include a single professional from the security or cybersecurity realm” … probably because “response capabilities are just not often viewed as business enablers.” That is, of course, until the lack of response capabilities disenable everything.)
• Does the section on Disaster Prevention and Recovery in company documents read like a box-checking exercise? Or does it bring to life processes demonstrating significant planning, resources and investment?
• How might an investment firm’s ESG process and ESG experts play a role in understanding potential threats to portfolio companies?
• Can the potential for disaster/mishandling of disaster be quantitatively modeled? Or is this an area where purely fundamental, qualitative investment approaches have an advantage?

And, perhaps most important, do the people in charge worry enough? After reading this book, the next time I hear a company leader or politician saying, in effect, “We’ll cross that bridge when we come to it,” I will wonder what happens when there is no more bridge. When the last line of defense fails and the latest in a series of near misses becomes a full-fledged disaster.

Fortunately, for a book about the inevitability of disaster, The Devil is weirdly hopeful because it provides a clear, inspired blueprint for “doing better next time.”¹

1. The inspiration for the title of this book came from a survivor of the 2011 tornado in Joplin, Missouri. Based on a conversation in the aftermath of the tornado, the author writes that Ms. Cage wasn’t merely “praying for deliverance or that Joplin would be spared” next time. While grounded in faith, her approach was “tactical, operational and realistic.” For many years after the tornado, Jane Cage led an effort to make Joplin better prepared for the next disaster.
2. In 2007, Nassim Nicholas Taleb, a professor and former Wall Street trader, wrote the influential book, The Black Swan: The Impact of the Highly Improbable to describe events considered impossible until they actually happened (until 1697, no one had ever seen anything but white swans until a Dutch explorer discovered a black swan in Australia). Nearly a decade later, global analyst Michele Wucker wrote The Gray Rhino. “There’s no point in looking for blue or pink rhinos,” Ms. Kayyem writes in describing the book. “Instead, just look at what is in front of us, the obvious risks that we face every day.”
3. In describing these three lessons, I have paraphrased language from The Devil in some cases while explicitly quoting the author in others.

Liz Hecht, October 2023

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“The world is very good at locking the barn door after the horses have been stolen.”

―From Wealth, War & Wisdom

When one reads a book, there often is a particular scene or story that remains fixed in memory. After first reading Wealth, War & Wisdom, I did not remember the “people hunts” conducted by the SS or the way the Russians used dogs as suicide bombers during World War II. For some reason, in a book filled with the horrors, chaos and vicious stupidity of war, I remembered most of all the story of Estelle Sapir, the daughter of a wealthy Polish investment banker.

During a final conversation with her father over a concentration camp fence, he assured her not to worry about money because there was plenty of money in the bank. Reaching through the barbed wire with a single finger to touch his 17-year-old daughter, Jozef Sapir made her repeat the bank information to be sure she would remember.

After the war, when Estelle went to get the funds, the bank informed her that the money could not be released until she could provide her father’s death certificate. “Who do you want me to get the death certificate from?” she asked. “Adolf Hitler?” Estelle tried repeatedly over several decades to recover her father’s money.

In Wealth, War & Wisdom, Barton Biggs explains that Jozef’s Sapir’s account likely was transferred after several years to the bank’s reserve fund.¹ “The moral of the story,” Biggs writes, “is that safe haven accounts must be crafted with the bank to provide flexibility of future identification. Read the fine print.” (Maybe Estelle’s dad didn’t read the fine print because he was about to be sent to a Nazi death camp? )

I was initially drawn to this book several years ago because of my own family’s WWII experience. My father and his sisters escaped Nazi Germany to England via the Kindertransport. And my great grandparents died in the Czech concentration camp, Theresienstadt. I recently reread WW&W because of the current immediacy and proximity of war. People sheltering from German bombs in London subway stations in 1940 and people sheltering from Russian bombs in Kyiv subway stations in 2022. And then earlier this month hundreds of civilians in Israel being slaughtered or taken hostage by terrorists. Plus ça change, plus c’est la même chose.²

A magnificent work of history, two main investment themes run through this book: the prescience of stock markets and strategies for retaining wealth amid the uncertainty of war.

The Prescience of Stock Markets

Barton Biggs initially became fascinated with the wisdom of markets when he discovered by chance that the British and U.S. markets started moving up, respectively, around the Battle of Britain and the Battle of Midway while the German market peaked just as German patrols started advancing into Moscow. “Those were the three great momentum changes of World War II,” he writes, “although at the time no one except the stock markets recognized them as such.” He describes the equity markets as “the epitome of a wise crowd” and attributes the markets’ often uncanny foresight to the cognitive diversity of many foxes versus the cognitive dissonance of a few hedgehog experts.³

Why were the markets so often right so early during this critical period of human history? At a nadir of despair in London, the wise market crowd nonetheless might have anticipated the strengthening alliance between Britain and the U.S. Although the Japanese press shared only good news, rumors of defeat at Midway began to circulate in the elite tea houses when naval officers and aviators failed to return to their geishas. And right before the German push into Russia, the German aristocracy already had become disenchanted with the Nazi regime while German soldiers were returning home with negative stories from the Eastern front.

Of course, Biggs observes, the markets aren’t always all-knowing. “The French bourse was dead wrong in 1941 when it forecast prosperity from the German occupation.”

Strategies for Retaining Wealth During War

Wealth, War & Wisdom explores different stores of value during wartime―cash, equities, bonds, jewels, gold, art and property―and reveals their respective flaws in different circumstances. Certain assets, while they prove to be long-term wealth generators, nonetheless are useless during dire periods of history. Being land rich but food poor, for example. In the first bitter winters of post-war Japan, warm clothes and food were more valuable than gold. And keeping one’s valuables in a safety deposit box may offer no real protection. (“Conquerors demand the key and your bank will give it to them,” writes Biggs.)

According to Wealth, War & Wisdom, surviving future wars may depend on two key factors:
(1) diversifying your wealth across different countries and asset classes and (2) cultivating a healthy aversion to complacency. A remote country house where you can grow your own food also would be helpful. In the book’s conclusion, Biggs poses a question that is sensible, stark and profoundly depressing: “What will be the threats to wealth of this new century? Terrorism, religious warfare, or a collapse of the financial system … Who knows? But be alert. The barbarians will come again.”

No matter how sanguine our day-to-day lives, we all live in a scary, unpredictable world. Read Wealth, War & Wisdom if you want to become more attentive to the message of the markets, prepare for “10 standard deviation events that transform the environment” and learn how to secure the barn before the horses are stolen.

Barton Biggs (1932-2012) was Morgan Stanley’s first research director and a founder of the hedge fund, Traxis Partners. He is credited with early focus on the investment potential of emerging markets and for predicting the dot-com bubble in the late 1990s. His other books include Hedgehogging, Diary of a Hedgehog and the novel, A Hedge Fund Tale of Reach and Grasp.

1. According to an April 16, 1999 New York Times article, Ms. Sapir, by then elderly and in poor health, withdrew from a class action lawsuit against the bank for an undisclosed settlement estimated to be approximately $500,000. Her father fortunately did not rely on one bank but diversified the family assets among banks in different countries. Ms. Sapir also visited a number of other banks where her father had sought to safeguard the family fortune. She told the Times that these accounts were turned over to her right after the war without question.
2. The more things change, the more they remain the same. This pessimistic observation is credited to the political journalist and satirist, Alphonse Karr in 1849. Barton Biggs expresses the same sentiment toward the end of WW&W: “The history of the world demonstrates that wealth destruction, whether through wars or plagues or technology, has been endemic to mankind, and there has been no sign as yet that sophistication and progress will change this eternal verity.”
3. For more on foxes versus hedgehogs, see the March 2021 issue of Excess Returns.

Liz Hecht, August 2023

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“Usury is defined as the charging of excessive interest. But no word exists to describe too little interest.”

―From The Price of Time

During the terrible inflation that gripped Germany in the 1920s, my grandfather was a resident at the hospital in Heidelberg. Every payday, my grandmother would meet him at the gates of the hospital to collect his paycheck before rushing off to buy food because an hour later his paycheck would be worth much, much less.

In considering recent Fed moves to curb inflation with higher interest rates, I often try to remember this bit of family history. I have to keep reminding myself that rising interest rates―painful though they may be in many respects―are designed to keep inflation in check.¹

Because higher interest rates tend to put pressure on stock markets, recent interest rate hikes have become a subject of endless speculation and trepidation. In this environment, Edward Chancellor’s book, The Price of Time: The Real Story of Interest, provides invaluable perspective. The book documents the origins of interest and the unintended consequences of excessively low interest rates.

During a period when many are worried about excessively high interest rates, Mr. Chancellor’s book provides an encyclopedic, intensively researched, elegantly written history of all the economic woes that can result from excessively low rates. He specifically addresses the evils that can arise from the ultra-low, zero-bound (even negative in some countries) interest rate regime that held sway after the Great Financial Crisis. Here are but a few of the many ills caused by an excess of easy money:

Financial Recklessness. “When the cost of borrowing is low enough, even the most absurd investments can appear viable,” Mr. Chancellor writes. He documents the role of easy credit in diverting valuable resources away from sound investments to corporate zombies and profitless unicorns. “Interest rates set at 2 per cent or less fuel speculative manias, drive savers to make risky investments, encourage bad lending and weaken the financial system … The large-scale misallocation of resources to loss-making businesses whose profits exist in Never-Never Land is a sign that the cost of capital is too low … A tale not so much of creative destruction but of capital destruction on a grand scale.”

Reduced Competition and Productivity. “Low interest rates [after the Great Financial Crisis] fueled a takeover boom, reducing competitive pressures by creating monopolies and oligopolies. Since zombies, monopolies and financialized firms tend to invest less, collectively they lower an economy’s innate capacity for growth.” Mr. Chancellor describes how cheap borrowing costs facilitated share buybacks with U.S. firms spending more on buybacks in the post-crisis period than they invested in their operations.² By increasing market concentration, low interest rates may lead to slower growth by creating “barriers to entry which discourage the establishment of new firms and innovation … a decline in workers’ bargaining power, and falling investment and R&D.”

Greater Income Inequality and the Rise of Populism. By disincentivizing and reducing savings, ultra-low interest rates can promote income inequality. In the U.S., growing pension deficits due to low rates caused some cities and towns to cut public services and fire workers. As the market recovered after 2008, the rich enjoyed most of the spoils while the middle class had most of its wealth tied up in the housing market. After their subprime losses, most American banks increased their interest charges to borrowers with poor credit scores, even as the Fed funds rate was slashed to zero. “Banks with busted credit,” Mr. Chancellor notes, “got bailed out while homeowners with busted credit got foreclosed.” For those who believe that political stability depends on the existence of a strong middle class, such trends are bad news. German Finance Minister Wolfgang Schäuble has blamed the rise of the German nationalist party AfD on the ECB’s negative interest rates.

Mr. Chancellor covers the bizarre topic of negative interest rates in a chapter entitled “Rusting Money.” At this farthest end of absurdity, homeowners in Europe and Japan were receiving rebates on their mortgages—a phenomenon the book describes as being “against human nature” and “possibly the stupidest and certainly the strangest innovation in the history of finance.” “Capital, like employees,” observes the author, “does not work productively without pay.”

A half-century after my grandmother rushed to cash my grandfather’s paycheck, I was trying to land my first job as a freshly minted college graduate. This was in 1980 when the Fed funds rate had climbed close to 19% with the goal of curbing inflation. Because of high interest rates, my job search was a vividly negative experience shared by many of my fellow graduates. I suppose I should have been happy that the Fed was putting the brakes on inflation with higher interest rates. But I was not happy.

Reading this book today begs an important question: Must we forever oscillate between the excesses born of easy money and the constraints of extreme monetary tightening? Endure the massive negatives associated with ultra-low interest rates or suffer through the keen miseries of ultra-high rates? Mr. Chancellor’s book suggests that Central Banks have been “slow to hike during booms but rush to ease during busts.” He also points to Iceland’s strong recovery (“The Icelandic Counterfactual”) after 2008 as being opposite to the U.S. approach in every respect. Iceland “swallowed the bitter medicine of austerity” by letting the banks fail, prosecuting miscreant bankers and sheltering domestic depositors and homeowners at the expense of other creditors.

I am profoundly grateful for a book that sheds light on the forces shaping my family’s experience and my own. The Price of Time enhances understanding of how interest rates—”the most important price in a market-based economy”—affect markets, companies and individuals.

1. Modern policymakers view interest as a lever to control the level of consumer prices and the impact of interest rates on inflation is a daily news event. But in the introduction to this book, Mr. Chancellor writes that “influencing the level of inflation is just one of the several functions of interest, and possibly the least important.” He organizes the book’s chapters around the various functions of interest, including “its influence on the allocation of capital, the financing of companies, the capitalization of wealth, the level of savings, the distribution of wealth, the measurement of risk and the regulation of international capital flows.”
2. Based on a November 2015 Reuters study of 1,900 listed companies showing that since 2010 aggregate dividends and buybacks amounted to 113 per cent of capital spending.