Profits of Pursuit

If the fundamental pursuit of the human individual is security, wealth is the material means to that end. But wealth is much more than money or assets, and it has been both a means and an end in itself for as far back as civilisational memory can stretch. That’s why we ask ourselves: How much wealth is enough? That seemingly unanswerable question pertains to both the individual in a socioeconomic context as well as everybody within the perimeter of an economy. How much wealth is enough for me? How much wealth is enough for us all? Foolish questions but they point to the difference between the winners and losers of history.

“Put but money in thy purse.” Iago’s trite advice would be the soundest one man could give another as long as it wasn’t meant for Rodrigo to get Desdemona in his bed. The first of the seven “cures” for a lean purse in George Clason’s 1926 classic The Richest Man in Babylon is “Start thy purse to fatten­ing”. Which is all very well Willy Loman would have said, but all we know is that Uncle Ben went into the jungle when he was 17 and when he came out, he was rich. That period in between which we don’t know, which we cannot know, is when what matters happens. For much less sophisticated socialist grudge-mongers than Arthur Miller, in that gap re­sides the great lie of capitalism. And yet, one doesn’t have to look beyond oneself to see that that gap is where we all want to be. What happens there is what keeps the world turning. For, private wealth means capital. And private capital is the proven best means to date of growing an economy.

THE INDIAN EXCEPTION

In 2022, global wealth fell for the first time since the crash of 2008 according to the Credit Suisse-UBS Global Wealth Report (2023). In 2021, aggregate global wealth had risen by 9.8 per cent to $463.6 trillion. In 2022, total net private wealth fell to $454.4 trillion, a decline of $11.3 trillion at (-)2.4 per cent. Wealth per adult declined by $3,198 at (-)3.6 per cent. Much of this decline was due to the ap­preciation of the dollar. Financial assets contributed the most to the fall while non-financial assets like real estate stayed resilient, defying higher interest rates. According to the Boston Consult­ing Group’s (BCG) Global Wealth Report (2023), “[f]ollowing nearly 15 years of steady expansion that began in the wake of the 2007-2008 financial crisis, the growth of global financial wealth was stopped in its tracks in 2022, declining by 4% to $255 trillion.” A downturn, given the sharp 10 per cent-plus rise in financial assets in 2021. However, the BCG report also says, “Combining both financial and real assets, total absolute global wealth in 2022 reached $516 tril­lion, an increase of 1% over 2021.”

What can be agreed on is that 2022 hasn’t been anywhere as good as 2021 although the longer term global pros­pects till 2027 look good. BCG expects global financial wealth to rebound in 2023 by 5 per cent to touch $267 trillion. Credit Suisse-UBS expects a 38 per cent increase in global wealth over the next five years to end around $629 trillion in 2027 and attention should be paid to middle-income countries because they will determine which way the arrow moves. Latin America, the outlier, has shown a total increase of wealth of $2.4 trillion, although the cause is largely lo­cal currency appreciations against the dollar. North America and Europe, with a total loss of $10.9 trillion, were the chief drain while individually the US, Japan, Canada and China were among the heaviest losers. Most notably, India, along with Brazil, Mexico and Russia, was one of the countries that experi­enced the biggest increases in wealth.

Something else has happened even as total global wealth declined. Wealth inequality has also narrowed with the share of the richest 1 per cent dropping to 44.5 per cent. But more importantly, global median wealth rose by 3 per cent in 2022. Which means, despite the Ukraine war and its extended fallout, the average individual hasn’t done all too badly although such numbers mean nothing when brought to bear on real people on the ground and their innumerably diverse circumstances.

No amount of wealth can be enough. Its pursuit is our sign of life.

CALAMITIES ARE CYCLICAL

“[A]t least once in every century there has been an episode of great wealth destruction when the Four Horsemen of the Apocalypse—Pestilence, War, Famine, and Death—have ridden rough­shod. World War II was the last time that the pale horse with Death on his back and Hell following him terrorized the world,” wrote Barton Biggs in Wealth, War, and Wisdom (2008). Biggs had correctly identified the dotcom bubble but the crisis looming in 2007 had given him the slip. Better known as the author of Hedgehogging (2006) and The Diary of a Hedgehog (2005 and 2012), Biggs in Wealth, War, and Wisdom took a hammer to Paul Samuelson’s maxim “the stock market has predicted nine out of the last five recessions” about the unreliability of markets. Financial economists as a rule have been dismissive about the predictive power of stock markets and not without reason. But Biggs showed, with facts and data, several instances in the course of World War II when markets reacted to what would become some of the turning points of the war. In other words, the market saw shifts in the fortunes of the warring parties that contemporary observers, including experts and journal­ists, did not. The crowd might be wise, after all. An analysis like this, of “what really happened to financial markets and wealth during the war years”, had never really been attempted before. But the reason to return to it now is not merely the doom-and-gloom enhanced by the Ukraine war, the possible spread of the Gaza conflagration, or Xi Jinping’s itchy foot across the Taiwan Strait.

The reason is another perpetual question. What happens to wealth in a cataclysm and how can it be preserved? As Biggs put it, “what happened to wealth before and during the war” leads us to “what insurance steps should a wealthy individual take to protect his or her fortune from the Black Swan-like appearance of the apocalypse.” Things in the wider world must be paid attention to and an investor needs to study history be­cause “[t]here is no use working yourself to death to accumulate wealth if it can’t be preserved and enhanced.”

There’s no such thing as too much wealth because wealth gets destroyed pe­riodically. Tangible assets burn or change hands, stocks and bonds become mean­ingless in times of war and occupation. Digital infrastructure will be severely tested by the next big conflict. In addition to calamities like global financial crises or pandemics, war and occupation and mass destruction of wealth are back as our possible futures. It’s not merely about trade patterns and the global financial order. It is said that land is the only real asset since it’s the only thing that tends to survive a cataclysm like war while ev­erything standing on it can get destroyed. Yet, there’s the example of post-war Japan which showed that even land could be destroyed, although this was a creative destruction by Douglas MacArthur whose confiscation and redistribution of farmland, while leaving industrial and commercial land untouched, provided the impetus for the renewed creation of wealth, or the creation of new wealth.

Creative destruction of wealth generates a sense of the persistence of wealth. But since there is no law of conservation of wealth like mass and energy, it matters little or negatively to the individual who loses wealth unless it’s his wealth getting renewed. And yet, it’s argued that wealth, like mass and energy, is conserved when it’s changed from one form to another, the transferee and transferor values of wealth being equal. That may be fine ceteris paribus, but what it doesn’t take into account, for example, is the museum and its artefacts being burnt to the ground or a tony address suffering the same fate.

THE MIRROR OF HISTORY

Capitalism runs on the creative destruction of wealth. Wealth begets wealth but that doesn’t make it a linear process. Two financial dynasties in the 20th century are more illustrative than most others of the resilience of wealth.

JPMorgan Chase & Co may be the largest ‘bank’ in the US and the largest in the world by market capitalisation today while Morgan Stanley—which long ago lost formal links with the other half of the House of Morgan, having been brought into being by the Glass-Steagall Act of the 1930s that separated commer­cial banking from investment banking in the US—is still a giant. However, these behemoths are far removed from what the name Morgan once meant before the secretive and rarefied world of the private banker as it once was came to an end. After the dawn of the age of the small investor, it has become increas­ingly difficult to recall the power of the private banker as financial ambassador and adjunct to government. As Ron Chernow put it in his much-celebrated The House of Morgan: An American Bank­ing Dynasty and the Rise of Modern Finance (1990): “During the pre-1913 Baronial Age [Chernow’s coinage] of Pierpont Morgan, bankers were masters of the economy… They financed canals and railroads, steel mills and shipping lines, supplying the capital for a nascent in­dustrial society… As the major interme­diaries between users and providers of capital, they oversaw massive industrial development. Because they rationed scarce capital, they were more powerful than the companies they financed and acquired increasing control over them.”

The JP Morgan myth was so pervasive that it led not only to some of the most hair-raising conspiracy theories but also a general distrust of the banker. In response to Pierpont Morgan’s remark “America is good enough for me,” a populist newspaper had retorted, “Whenever you’re tired of it, you can give it back.” When Pierpont Morgan died in 1913, his estate was worth $68 million, more than a billion today. Andrew Carnegie was surprised that Morgan Sr was not a “rich man”. But Morgan’s power was the money he commanded, not what he owned.

“The story of the three Morgan banks [Morgan Grenfell in the City of London being the third] is nothing less than the history of Anglo-American finance itself. For 150 years, they have stood at the center of every panic, boom, and crash on Wall Street or in the City. They have weathered wars and depressions, scandals and hearings, bomb blasts and attempted assassinations. No other financial dynasty in modern times has so steadily maintained its preeminence,” wrote Chernow. The emergence of fiercely competitive global markets in the second half of the last century, with multinational corporations much more powerful than banks and the prolifera­tion of instruments to raise capital for both governments and companies, saw bankers lose that pre-eminence and the old, conservative and secretive world of private banking which didn’t advertise it­self, let alone put up a nameplate (J.P. Mor­gan & Co. had nothing but the number 23 on its door), and whose illustrious clients would travel halfway across the world to the bank, was gone. The new, necessarily aggressive tactics employed by Morgan Stanley from the 1970s was actually the visible sign of bankers’ weakness. Thus, the fall of haute banque is essentially a story of adaptation and evolution.

The second illustrative story of the destruction and resurrection of wealth is that of the Warburgs. If JP Morgan is the story of America, of American and global finance, and how the power of the financier shrunk and then reconciled itself to an altered world, bringing about a fundamental change in the idea and reality of wealth, nothing tells more of the resilience of wealth in the most sanguinary century in human history than the saga of the Sephardic Jewish banking family that took its name from the central German town where they settled in the 16th century after moving there from Italy.

“Older than the Rothschilds, more versatile than the Barings or the Hambros,” was a statement of fact from Time magazine in a profile of the family in 1966. “No less than the Rothschilds, they were revered as Jewish royalty. A huge, charming, and gregarious clan with enormous joie de vivre, they may rank as the oldest, continuously active banking family in the world,” says Chernow in his history of the family and its banking empire in The Warburgs: The Twentieth-Century Odys­sey of a Remarkable Jewish Family (1993). The story of the Warburgs is the story of the rise and fall of Jewish life in Ger­many. And astonishingly, of its renewal.

If they showed the “abundance of Ger­man-Jewish achievement and the eerily close fit of German and Jewish culture,” they also “displayed the shortcomings of German Jews. They could be snobbish, arrogant, and status-conscious…” But un­like other Jewish banking families they never fully assimilated into the aristocra­cy while refusing to be baptised. And yet, “[s]eemingly heedless of the darker side of the German psyche… and subservient to the state, they were generally ill equipped to deal with the tragedy that befell them. The Warburgs didn’t love Germany wisely but too well.”

That could be said of much of Ger­man Jewry even after the Nazi capture of power in 1933, and like the rest of Ger­man Jewry they learnt that to Hitler it didn’t matter how they saw themselves or constructed their identity. Where their story differed was in survival. Al­though most members of the Warburg branches had fled to the US and UK be­fore the war began, they have their dead in the Holocaust, too. Paul Warburg, one of the fathers of the US Federal Reserve, and his brother Felix had migrated to the US long before (Paul died before Hitler came to power) while another brother, Max, who was director of M.M. Warburg & Co. in Hamburg—and once an advisor to the Kaiser—held on till the end before fleeing in 1938. Their cousin Siegmund migrated to the UK in 1934 and founded S.G. Warburg & Co. in London in 1946. Max’s son Eric, the founder of Warburg Pincus, would return to Germany as an officer in the US Air Force and later help rebuild both the family’s business as well as West Germany, to say nothing of post-Holocaust German-Jewish rela­tions. Eric’s son Max is still a partner in M.M. Warburg & Co. which remains one of the oldest extant investment banks in the world (the bank was implicated in the 2017-onwards Cum-Ex scandal of allegedly defrauding taxpayers but that’s not of any pertinence to this story just like the Warburgs’ impressive artistic, scientific and overall intellectual accom­plishments aren’t).

Perhaps the key to Warburg sur­vival and resilience lies in Chernow’s observation that though they were well-assimilated into the upper echelons of society in Hamburg, New York and London, “the Warburgs were never wholly accepted. This enabled them to combine an outsider’s perspective with an insider’s entrée. Often seeing things from a somewhat skewed angle, they tended to peep deeper into their times than their contemporaries.”

The name Warburg is a synonym for both resilience and survival.

SEIZETHE DAY

The relevance of these vastly different but ultimate, and one extreme, stories of the rise and fall and resurrection of wealth is as much the triumph of private enterprise they demonstrate as the warning they advertise. Wealth in every form is vulnerable. Its destruc­tion is always a war or an epidemic or a natural disaster away. No amount of wealth is enough and what there is, must be preserved.

While India has been spared a cataclysm on the scale of World War II, the next largescale upheaval is unlikely to leave us unaffected, no matter where it starts, not least because we are much more integrated into the global economy than ever before. An investor, wealth creator or wealth manager cannot ignore anything that happens in the world outside. The best wisdom lies in hind­sight. But we cannot get there on time. Therefore, we must never lose sight of the third and fourth cures from Babylon:

Make thy gold multiply.
Guard thy treasures from loss.
Persevere, because we don’t know what comes tomorrow.

JP MorganProfits of PursuitWarburgWealth Issue 2023Wealth manager