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November 17, 2022If you are new to these essays, welcome! My name is Paul. I am a writer and investor. I wrote the book Raising a Thief about being a parent. You may have seen my writing in The Wall Street Journal. For many years I was at Bridgewater Associates, an investment firm. My goal is to share content that shifts your perspective about how the world works, things you won’t learn at school. Feedback: paul@paulpodolsky.com.
Today’s post is a) a recap of my Tuesday WSJ op-ed b) a podcast with Victor and Leopold Cox c) An answer to the most popular polled question in last week’s essay, which was “How To Survive a Bureaucracy” and d) an investment outlook. Regarding “d,” this week was a big deal.
Financial War from the WSJ (skip if you already read in the paper)
Soaring energy prices in Europe, an alleged attempt to detain a Fed official in China, efforts to diversify chip supply away from Taiwan Semiconductor: We are in a global financial war.
Financial wars date at least to the Crusades, but after more than 200 years of increasing globalization, financial conflict is now far more costly and unpredictable. People on both sides of these conflicts typically don’t understand what is going on. They know only that their world is being turned upside down. So, for example, ordinary Europeans will be shocked as they struggle to pay for heat this winter. My Putin-supporting mother-in-law in Moscow was shocked to discover her preferred coffee shop, Starbucks, no longer operates in Russia. “What happened?” she asked me.
Anodyne words such as “globalization” obscure the gritty connections of cause and effect. Over the past two centuries we have learned how to produce food and build shelter efficiently, and we now feed and house eight billion people more easily than prior centuries did one billion.
The causes were industrialization, mechanization, electrification and automation, joined with the ability to finance such innovations. Global trade grew sharply, jumping higher both after the second world war and the collapse of the Soviet Union. When Nixon visited China in 1972, the US didn’t have a trade relationship with the country that is now one of its top trade partners.
The sophistication of this system is also its vulnerability. Spending in any economy has two parts, income and borrowing, and financial warfare tries to undermine both. Income consists of trade, employment and corporate profits. Borrowing consists of spending what hasn’t yet been earned. The cost of this borrowing is driven by the supply and demand for capital. These relations are interlinked: My spending is your earning.
U.S. sanctions against Russia fit neatly into the income-and-borrowing framework. The banning of imports of Russian oil sought to impair Russia’s income. The forbidding investors to purchase Russian bonds and the freezing of Russia’s central-bank reserves were intended to increase the cost of credit.
But as Russia has demonstrated, in any war it’s possible to counter-attack. Lower prices on Russian crude found buyers in India and other countries. When Russia cut off natural-gas sales to Europe, it sought to destroy European income. Many European companies can’t make a profit with such high costs.
America’s energy industry isolated the nation from significant harm. But a war over Taiwan would wreak havoc on the global economy. Global trade with China is about $4.5 trillion; of which the U.S. is about $600 billion, No other country could easily replace China. The entrepreneurial infrastructure around Shenzhen is unique. In the event of war, the U.S. might try to freeze China’s foreign-exchange reserves. Or, seeing the Russia example, China could move first and disrupt U.S. credit markets.
Over the same 200 years that produced huge increases in standards of living, there have been many disruptions to globalization. An expansion in global trade from the 1860s to World War I was followed by a retreat. After each interruption, the world gradually resumed its path of greater trade integration, and the same will likely happen this time for the simple reason that isolation impairs wealth.
The key assumption behind the post-Cold War order has been that economic self-interest would discourage conflict. I certainly believed that. My contacts in China and Russia experienced an increase in living standards. The most obvious indicator of increased wealth was their foreign travel, which rose to levels their parents couldn’t imagine.
The invasion of Ukraine taught me that this assumption was flawed. After Russia’s military setbacks, Beijing may be reconsidering its Taiwan policy. More likely, Beijing believes the U.S. should be reconsidering it’s own policy.
So far, my mother-in-law’s enthusiasm for Putin outweighs her nostalgia for Starbucks. When offered a trip to Finland to see my wife and me she declined, citing the need to stay and support the war.
Leopold and Victor Cox Podcast
To be accurate, the conceptual must be grounded in the specific. That’s what I love about podcasts. They are individual stories and, as such, unarguably true.
You almost certainly have not heard of this week’s guests, Leopold and Victor Cox. The full episode is here. Like any good story, this one operates on several levels at once. They are father and son. The father left Grenada as a child, so there is an immigrant thread. They are Black. The son is training as a doctor. The father supported three kids as a New York City bus driver and upon completing almost 30 years behind the wheel promptly passed the bar and now works as a lawyer.
Regular readers know I track the movement of people. That’s what I wrote about in The Talent Skedaddle. Who leaves what places for where? This is the ultimate test of a country or a company or a family. All social structures, including countries, are imperfect. It’s a question of relative opportunity.
In the US, that imperfection is in part tied to our tortured history with race. I am uncomfortable talking and writing about race and try to go out of my way to do so, however awkwardly, with guests like Greg Taylor and Robert Johnson and Victor and Leopold. I feel I will learn more by broaching the topic than not.
A few things I took away from the conversation.
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Given that Leopold grew up on an island that was almost all Black, he only experienced racism when he arrived in the US. “It was shock…we had to learn this is what goes on.” Victor, the son, had high-school teachers who systematically lowered his grades. He learned to catalogue every assignment and hold the teacher accountable to a proper attribution.
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Leopold liked driving a bus. “Your office is the wide open street.” That said, he experienced discrimination within the Transit Authority not because of his race but because he was educated! The management didn’t like educated people.
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About 5% of US doctors identify as Black versus 14% of the population. How do Black patients view Black doctors? Victor recounts a story of a patient asking a question that put this dynamic into perspective.
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Finally, great “things they didn’t learn in school” lessons from both of them. I was also buoyed by Leopold’s optimism. “Life is positive. there are good people in the world.” A good reminder.
Surviving a Bureaucracy in a Downturn
The economy is running hot, which means the central bank needs to print less money, which means growth will slow, profits sag and companies will fire people. That isn’t up lifting, but it’s true. The question is how you navigate a bureaucracy at any point in time, but particularly now.
Before breaking out on my own, I worked for a number of corporations, some with hundreds of thousands of employees (Bank of America), some with tens of thousands (Dow Jones) and some with just a few thousand (Bridgewater). While I don’t have a boss now (other than you the readers), many of you or your children will have a boss and work in a bureaucracy, so below are a few reflections on how to manage.
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Know the goal. Often it is not what’s stated. For instance, a bank might say its goal is “to make financial lives better.” That’s not accurate. The goal is to make money. Making money is a far more precise, measurable goal than making “financial lives” better. Similarly, a military might say the goal is defense. In truth the goal, as one veteran said to me, is “to kill people and blow stuff up.” Once you know the goal, get as close as possible to that function and make yourself essential. If profits sag where you work, layoffs will almost certainly follow, so make yourself essential ahead of that.
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Big organizations are an orchestra, know what instrument you play. Big organizations exist because some jobs are so complicated they can only be completed by large teams. Building a Pyramid, banking a country, managing a multi-billion dollar portfolio or defending a region all qualify. In all organizations, there is a conductor and there is the orchestra, of which one part is you. If the job is to play oboe, learn to play the oboe and don’t make pretensions about playing the violin. The conductor doesn’t care (certainly not initially) if you have multiple skills.
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Recognize the boss is the boss. Bureaucracies are authoritarian. You may get to vote in your country, not at your job. A good boss will tell the truth, focus on getting the work done and developing you. A bad boss will prevaricate, treat you like a cog in a machine and put you down. To survive, you need to quickly recognize what type of boss you have. Often it is a mixture. Sometimes you have multiple bosses and sometimes these bosses don’t get along very well. This is challenging and deserves its own post. Suffice to say, tred carefully.
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Don’t negotiate blind. A job is trading your labor for lucre. Lucre can be literal money or some other perk, like travel. Your salary is a cell on someone’s spreadsheet. In America, this information is carefully guarded. Do your best to achieve information symmetry with the people who are deciding your salary. The best you can do is getting paid “market” for your work. So you have to learn what the market is.
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Obey meeting structure. You will have lots of meetings in a bureaucratic organization. Prepare for them, whether you are running them or not. Each meeting is like a game with winners and losers. The best preparation is to know what the topic is, who is supposed to be responsible for what and anticipate questions. Rare is the person who thinks well on their feet. Winston Churchill went so far as to plan his jokes early.
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Emails are an art. You will send a lot of emails. Aim for a clear subject line (like “profit analysis”), brevity and zero emotion. Always, always be calm and kind in emails, even if you are in disagreement.
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Powerpoint is a form of story telling. Listen to my podcast with John Yorke for context about what that means. The power point has a beginning, middle and end and each slide ties logically and seamlessly to the next slide. No fluff.
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Conflict is to be expected. Some people are linear, some lateral, some concrete, some abstract, so disagreement is hard-wired. When you are in disagreement, get to a calm place. If you can’t get calm, don’t write or say anything. Once you are calm, first talk about how it (whatever it is) should work, theoretically and only then discuss the matter at hand. So you might say, “we are having a disagreement over the quality of my work. Let’s first step back and ask what the right attributes are for a first year analyst/lawyer/writer/doctor.”
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When socializing, don’t mistake the goal. Work socializing is not about having fun. I’ve watched numerous people lose their jobs after social events. I recommend drinking water, asking questions about others and only talking about yourself if asked directly. Along the way, you will make some genuine friends, but this is rare and takes time and distance to see and stress test.
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Learn all the time. All companies die, as I wrote before. Boss’s come and go, as do “reorgs,” “game plans,” “strategic goals,” and “crunches.” Throughout my career, my goal was to contribute, yes, but also to learn. Each assignment, I tried to figure out what my role was but also what I could learn and take away with me. When I began my career in Russia, I learned Russian. When I was a journalist, I learned how to write on deadline. When I was a banker, I learned how to think about the relationship of asset prices to the economy. There are wonderful opportunities to learn all along the way, use them.
There is more to surviving a bureaucracy than this, but that’s a start. Good luck!
Investment Implications