“In politics… never retreat, never retract… never admit a mistake.”
– Napoleon Bonaparte
Napoleon was not only one of the greatest military minds in history, but also one of its most effective practitioners. An innovative artillery officer-cum-general, he won multiple offensive and decisive battles with a force that was, on paper at least, materially weaker than that of his opponents. And this was at a time when the conventional wisdom assumed that successful offensive warfare required at least a 3:1 superiority in manpower.
But his genius did not stop there. When the opportunity presented itself, he stepped into the power vacuum left by the imploding French revolutionary state and, in its place, built an empire.
Not to give him too much credit, the Napoleonic empire didn’t exactly have much staying power. However, if not for the – in retrospect – horribly misguided decision to invade Russia, it might have lasted somewhat longer.
One of Napoleon’s signature operational tactics was to open battle with a move that was, on the surface at least, conventional and obvious. As one might expect in a typical chess match, a classic opening move is followed by a classic riposte, resulting in a zero-sum start.
Yet Napoleon’s chess was three-dimensional. His opening move might have appeared conventional, when in fact it was intended to serve another operational purpose entirely. For example, he might have ordered flank support for another thrust from a different direction while using the artillery support obtained (and protected by) the initial assault.
In several cases, Napoleon effectively won battles fought in this way in the first hour, even if the bulk of the fighting occurred several hours later. Indeed, when once asked whether he should counter an opponent manoeuvring into a such a trap, he famously exclaimed, “Never interrupt your enemy when he is making a mistake!”
In certain respects, Napoleon incorporated the thinking behind his military success into his political strategies. Yet what works on the battlefield operationally does not necessarily yield success in terms of international politics. Within two decades Napoleon was, in effect, at war with about 80% of Europe, including Russia, which he chose to invade in 1811 against much learned advice.
The results are well known. Napoleon’s army was defeated by the Russian winter and what little was left was unable to protect him from the repercussions. He did return from exile briefly, only to be soundly defeated at Waterloo. (My personal opinion is that the battle would have been even more decisive had Prussian Field-Marshal Blücher joined somewhat earlier as Wellington had expected.)
Odd as it may seem, the lessons provided by Napoleon above can be useful when understanding the conduct of the relatively modern, unconventional practise of central banking.
Monetary policy warfare
Let’s start with the origins of what was initially called “unconventional” monetary policy in 2008-9. Much as Napoleon stepped in to fill the vacuum left by the imploding French state, central bankers stepped in to an imploding global financial system with new “tools’”. In their various ways, these tools enabled central banks to prop up failing financial institutions, several of which were amongst the largest in the world, in terms of their systemic significance.
That these institutions were arguably insolvent was beside the point. Central bankers propped them up, governments arranged shotgun mergers, part or fully nationalised them, and arranged taxpayer-funded bailouts.
All of the above required huge expansions of the money supply, financed at near-zero interest rates. This did not show up in price inflation, at least not for a while, as the money remained locked up in asset markets, such as stocks, bonds and property.
As we know, those days are over. Over the past two years, due to a variety of factors, the massive monetary expansion has spilled out into the economy generally. Double-digit inflation the world over is now the norm rather than the exception, and workers are understandably seeking double-digit pay rises as a result.
But rather than admit that their unconventional policies might have had anything to do with this, central bankers have followed Napoleon’s dictum to “never retreat, never retract, never admit a mistake” and, as they raise interest rates into what is almost certain to be a recession, they try to reassure us that they know what they are doing.
Having failed to engineer inflation after a decade of trying, or multiple decades in the case of Japan, and having engineered too much inflation when it finally struck, do they still deserve our confidence?
Consider me sceptical. Central economic planning in any form tends to produce sub-optimal outcomes over time, to which history repeatedly attests. Central monetary planning is no exception.
So, what is a sceptical investor to do? First, get defensive. Normally, this would imply shifting out of equities and into bonds. But in this case, as manipulating the prices of bonds is now an essential, if unconventional, central banker policy tool, unless you know precisely how this tool is to be used, and when, it is best to stay away.
Nor is cash a good option, guaranteed as it is to lose value over time in an inflationary environment.
Perhaps counterintuitively, this leads us back to equities. In an inflationary environment, equities can provide investors with a safe haven: mature, cash-generative companies paying dividends. Unlike bond coupons, dividends tend to grow with inflation. And mature, relatively non-cyclical companies trading at modest multiples are likely to hold their value in essentially all economic conditions.
Outside of financial assets entirely, there is the perennial safe haven of gold. While not paying a dividend or coupon, gold’s unique investment properties are well-known. A defensive investor should always have at least some allocation to the precious metal. Given current and probably near-future economic conditions, investors should be overweight gold.
Another possibility is cryptocurrencies like bitcoin. But these may be a trap of cunning proportions. There will be more on that tomorrow’s edition of Fortune & Freedom.
Contributor, Fortune & Freedom