Books - Q2 2025

Second quarter: read ten books, down from 11 in Q1 2025. 

• The Price of Time: The Real Story of Interest (3/5) See The Tom File review last year. I read it because it is by Edward Chancellor, who edited Capital Returns: Investing Through the Capital Cycle, which is a CBS 5/5 book (see review). He says he wrote it out of a "Bastiat-like conviction that ultra-low interest rates were contributing to many of our current woes." I used to be a big believer in this, but after doing cornucopian studies, I am no longer as convinced. The first part of his book is a defense of the morality of charging interest on loans. "Interest has always been with us because resources have always been scarce and must be rationed somehow." There were always lots of workarounds to the "usury" prohibitions. "The Scholastic denunciation of usury was suited to a self-sufficient agrarian society, in which loans were primarily for consumption purposes." Something funny by William Gladstone in 1854: "the superstition which formerly prevailed [on the subject of usury] was partly Judaical and partly Mohammedan." Swedish economist Knut Wicksell is the one who concluded that a discrepancy between market interest rates and the "natural" interest rate would be revealed by changes in the price level (i.e. deflation or inflation). John Law mistakenly believed that the Dutch had lower borrowing costs because they had a greater quantity of money in circulation and not because they were thrifty and has a greater stock of capital. Bagehot quote: "John Bull can stand many things, but he cannot stand two per cent." His book Lombard Street discusses ideas for central bank intervention during market panics. ("It is no coincidence that the chief proselytizers for central bank accommodation came from banking families." "In his memoirs, The Courage to Act, Ben Bernanke mentions Bagehot more frequently than any other economist.") We have not read Bernanke's book, but he thinks that the Great Depression was caused by "monetary policy [which] tried overzealously to stop the rise in stock prices." It may be one that we need to read for our "Bailout Studies" program. (He also has a book of Essays on the Great Depression.) Other highlights: "Piketty assumed that wealth compounds with time, whereas in reality the rich divide their fortunes and most savings are spent in retirement." "Between 1945 and 1980, interest rates in the United States and the United Kingdom averaged in real terms minus 3.5 per cent. Negative real rates provided an annual subsidy to the U.S. government equivalent to a fifth of tax revenues. Thanks to financial repression, America's national debt (relative to GDP) declined by nearly three-quarters."
• Civil War America: 1850-1870 (5/5) This is an excerpt of Paul Johnson's A History of the American People, dealing with the Civil War era. Something that we have come to appreciate is that the Southerners' vision for the Americas was horrific. As Paul Johnson puts it, "the South's dream of an all-American, all-slave Caribbean." "[T]he Civil War hastened the development of the West because, by removing the Southern-Democratic majority in both houses of Congress, it ended a legislative logjam which had held up certain measures for decades and impeded economic and constitutional progress." Some highlights: "The Mexican war was the great proving ground for future American bigshots, both political and military." Johnson thinks that Jefferson Davis (1808-1889) "tended to take the progressive line on everything except slavery." "From 1840 to 1860 this megalopolis [stretching from Wilmington to New York] was the most rapidly growing large industrial area in the world - and it was this complex which made inevitable, in military-economic terms, the South's ruin." "What finally happened to the South in the 1950s, Davis was urging in the 1850s. But slavery repelled capital and white skilled labor alike, and Southerners themselves did not want industrialization for many different reasons, most of all because they felt instinctively that it would mean the end of slavery and plantation culture." "By seceding from the Democratic Party, the Southern states threw away their greatest single asset, the presidency. Then, by seceding from the Union, they lost everything, slavery first and foremost." "No railway trunk lines bound the rebellious states together. The South had no infrastructure. Its railroad system was designed solely to get cotton to sea for export. There was virtually no interstate trade in the South, and so no lines to carry it." "By opposing slavery and by insisting on the integrity of the Union, Lincoln identified himself and his cause with the two most powerful impulses of the entire 19th century - liberalism and nationalism." General Jackson: "He certainly preferred a fight on Sunday to a sermon but failing to manage a fight, he loved next best a long, Presbyterian sermon, Calvinist to the core." Lincoln talking about the Bible: "Take all of this book upon reason that you can, and the balance on faith, and you will live and die a happier and better man." Woodrow Wilson (1856-1924) was the last president born before the Civil War.
• The Fundamental Index: A Better Way to Invest (5/5) Written in 2008 by Rob Arnott (and coauthors) of Research Affiliates (RAFI). Something that I never realized - the S&P 500 index was created to measure how the stock market was doing, and not as a strategy. After it was a measurement it became a benchmark, and then from a benchmark it became a strategy. The problem with the capitalization-weighted index is that "we're going to wind up putting most of our money in overvalued stocks because the scale of our investment is explicitly linked to the stock's price, hence to the error in that price." "Price weighting ensures investors have maximum exposure to a bubble's darlings right before they fall off a cliff." S&P 500 investors lost a bunch of money in Cisco in 2000 when it had a 4.3% weight and then fell 90%. I would imagine something similar will happen with Tesla in the coming years. (The top five in the S&P today are AAPL, MSFT, NVDA, AMZN, and META.) One alternative to the market cap weighted index (SPY) is to equal weight (RSP). But another alternative is to fundamentally weight. You could own every company in proportion to its revenue (RWL) as a share of the total, for example, or another fundamental attribute like book value or cash flow.. But the most interesting approach is to use a composite of these fundamental attributes (PRF). The particulars turn out not to be hugely important: "all of these Fundamental Index portfolios performed similarly - while capitalization weighting did not - because each one broke the link between portfolio weight and pricing error." Something interesting they find is that the more inefficient the market, the more the fundamental weight strategy outperforms the market cap weighting. So it does better with small cap stocks and foreign stocks. ("Cap-weighting performance drag relative to its opportunity set is proportional to the square of the errors in price.") They also find that five-year smoothing of the fundamental variables does better than weighting on the most recent data. Basically the key here is that market cap weighting is trying to own companies in proportion to their size, but the fundamental variables are a better measure of size than the market capitalizations. "Changes in the size of a company on one fundamental measure may be offset by changes in another size metric. For example, U.S. automakers recently experienced a large increase in sales accompanied by a reduction in cash flow. This netting effect in the [fundamental composite] indexes can leave the overall fundamental size of the company and the need to rebalance unaltered." Which is good because, "one of the indexing world's dirty secrets is that their trading costs are a disaster, only alleviated by the very low annual turnover." Periods of time when market cap weight index outperforms the fundamental are "growth-dominated markets" - essentially there is an out of control positive feedback loop. If I had to do passive investing, I would for sure use a fundamental index and not a market capitalization one.
  
• Skunk Works: A Personal Memoir of My Years at Lockheed (3/5) The author Ben Rich (1925-1995) worked for the "Skunk Works" of Lockheed building stealthy aircraft. The big accomplishments were the U-2 (late 1950s), the SR-71 Blackbird (1962) and the F-117 Nighthawk stealth fighter (1978). Some highlights: "Our designers spent at least a third of their day right on the ship floor; at the same time, there were usually two or three shop workers up in the design room conferring on a particular problem. That was how we kept everybody involved and integrated on a project." "A future commander resented having only a four-man crew to boss around on a ship that was so secret that the Navy could not even admit it existed. Our stealth ship might be able to blast out of the sky a sizable Soviet attack force, but in terms of an officer's future status and promotion prospects, it was about as glamorous as commanding a tugboat. At the highest levels, the Navy brass was equally unenthusiastic about the small number of stealth ships they would need to defend carrier task forces. Too few to do anyone's career much good in terms of power or prestige. The carrier task force people didn't like the stealth ship because it reminded everyone how vulnerable their hulking ships really were."
• Romney: A Reckoning (2/5) A case study of a principled loser. "Watching Trump complete his conquest of the GOP was even more devastating to Romney than losing his own election in 2012." Even though Romney was right about Trump, he's an unbearable goody-two-shoes. Has there ever been anyone in American history more sanctimonious than Mitt Romney? Romney's dream in life was to make sure the Empire's books are balanced by canceling Social Security before it collapses. This was funny though: "It's a challenge to justify borrowing 33 billion from China so we can give it to Israel, particularly when I am under the impression that Israel is sufficiently well financed to provide the funds itself." "A devout institutionalist, Romney had harbored a certain subconscious notion that somewhere in the U.S. government, serious people were sitting in rooms drawing up cohesive plans to address America's long term challenges. But if those rooms existed, they did not appear to be in the United States Senate."
• On the Hunt for Great Companies: An Investor's Guide to Evaluating Business Quality and Durability (3/5) Topics: economies of scale, switching costs, network effects, brand. Highlights: "there are rare examples of the phenomenon where market-leading firms actively downplay their market positions in investor communication due to fear of antitrust intervention. In these instances, they define their markets as a union of several large markets to disguise their monopolistic market positions. Most companies, on the contrary, exaggerate their distinction by defining their market as the intersection of various smaller markets, making them appear more dominant than they are.""Occasionally, businesses are 'undermonetized,' where they intentionally or unintentionally do not extract as much value from customers and/or suppliers as they could." Businesses that are over-earning "may appear statistically cheap to some investors who are overly focused on valuation-multiples." Analyzing companies that aren't yet profitable: "Typically, the time of the largest absolute losses isn't that far from the [per unit] break-even point. At that point in time, when the business suffered its largest absolute loses, two investors - one focusing on per-unit profitability and another focusing solely on absolute profitability - would come to opposite conclusions about the company's direction. The one only focusing on absolute profitability will see that the business seems to lose more and more money. The one focusing on per-unit profitability will see that the business is rapidly approaching breakeven." Geographical repeatability: "focusing only on consolidated profits leads the investor to conclude that the entire group is not operating with a proven business model, while in fact some parts of the business are profitable, and the remaining part is following the same delayed unit economics trajectory as the mature ones..." An investor who focuses on the "group" profitability is implicitly capitalizing the newer markets/stores as liabilities! Businesses that acquire customers with a high lifetime value can have a high customer acquisition cost, and those can look unprofitable to the untrained eye while actually having solid underlying economics.
• A History of the American People (3/5) Paul Johnson's history of America, from which the Civil War book (above) was excerpted. His view of America: it was "founded primarily for religious purposes." “The Revolution could not have taken place without this religious background. The essential difference between the American Revolution and the French Revolution is that the American Revolution, in its origins, was a religious event, whereas the French Revolution was an anti-religious event. That fact was to shape the American Revolution from start to finish and determine the nature of the independent state it brought into being.” “The Second Awakening, with its huge intensification of religious passion, sounded the death-knell of American slavery just as the First Awakening had sounded the death-knell of British colonialism.” More highlights: "If the antinomians had their way, it was argued, religion and government would cease to be based on reasoned argument, and learning, and the laws of evidence, and would come to rest entirely on heightened emotion - a form of continuous revivalism with everyone claiming to be inspired by the Holy Spirit." "The basic economic fact about the New World was that land was plentiful: it was labor and skills that were in short supply." "Modern politics was invented in the England of the 1640s..." which was right when the English began settling in America. "In 1700 the American mainland's output was only 5 percent of Britain's; by 1775 it was two-fifths." So, the revolution was economically determined. "Colonial American was the least taxed country in recorded history. Government was extremely small, limited in its powers, and cheap." Washington: "the next best thing to owning a lot of land was to become a land surveyor." The founders: "They were the Enlightenment made flesh, but an Enlightenment shorn of its vitiating French intellectual weaknesses of dogmatism, anticlericalism, moral chaos, and an excessive trust in logic, and buttressed by the English virtues of pragmatism, fair-mindedness, and honorable loyalty to each other." Both the Southerners and, before them, the English crown were blocking Manifest  Destiny. A royal proclamation in 1763 "forbade Americans to settle in any lands beyond the heads or sources of any of the rivers which fall into the Atlantic Ocean from the West or Northwest." Franklin: "Though sad about the break with Britain, he was confident that America's huge economic and demographic strength - he was one of the few people on either side who appreciated its magnitude - would make it a certain victor." "No member of the [British] government ever thought of crossing the Atlantic on a fact-finding mission." "Franklin was planning with the French Ministry of Marine a series of attacks on the English coasts, with John Paul Jones in charge of the naval forces and Lafayette of an invasion army. British resources were stretched thin all over the world." George III called the revolution "a Presbyterian rebellion." "The English church and state lost the political and military battle because they had already lost the religious battle." The anti-Federalists: "their objections varied and they appeared unable to agree on an alternative to what they rejected." The Constitution "by a historical accident [was] actually drawn up at the high tide of 18-th century secularism, which was as yet unpolluted by the fanatical atheism and the bloody excesses of its culminating story, the French Revolution." "The farmers and planters of the South hated Philadelphia and its rich Quakers, they hated New York and its rich lawyers, and, most of all, they hated Boston and its rich merchants and shipowners." Paul Johnson is good on economics: "Taylor's theory was an early version of what was to become known as the physical fallacy, a belief that only those who worked with their hands and brains to raise food or make goods were creating 'real' wealth and that all other forms of economic activity were essentially parasitical. It was commonly held in the early 19th century, and Marx and all his followers fell victim to it. Indeed plenty of people hold it in one form or another today, and whenever its adherent acquire power, or seize it, and put their beliefs into practice, by oppressing the 'parasitical middleman,' poverty invariably follows." "Next to Burke, [John] Marshall revered Adam Smith's Wealth of Nations. He was closer to its spirit than Hamilton, believing the state should be chary of interfering in the natural process of the economy." Great quote: "Some of the older churches, especially the Episcopalians, sniffed at camp-meetings, saying 'more souls are begot than saved there'... it was the uninhibited Methodists who profited most from revivalism... by 1844 they were the biggest church in the United States." "The esoterical reinterpretation of the scriptures produced in thirty-eight huge volumes by the 18th century philosopher Emanuel Swedenborg became an immense quarry into which American sect founders buried industriously for decades." "Even the most bizarre of these sects founded schools, training colleges for teachers and evangelists, and even universities." "By opposing slavery and by insisting on the integrity of the Union, Lincoln identified himself and his cause with the two most powerful impulses of the entire 19th century - liberalism and nationalism." On T.R.: "There was something petty in this kind of populism, coming from a man whose family had inherited, and always lived off, wealth accumulated in distant times by methods which would not bear close examination." We never think about how T.R. entered the race in 1912, splitting the vote with Taft, and allowing the horrible Wilson into office.
• U.S. Bank Deregulation in Historical Perspective (3/5) Another one by Charles Calomiris, author of Fragile by Design (note) and also the "Fiscal Dominance" paper from two years ago. This short review by Cato is a good summary of the book. His academic career was essentially pushing for bank deregulation, and this book is a collection of some of his papers. One of his main ideas was that unit banking - prohibiting banks from having branches, which was the law in most states for a long time - made the U.S. financial system less robust and contributed to the many financial panics and episodes of bank failure. ("The United States experienced banking panics in a period when they were a historical curiosity in other countries..." "likely association between the unique init banking system in the United States and its unique propensity for panics.") Other countries with similar banking systems (fractional reserve, which Austrian economics people blame) such as Canada were able to avoid having so many episodes of systemic bank failure. "The evidence shows that unit banks were less diversified, more vulnerable to failure, less able to grow in the aftermath of diverse shocks, less efficient in their use of scarce bank capital and reserves, less able to provide credit at low cost during times of peak demand, less able to provide services in remote areas, less competitive in local markets, less able to transfer capital across regions, and less able to finance interregional commodities trade. It is no wonder that the unit banking system was so uncommon in the international history of banking. The main puzzle is why it persisted so long, despite its disadvantages, in the American banking system." Another thought: "Restrictions on branching served the interest of wealthy farmers at the expense of poorer farmers and industrialists." Why is the government tolerating stablecoins? "Another interesting possibility is that technological change and global market competition will force the full deregulation of the banking industry, whether Congress acts to do so or not. The key to such a dramatic change could be the privatization of the payment system, made possible through the development of new wholesale and retail clearing arrangements via the internet. If financial institutions can develop networks to clear claims among their customers without the use of checking accounts and Fed-controlled payment networks, then there would be little need for them to maintain bank charters (which currently provide unique access to the payment system)." It is interesting to think about the economic function that banks serve. Theories: "repositories of scarce information capital about borrowers." Farmers liked unit banking because location-specific bank capital tied the banks fortunes to their own. Senator Carter Glass had a strange fixation with separating commercial banking from investment banking. That separation lasted until the Gramm–Leach–Bliley Act (GLBA) aka the Financial Services Modernization Act of 1999. Maybe big banks should have made more of the fact that Carter Glass was a segregationist who supported poll taxes and literacy tests for voting? Also, Senator Phil Gramm who wrote the deregulation legislation is the father of Jeff Gramm, activist investor who wrote Dear Chairman.
• Original Sin: President Biden's Decline, Its Cover-Up, and His Disastrous Choice to Run Again (2/5) The purpose of this book is to assign blame for the 2024 election loss to Biden and his inner circle of advisors (politburo) for hiding his cognitive decline. It also whitewashes Biden's other scandals, such as his bribery racket, by focusing attention on Hunter's drug addiction and not his role as a bag man. Even though it is a whitewash and a rush job, there are some fascinating admissions. One thing we realize is that common knowledge in D.C. does not circulate very far, even on Twitter. Regarding Biden's cognitive decline: "We weren't going to change that he was running, and no one wanted to be on the outside in case he did win. So no one said anything." Even more surprising, in September 2023 at an event that included Chris Christie and Jeb Bush, Ari Emanuel shouted at Ron Klain across a room, "Joe Biden cannot run for reelection! He needs to drop out! He can't win!" How did we not hear about that at the time? Another thing insiders know is that the polls are fake. The public is being told that Biden or Harris are five points ahead while everyone in D.C. knows that they are going down in flames. But we never hear about that either. For example: "Biden needs to stay in, one black congresswoman argued before the entire caucus. If he gets out, this is going to fall on the shoulders of a black woman. And Kamala Harris is going to lose, and everyone is going to blame black people. There was a real sense from black members that a Harris candidacy - and a devastating loss that many seemed to anticipate as a foregone conclusion - would be horrible for people of color. And yet that argument often came with the caveat that the party could not pick any replacement nominee other than Harris." 
• Dealings: A Political and Financial Life (2/5) We remember reading about Felix Rohatyn in Barbarians at the Gate, because he represented the special committee of RJR Nabisco in the leveraged buyout auction. Classic silent generation: he "flunked out" of physics at Middlebury, but had some sort of distant connection to André Meyer and was able to get a low-level job at Lazard. Never reveals how he got Meyer's attention. He does say that he knew Samuel Bronfman's daughter and that Bronfman told him, at breakfast one Sunday, to ask to transfer from foreign exchange trading to working on mergers. Also puzzling how he was able to get into (and pay for) Middlebury as a refugee from Europe in 1942. As an investment banker, Rohatyn would go to the Allen & Company conference in Sun Valley, Idaho since he was involved in media deals. That is an interesting multi-generational financial firm, with CEOs Charles R. Allen, Jr., Herbert A. Allen, Jr., and now Herbert A. Allen III.