In his book, The Great Crash 1929, economist J. K. Galbraith came up with one of the most useful concepts ever coined in finance: “the bezzle”. In short, it’s the as-yet-unrevealed inventory of nasty shocks that builds up in the economy during the good times, when “people are relaxed, trusting and money is plentiful”, only to reveal itself when tougher times arrive. While Galbraith describes this as “embezzlement”, “bezzle” is not necessarily outright criminal. Rather I see it as being similar to the Austrian economic notion of “malinvestment”. So it’s not just about the Bernie Madoffs of this world, it’s also the overambitious founder who is better at selling his idea than turning it into a successful business. Or the blatantly wacky investment fad that nevertheless takes off. Or the once highly-profitable fund manager who just got lucky with timing or borrowed money – or both.
What’s impressive about today’s investment environment is that it’s already been a vintage few months for revealed bezzle of all kinds, and we haven’t even had the crash yet. Here in the UK, under the likely category of overambitious founder, we have the ongoing unravelling of Lex Greensill’s “supply chain finance” group Greensill Capital, which employed none other than former prime minister David Cameron as an adviser. On the wacky investment side, we’ve seen non-fungible tokens (NFTs) – New York Times journalist Kevin Roose sold an NFT of a newspaper column he wrote on NFTs for more than $500,000 (for charity, but still – and yes, I am open to offers). And this week, in markets, we’ve seen the implosion of “family office” Archegos Capital Management, which appears to have done nothing much more complicated than borrowing lots of money from fee-hungry banks to make big leveraged bets on stocks, which then turned bad.
What does any of this mean for your money? First, it’s a useful reminder that as an investor, your scepticism should grow in direct proportion to the levels of credulity around you. A lot of bezzle consists of nothing more than momentum and herding behaviour, as investors assume that because everyone else is doing it, it must be OK. Trust your own judgement. If you can’t wrap your head around an investment, don’t invest in it.
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Second, be especially alert for scams. The low-interest-rate era combined with Covid-19 forcing even more activity online has created the ideal breeding ground for scammers, and there are huge numbers of them about right now. The tax-year end is a particularly ripe time for financial scams – from threatening automated calls purporting to be from HMRC (hang up immediately) or fake Isa accounts with ridiculously high interest rates. Be on your guard and never fall into the trap of imagining that you can’t be fooled – that’s what they’re relying on. Third, make sure your portfolio is in resilient shape. As I said, if this is the bezzle that’s already coming to the surface, what’ll happen when the tide really goes out? The next crash will be one for the record books (admittedly, so were 2020 and 2008).
Finally, don’t miss Merryn’s video interview with the wonderful Dr Pippa Malmgren, in which they discuss everything from Donald Trump’s next big adventure to those aforementioned NFTs to sex in a post-pandemic world. You can watch it here.
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