Fall of Empires

Sir John Glubb wrote an essay regarding the rise and fall of empires and the corellaries between them. The essay, titled Fate of Empires, has a lot to digest so I won’t be able to cover all of it here. I highly recommend you read it and draw your own conclusions with what is happening in the world today.

Glubb speaks on certain defining eras, deemed ‘ages’, that are common to all empires:

  1. Age of Pioneers
  2. Age of Conquest
  3. Age of Commerce
  4. Age of Affluence
  5. Age of Intellect
  6. Age of Decadence

I’d like to begin in the Age of Intellect:

The dawning of this age gives rise to the thinking (wo)man, who believes problems can be solved through intellectual horsepower alone. This stage involves the influx of capital into universities and research institutions, accompanied by a boom in scientific and intellectual discovery. Philosophical and democratic debate ensues, as in ancient Athens with Plato and Socrates.

However, Glubb argues, “Amid a Babel of talk, the ship drifts on to the rocks.” Thus gives rise to the anti-intellectual “school of thought”.

In the 2016 US Election, the populous elected a man of action rather than words.

The 45th President, Donald Trump, has made no secret of his disdain for learning and specialized knowledge, sneering at a campaign rally in 2016, “You know, I’ve always wanted to say this—I’ve never said this before with all the talking we all do, all of these experts, ‘Oh we need an expert’—the experts are terrible!” (2)

The notion of anti-intellectualism perhaps will change the trajectory of the United States empire. The citizens may find that the brainpower of the intellectuals cannot solve the problems created by inaction, frivolity and greed. The intellectuals may wake up to the desire for action over words; creating a new type of leader, both dynamic and capable, which will meet the demands of the populous. People want a nation they can believe in, one that stands for the ideals they strive to emulate.

I’m not saying intellectualism is inherently “bad”, just that argument often leads to more disagreement until hubris is cast aside (and there is no lack of hubris in Washington at the moment). If action does not replace words, patriotism continues to decline, and internal political rivalries continue to deepen, I fear for the fate of the United States.

Religion as a solution:

… it was inevitable at such times that men should look back yearningly to the days of ‘religion’, when the spirit of self-sacrifice was still strong enough to make men ready to give and to serve, rather than to snatch. (Glubb, 18)

Born-again, fundamentalist Christians overwhelmingly voted for and approve of our current president. As a nation, we should be wary of the path this may take us. (7)

At the height of their intellectual era, the Arab empire (roughly 800-1100) was the richest nation on earth, with Baghdad as its capital. The intellectuals of the nation discovered the earth was a sphere a full five hundred years before Galileo. They also were on the brink of discovery of flight, nearly 1,000 years before the Wright Brothers. Experimental physics, algebra, cameras, astronomy, and chess were all products of this era (5).

Academics have long maintained that the great Islamic theologian, Abu Hamid Al Ghazali, who lived from 1055 to 1111, single-handedly steered Islamic culture away from independent scientific inquiry towards religious fundamentalism. In a remarkable intellectual shift, he concluded that falsafa (which literally means philosophy but included logic, mathematics and physics) was incompatible with Islam.

After writing his book, The Incoherence of Philosophers, Algazel as he was known in medieval Europe, is said to have “stabbed falsafa in such a manner that it could not rise again in the Muslim world”. Thanks to his unparalleled mastery of falsafa and Islamic law, he injected repugnance among Muslims for science that ultimately led to its decline and, in the process, the decline of Islamic civilization. (6)

In 1203, the largely uneducated and illiterate Mongol empire under Ghengis Khan was established as a major power in Asia. In 1258, Baghdad was sacked and pillaged by Ghengis Khan’s son, Hulagu Khan, definitively marking the end of the Golden Age of Arabic intellectualism.

I leave you with the following from Glubb:

[The] spirit of dedication was slowly eroded in the Age of Commerce by the action of money. People make money for themselves, not for their country. Thus periods of affluence gradually dissolved the spirit of service, which has caused the rise of the imperial races.

In due course, selfishness permeated the community, the coherence of which was weakened until disintegration was threatened. Then, as we have seen, came the period of pessimism with the accompanying spirit of frivolity and sensual indulgence, by-products of despair. It was inevitable at such times that men should look back yearningly to the days of ‘religion’, when the spirit of self-sacrifice was still strong enough to make men ready to give and to serve, rather than to snatch.

But while despair might permeate the greater part of the nation, others achieved a new realisation of the fact that only readiness for self-sacrifice could enable a community to survive. Some of the greatest saints in history lived in times of national decadence, raising the banner of duty and service against the flood of depravity and despair.

Thanks for reading,


What I’m Reading: Bonfire of the Vanities – Tom Wolfe


  1. https://www.federalreserve.gov/monetarypolicy/reservereq.htm
  2. https://www.opendemocracy.net/transformation/nicholas-baer/american-idiot-rethinking-anti-intellectualism-in-age-of-trump
  3. https://www.thebalance.com/current-u-s-federal-budget-deficit-3305783
  4. http://people.uncw.edu/kozloffm/glubb.pdf
  5. https://www.independent.co.uk/news/science/how-islamic-inventors-changed-the-world-6106905.html
  6. https://www.thenational.ae/opinion/comment/how-the-decline-of-muslim-scientific-thought-still-haunts-1.382129
  7. http://www.pewresearch.org/fact-tank/2016/11/09/how-the-faithful-voted-a-preliminary-2016-analysis/

Bogus Tweet Risk


Most financial media is focused on “tweet risk” or “trade wars”. To me, these seem like water under the bridge. It’s in China’s interest politically to retaliate to trade sanctions, but not in their interest to crash US markets. They hold a massive amount of US Treasurys, if they stop buying US bonds, rates will shoot through the roof and China loses. The following analysis attempts to succinctly summize the economic situation.

Tempered Expectations of Future Growth

We’ve crossed the 50 bps level in the 2 to 10 year US Treasury Spread, signaling lower expecations of future growth prospects, strengthening the late stage economic growth narrative.



US Dollar Slides


The DXY Index represents the US Dollar vs a basket of major currencies. Yields in the above chart are represented by the Generic 10-Year US Treasury yield. Higher yields depreciate a currency, as stated by Interest Rate Parity.

A weaker dollar allows foreign investors more buying power in US markets.

Resilience of US Goverment Capital Markets

The 10-Year Treasury rate now sits at around 2.75% following last week’s sale of a LOT of Treasurys. The market is handling this flood of supply well (nearly $300bil last week), as bonds have rallied in the face of rising interest rates. The US Treasury Department will auction off $48bil of 3-month T-bills and $42bil of 6-month T-bills this week.

Rates on the short end are slightly higher following a Fed funds rate hike in March, but longer term yields have fallen since last month signaling strong demand for US debt.


Higher Volatility but Lower Tail Risk

We’ve seen elevated levels of stock market volatility since the beginning of the year. However, since last month we’ve seen less tail risk, i.e. a flatter Volatility Skew.

  1. Elevated levels of Volatility overall
  2. Lower levels of Vol Skew


Tail Risk is the risk of a Black Swan event. This is measured by the relative demand of out of the money calls and puts. As the volatility smile flattens, the market is pricing in less tail risk, albeit at an elevated level of overall volatility.

Higher vol means more trading, which is good for financial services, as are higher rates. A trade war will be bad for industrials. I’ll be watching financials (XLF), and industrials (XLI).

Thanks for reading,


What I’m Reading: Lords of Finance: Bankers Who Broke the World



  1. https://www.wsj.com/articles/treasury-to-sell-90-billion-in-debt-1522342484
  2. https://www.wsj.com/articles/foreign-investors-are-bulking-up-on-u-s-treasury-bonds-once-again-1522693557

Disclaimer: The opinions above are my own and are for information purposes only.  This post is not intended to be investment advice.  Seek a duly licensed professional for investment advice.


Who’s got the power?


When interest rates go up, and they will, the 50% increase across the board will topple markets, namely bond markets.

Today’s interest rates are unprecedented. The lowest possible bound for an interest rate USED to be 0%. In finance terms, we call it the ZLB or the zero lower bound. Today bond yields in Germany and Denmark (among others) are NEGATIVE! What does this mean for me, the common investor?

Examples of Interest Rates  in History, for relativity:

I’ll admit, I’m not finished with the 700+ page novel written by Sidney Homer first published in 1963. The preface is packed with insightful information such as:

1.) In ancient India, the going rate of interest on livestock was 100%. Then: You can borrow my cow for one year, if after the year is over you’ll pay be back with two cows. Today: I’ll let you use my house for a year, but after that, I’m gunna need that house back, plus a whole extra house.

2.) In early 20th century Indo-China, loans on rice were given at a rate of 50% annually commonly.

3.) In British Columbia, a phenomenon called “potlatch” was first documented. The Kwakiutl, an Candaian Indian tribe, used thin white blankets currency, roughly valued at $0.50 per item. The citizens of this tribe would give the blankets as ‘forced loans’ to one another, with the expectation of receiving what they gave plus interest. “Wealthy Indians vied with each other to see who could give away the most blankets, all with the understanding that even more would be given back—usually double.” – (p. 23, Homer) Kind of wonky huh? They gave because they were greedy.

4.) In Northern Siberia, domesticated reindeer, horses, and sheep were used to collateralize loans. They exchanged the animals like currency, usually charged at an annual rate of 100%.

All in all, lending is not new, but this new environment of negative interest rates is new. You have never  had to PAY someone so they can use your money, that just seems backwards. Remember quantitative easing (QE*)? The Europeans are doing the exact same thing. However, the European Central Bank (ECB) are buying up these negative interest charging bonds because the ECB is attempting to inject liquidity into markets. The ECB is allowing banks to use their cash and they’re paying the banks interest… hmm…

The goal of QE* is to inject liquidity into markets to avoid disastrous outcomes. The program is designed to allow debt to be more readily available for the average consumer. Lowering interest rates and loading up commercial banks with cash will help settle investors’ concerns surrounding a global financial meltdown without a doubt. This being said, if times are bad (economically), the average consumer will become risk averse, and will stay as far from debt as possible until things get better. When consumers get a pay raise or a new job, they might think about taking out a loan to build a new deck or get a new car. Demand drives supply and the policy makers who control interest rates and QE can only control supply. No matter how hard they try to get us to take out debt, we just won’t do it unless market conditions are appropriate. The final result of QE in the United States was a massive increase in the amount of cash that banks hold in reserves.

The graph below shows the level of reserves banks have on their balance sheet from 1984 to 2008. In 1999, banks jacked up their reserves because of Y2K scares; if the whole system imploded at the turn of the century, they wanted to have enough cash on hand to prevent a catastrophic collapse of our financial system. Notice how the level was just shy of $70 billion.

Screen Shot 2016-08-02 at 5.44.39 PM

This graph below shows what has happened to reserves since the beginning of quantitative easing. In 1999, (from above) the level of reserves his $70 billion, here $70 billion isn’t even on the scale. This is where all the bailout money went, onto the balance sheets of big banks.

Screen Shot 2016-08-02 at 5.45.07 PM

Holding reserves used to be an implicit tax for banks, because the more cash they held, the more return they were missing out on (opportunity cost, for you econ buffs). The banks could have put the currency to work in stocks or bonds to achieve a higher return. However, the less cash a bank has on hand, the more risky the institution is. The Fed instituted a return on cash of 50 basis points (0.5%) in order to incentivize holding cash reserves (both required* and excess). The banks can hold all of it in cash and make a half a percent annually or they can buy negative yielding bonds. It’s a positive, riskless yield. Why wouldn’t banks take advantage?

*Note: by law, the required reserve ratio in the US is 10% for big banks.

QE works as a mechanism to prevent economic collapse, but demand drives supply; thus, you cannot force people to buy things they don’t want (except maybe in Communist Russia where they don’t actually tell you what you’re taking until you’re disqualified for the Olympics) QE cannot create prosperity because no matter how available you make debt, it is the preferences of the consumers that ultimately drives demand for loanable funds.

The Federal Reserve of the United States holds way, way more power than Donald Trump and Hilary Clinton, yet when they make a statement in the press, it usually doesn’t even make the front page. The Fed has the power to control interest rates. They also have the power to create money, as in printing currency (yup, money growing on trees). They control what you pay on your mortgage and they control how much interest your money makes (in markets and in savings accounts). This affects how soon you will be able to retire, how much your house is worth, how much your pension has in cash (i.e. how much risk your pension can take), how much your kid’s college fund will make… you name it, the Fed controls it. The best part is, you didn’t get to elect these officials. The US government deemed it too risky to put big financial decisions in the hands of under-informed citizens (*cough* Brexit *cough*).

Thanks for reading.

– tommander-in-chief.

Note: For more on pensions taking on too much risk check out this economist article, http://tinyurl.com/hg4rbjl


  1. http://www.forbes.com/sites/marcprosser/2013/04/07/beyond-the-10-year-treasury-yield-how-to-follow-the-bond-market-with-etfs/#7c753437523d
  2. http://www.wiley.com/WileyCDA/WileyTitle/productCd-0471732834.html
  3. https://fred.stlouisfed.org/series/WRESBAL/


Side note on bond prices –

Bond prices are inversely related to bond yields. That is, when the rate on a bond rises, it’s price will drop. Because today’s rates are so low, the effect that a rise in interest rates will have will be massive. For a little relativity, interest rates (the fed funds rate) in 1999 was around 5%. A 50% increase in this rate would raise the rate to 7.5%, which is a massive jump. Now, we are debating a 25 basis point* increase in rates, which brings them from 25-50 bps to 50-75 bps. This may seem trivial, but that represents the same 50% increase in the fed funds rate!

*Note: a basis point is a ten thousandth of a percent; 1 basis point = 0.01%