JULY 2012                                                                                                               

Keynes and the First Credit Crisis.

John Maynard Keynes is now seen as one of the founders of macro-economic theory and one of the most influential economists of the 20th century. However, it is from his actions as a portfolio manager rather than his economic theories that we can gain the most insight into the current credit crisis.

The economic remedies of John Maynard Keynes have regained prominence since the start of the current credit-led crisis in 2008. His theories were forged in the furnace of the first credit crisis of the 1930s, and are now being trotted out again for our consideration. Perhaps, however, we are looking to the wrong Keynes and it is Keynes, as the fund manager of the King’s College Cambridge endowment fund, not Keynes the economist, to whom we should be paying closer attention.  

The Genie in the Bottle

Keynes strongly advocated the use of both fiscal and monetary measures to encourage economies to move forward from recessions; in basic terms he would suggest spending your way out and devaluing the currency. Therefore in a world of an over-leveraged financial sector combined with indebted governments it is no surprise that the genie of Keynes is being summoned to conjure the elixir of easy money. In fact, the call for central banks to conduct more Quantitative Easing and for the fiscal authorities to delay any deleterious measures is coming not only from the financial sector but also is being supported by an impressive array of Nobel laureate economists.

However, if Keynes the economist suggested deficit spending and devaluation, then how did Keynes the investor prepare for such an outcome?

Theory and Practice

Current thinking is that, if we are likely to get another round of Q.E. then you need to be correctly allocated to “risk-on” asset classes. Unsurprisingly people are looking towards a basket of indexed equities and commodities to provide the returns to their portfolios.

If we turn to Keynes, the fund manager of the 1930s, what did he do? He surmised that Q.E. and devaluation would help equities but, more importantly, that the effects of this double act would not be uniform; this was not a time for “risk-on” with the index.

No Closet-Indexer

Of the 30 largest stocks on the UK market in the 1930s 50% of them were banks or insurance companies; Keynes did not invest in any of them. He focused on the new technology stocks of his day, the telephone and auto companies, and even more heavily, on the mining stocks.

What was the result? Spectacular out-performance. During the 1930s the endowment Keynes managed increased more than 2.5x the performance of the general equity index.

The Real Lesson

Therefore as a number of people start to break for the summer they should consider the lesson of the 1930s credit crunch.

If, as seems likely, the genie of Keynes the economist will grant everyone’s wishes and another round of Q.E. begins later this year, then we need to learn from Keynes the investor and allocate our portfolios accordingly.


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