The Parallels of Past and Present in Finance - Mark Higgins | #594

Episode Summary

Executive Summary: Meb Faber and historian Mark Higgins use U.S. financial history to argue that markets and policy repeat because human behavior does not change much. They focus on insider trading, debt, reserve currencies, gold, inflation risk, passive investing, and the dangers of private-market hype and fees, concluding that history strongly warns against complacency in today’s markets.

Main Topics: Financial history as a guide to markets (Priority: 5/5): Higgins argues that studying 230 years of U.S. financial history reveals recurring patterns in bubbles, policy mistakes, and investor behavior, making history a practical forecasting tool. Insider trading and political privilege (Priority: 5/5): The conversation begins with William Duer and the Panic of 1792, then shifts to modern concerns that elected officials still trade on privileged information while ordinary investors cannot. U.S. debt, deficits, and fiscal discipline (Priority: 5/5): Higgins says persistent deficit spending is historically abnormal in the U.S. and that the country has violated Hamilton’s rule of borrowing mainly in public danger and paying debt down afterward. Reserve currencies, gold, and financial repression (Priority: 4/5): The discussion covers how dominant reserve currencies have changed only during crises, the role of gold as a restraint on fiscal excess, and the risk that high debt could force inflationary or repressive policies. Inflation and the Fed’s policy credibility (Priority: 4/5): Higgins warns that the 1970s taught that failing to fully defeat inflation lets it return at higher levels, and he believes recent Fed easing increases that risk. Passive investing versus active and private markets (Priority: 5/5): The episode contrasts the long-term efficiency of public equity markets with the rising, and in Higgins’s view troubling, trend of expensive and opaque private-market products marketed to retail investors. Historical investing lessons and standout figures (Priority: 3/5): Hamilton and Hetty Green are highlighted as especially important historical figures, with Green presented as an unusually disciplined and contrarian investor.

Key Arguments: Human behavior changes slowly, so bubbles, scandals, and policy errors recur across centuries rather than disappearing. Insider trading has always existed, but the oldest and most persistent form is political/government insider trading because lawmakers have incentives not to ban it. U.S. debt accumulation is historically unusual; for much of U.S. history, debt was used for war or crisis and then paid down afterward. The U.S. may be approaching a medium-term debt constraint that could limit its ability to respond to the next crisis. Reserve currency status is not permanent; the Dutch guilder and British pound lost dominance after major crises, and the dollar could too if public credit is mishandled. Gold historically served as a governor on fiscal recklessness, while fiat money removes that restraint and increases the risk of debasement. The Fed risks repeating the 1970s by easing before inflation is fully contained, which can make future disinflation harder and more costly. Public equity markets became difficult to beat relatively early, and passive investing is therefore a rational default for most investors. Private markets are undergoing a predictable cycle of capital saturation: early investors earn strong returns, later entrants face worse economics and more questionable markups. Retail access to private equity/private credit via 401(k)s and similar vehicles is likely to benefit managers more than end investors, especially given fees, illiquidity, and opaque valuation methods.

Data Points: Years of financial history tracked: about 230 years - Higgins says he wallpapered his wall with note cards to track major events, quotes, and themes across U.S. financial history. Book publication date: February 2024 - Higgins’s book Investing in U.S. Financial History was published in late February 2024. Federal debt level relative to GDP: above World War II levels - Higgins says current U.S. debt-to-GDP has surpassed WWII-era levels. Reserve currencies discussed: 3 major reserve currencies - He cites the Dutch guilder, British pound, and U.S. dollar as the main historical reserve currencies. Financial memory window: no more than 20 years - Meb cites Galbraith’s idea that market memory of disasters fades within roughly two decades. Inflation reading mentioned: headline 2.7%, core 3.1% - Higgins argues the Fed should not ease with inflation still running above target. Potential debt-risk horizon: 5 to 20 years - He describes the debt problem as a medium-term issue rather than a distant one. Gold price cited: $3,500 per ounce - Meb notes gold’s recent rally as investors revisit its role in portfolios. Great Inflation policy backdrop: 1970s - Used as the key historical warning about stopping rate hikes too early. Closed-end fund fee example: 2.5%–3.5% load plus 1.5% annual fee - Higgins references historical fee structures and compares them to modern private-market products. Fund industry churn: 50% of funds close or merge over a decade - Meb cites ICI data to support the case for low-cost indexing and skepticism of active products. Private-market cycle length: about 25 years - Higgins says the current private-markets craze has unfolded over roughly a quarter-century since Yale’s endowment model gained popularity. Secondary purchase discount example: 40% discount - He describes buying private LP interests at a discount and then marking them up to NAV almost immediately. Venture/private exposure leverage example: about 2.5x notional exposure - Meb references a PE/VC ETF product that uses leverage to mimic private-market risk/return characteristics.

Pivotal Quotes: "For practical purposes, the financial memory should be assumed to last at maximum, no more than 20 years." — John Kenneth Galbraith (quoted by Meb Faber): Used to illustrate how quickly markets forget prior crises and repeat old mistakes. "The public debt affords the best field in the world of speculation, but it's a field in which strangers may easily be lost." — Meb Faber quoting a historical sidebar: Introduced during the discussion of early U.S. debt speculation and insider advantage. "The kid who owns the ball is usually the captain and decides when and where the game will be played and who will be on the team." — New York World Telegram (1943), quoted by Mark Higgins: Used to explain why U.S. gold dominance helped establish dollar supremacy after WWII.

Implications: Listeners should view today’s debt, inflation, and private-market enthusiasm through a historical lens: policy mistakes and valuation excesses repeat, reserve-currency dominance can erode, and low-cost, disciplined investing remains the safest long-term default.