Behind every great fortune lies a crime

Behold the criminocracy

“The issue I have with the Covid-19 inquiry is that it is run by lawyers whose expertise is adversarial, rather than scientists, who are inquisitive. The KC may be excellent in court, but we need to find out what happened and why, not put people on trial.

“So when former chancellor George Osborne gave evidence last week, his robust response to the questions was to be expected (“Osborne insists austerity gave financial ‘flex’ for pandemic”, Report, June 21). He should have been asked what information he requested concerning the health of people in different income groups; the life expectancy and comorbidities while he was implementing austerity; and whether that informed any of his decisions as chancellor. We have many eminent scientists and mathematicians who are as competent as any KC to get at the truth. I’ve met some. They are really intelligent. But none is on the inquiry panel.

“Contrast this with America’s 1986 Challenger disaster inquiry. It was Richard Feynman, the physics Nobel laureate, who found out what went wrong, and why, not the politicians, lawyers or soldiers, or even the astronaut Neil Armstrong.

“When Lord Bethell (parliamentary under-secretary of state at the Department of Health from March 9 2020) said on BBC Radio 4’s Today programme last week that managing the health service was — and here I quote him directly — “muddling through”, we need the facts, not adversarial questions that make witnesses defensive and unco-operative.”

• ‘Covid enquiry needs scientists not barristers’, Letter to the FT, Peter Slessenger, Reading, Berkshire, 26 July 2023.

“I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. As a result of the war, corporations have been enthroned and an era of corruption in high places will follow, and the money power of the country will endeavour to prolong its reign by working upon the prejudices of the people until all wealth is aggregated in a few hands and the Republic is destroyed.”

• Attributed to President Abraham Lincoln.

“The secret of a great success for which you are at a loss to account is a crime that has never been found out because it was properly executed.”

• Honoré de Balzac, Le Père Goriot (1834).

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President Eisenhower called it the “military-industrial complex” in his farewell address of 17^th January 1961. The address clearly meant much to him; the speech itself went through over 20 drafts. Much of it could have been written today. It was “a solemn moment in a decidedly unsolemn time” that laid down Ike’s warning for a country “giddy with prosperity, infatuated with youth and glamour, and aiming increasingly for the easy life.”

Despite the fact that he would be the only general to be elected president in the 20^th Century, Eisenhower warned of a concentration of power and influence from an ‘industry’ he knew well:

“Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But we can no longer risk emergency improvisation of national defense. We have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security alone more than the net income of all United States corporations.

“Now this conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence—economic, political, even spiritual—is felt in every city, every Statehouse, every office of the Federal government. We recognize the imperative need for this development. Yet, we must not fail to comprehend its grave implications. Our toil, resources, and livelihood are all involved. So is the very structure of our society.

“In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.”

Swords into ploughshares – and back into swords

That reference to American makers of “plowshares” speaks to a bygone age. It also speaks to America’s mid-century industrial brilliance, determination and ingenuity that by 1944, Henry Ford’s Willow Run plant in Michigan, for example, was churning out a completed B-24 Liberator bomber every 63 minutes. Faced with that degree of industrial productivity, Nazi Germany never really stood a chance. Nor, for that matter, did the Japanese war machine. Consider this tweet posted by a consultancy called ‘Human Risk’:

“When the Japanese within six weeks of Pearl Harbor took control of 90 percent of the world’s rubber supply, the US dropped the speed limit to 35 mph to protect tires and then, in three years, invented from scratch a synthetic-rubber industry.”

In other words, there are almost no limits to what a motivated US war economy can achieve.

But it was not just a permanent military faction whose influence Eisenhower feared, it was the influence of what would become known as Silicon Valley, too:

“Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

“In this revolution, research has become central, it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government..

“The prospect of domination of the nation’s scholars by Federal employment, project allocation, and the power of money is ever present and is gravely to be regarded.

“Yet in holding scientific discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.”

What would turn out to be Big Tech’s malign coexistence with Big Government began during the latter stages of World War 2, when the race was on to deliver the atomic bomb. As Ian Hall writes in his book Unsettled Science, by 1945 the Manhattan Project had cost $2 billion  – the equivalent of roughly $30 billion today.

“To keep the Manhattan Project scientists gainfully employed (and out of Russia’s hands) they were spread to the huge number of US universities, and settled into a post-war mindset; government grants for research became a regular budget item, and both the scientists and the universities cashed in on the new milk cow.”

The Internet itself owes its origins and protocols to the US Defence Department’s Advanced Research Projects Agency Network (ARPANET): you can review the timeline here. With its roots successfully embedded in the world of academia, all the Internet needed for its explosive take-up by the commercial economy was the fuel provided by Tim Berners-Lee and the World Wide Web.

The five families – then..

There is a three-part documentary about the FBI taking on the Mafia in the form of New York’s ‘five families’ during the 1980s. It’s called ‘Fear City: New York vs the Mafia’ and it describes how Cosa Nostra managed to worm its way into almost every part of the New York economy: variously, the Gambino, Colombo, Bonanno, Lucchese and Genovese crime families successfully took control over fish markets, restaurants, the construction business, transportation, the garment industry, hospitals – all the way up to the federal judiciary itself. Think The Godfather – just a few decades later, and entirely for real.

Two things did for those senior ‘Big Apple’ Mafiosi back in the 1980s. One of them was a technology itself: that of the ‘bug’ and the wiretap. The other, more profoundly, was the adoption of a new law that initially neither the administration nor the criminals knew much about: RICO, the Racketeer Influenced and Corrupt Organisations Act. RICO enabled the FBI to go after entire crime families, rather than waste their time and effort securing the prosecutions of ordinary ‘soldiers’ who would almost immediately get replaced anyway.

Prediction: expect to hear a lot more on the topic of RICO prosecutions in the months ahead.

..and now

Financial writer and erstwhile colleague Dan Denning, when we last met – for a pre-lockdown meal in London’s Chinatown – shared his views about the latter-day ‘five families’ that have effectively replaced the Mafia, and that have done so in large part well beyond the shores of the United States. Dan’s modern ‘five families’ comprise:

• Washington (or Big Government, if you prefer);

• Wall Street (or Big Finance, if you prefer);

• The military;

• The media;

• Big Technology.

Our only quibble with Dan’s selection is that he separates media from technology. (We would amalgamate them into one entity – more on this topic later.) That aside, his list strikes us as a pretty good summary of the darker forces pulling so many of our collective geopolitical and economic strings today.

In the UK, we had Brexit as our own ‘wrecking ball’ delivering radical change to a complacent Establishment. The US had the 2016 election of Donald Trump, which similarly shook up traditional power structures, not incidentally triggering violent and almost universal hostility from new families 1 (Washington), much of 2 (Wall Street) and also 4 (the mainstream media) and 5 (Big Tech).

All of which makes the idea that we live in a grown-up democracy seem almost quaint. As far as the culture wars are concerned, the historian Niall Ferguson has it right when he talks about the rise of “emocracy” instead: the triumph of raw emotionalism over rational, polite and sensibly argued debate. (We recommend each of his various interviews with the former Australian politician John Anderson for a cogent analysis of the global political and economic landscape here, here and here.)

With the exception of Washington – where the minimum investment threshold is a function of corporate or individual lobbying power, and therefore beyond most of us as active investors, either financially or ethically – each new member of the five families offers a handful of ‘preferred’ investment choices. Those who believe in the continuation and consolidation of the geopolitical and economic status quo can take their pick from the following companies.

• The ‘cream’ of Wall Street comprises JP Morgan, Goldman Sachs and Bank of America, pretty much in descending order of influence. Other investment and commercial banks are, of course, available – but these are the players with clout. In fund management terms, there’s Blackrock – and, frankly, not many serious comparable rivals in terms of scale. Personally, this correspondent would rather gnaw his face off than invest in, or with, any of them. So from both a valuation and an ethical perspective, we’d rather own genuinely independent fintech. And there’s a reason why the companies in the ‘Wall Street family’ are exclusively American – no other country’s national champions in banking currently come close. In terms of fund management, for any number of reasons we would prefer to invest in and with investment boutiques – most or all of whom are likely to be privately held and therefore unlisted.

• The military budget justifies and supports the existence of vast armaments businesses like Lockheed Martin, Boeing, Northrop Grumman, Raytheon Technologies and General Dynamics. Note that here again the top (five) players are all North American businesses.

• The major media players are essentially Comcast, Disney, ViacomCBS and AT&T (Warner). You might think of Disney, for example, just as an animation house or an operator of theme parks – that would be to ignore its assets in TV production, broadcast TV, cable channels, news and business channels, sports networks (ESPN), its music interests, traditional publishing and streaming media assets. All of which reminds us of an old (June 1998) story from the US satirical news website The Onion, republished below:

“Just Six Corporations Remain

“NEW YORK—MCI-WorldCom and Bank One-Chase Manhattan merged in a blockbuster $112 billion deal Monday, forming the world’s largest telecommunications/banking company and reducing the number of existing corporations to six.

“This is an exciting move for both companies,” said Donald Cosgrove, CEO of MCI-WorldCom, whose subsidiaries include SBC-Ameritech, Bell Atlantic-NYNEX and McDonnell Douglas. “As a result of this historic merger, we should be in much better position to consolidate vast amounts of wealth and power in the coming years.”

“The other five remaining corporations are Daimler-Chrysler, Monsanto-American Home Products, Shearson-Lehman-Chemical-Citicorp-Travelers Group, Paramount-Viacom-ABC-Disney, and Lockheed-Northrop-Boeing-Pepsico.

“According to Forbes managing editor Russell Belanger, at the current rate of mergers, there will be only one corporation in the world by 2000.

“The six remaining corporations have shown great interest in merging with each other,” Belanger said. “Clearly, the stage is being set for the long-discussed creation of UniCorp, a $92 trillion corporation that produces every product on earth, from canned yams to basketballs to poison gas.”

And yes, that reference en passant to Lehman is somewhat touching, isn’t it ? We find it actually a sobering reminder, over 20 years after the original article was written, of how little genuine competition (and therefore resultant corporate failure) exists among the ‘five families’ today. Which is, of course, the point of an industrial cartel.

• Last, but by no means least, the identity of the dominant Big Tech players will come as no surprise. At the time of writing, on a market capitalisation basis, the key players in the (US, but arguably global) technology sector were Apple ($2.9 trillion), Microsoft ($2.5 trillion), Alphabet (formerly Google; $1.6 trillion), Amazon ($1.3 trillion), and Meta / Facebook ($740 billion). In a sense, there is something to be impressed by here: not one of those companies even existed before 1975 (the date of Microsoft’s founding; Apple came a year later).

So these are the companies and entities that in large part control (through both their lobbying power and their ownership of media platforms) who gets into government; resultant economic policy; who wins wars; who gets access to capital and who doesn’t; what you consume – and how you consume it; and what you read, see and think. Like the original ‘five families’ in 1980s New York, these guys are everywhere, and in everything.

Which is not to say they are invulnerable. The Feds got the Mafia and the members of its ‘Commission’. They could yet get Big Tech. While the ‘Big Six’ of Facebook, Apple, Amazon, Alphabet (Google), Netflix and Microsoft account for roughly a quarter of S&P 500 total market capitalization there is yet the potential for both targeted taxation and regulation.

These also happen to be issues on which the socialist Left and free marketers agree, in the same way that both wanted to nationalize the bailed-out banks in 2008.

And there is always the threat of anti-trust action by, for example, forcing the divestment and unbundling of WhatsApp and Instagram in the case of Facebook, or YouTube in the case of Google. So the consolidation of power by the new ‘five families’ could proceed, along with their fabulous consolidation of market wealth and influence – but we, for one, would not voluntarily make that bet.

Mario Puzo opened his 1969 novel The Godfather with an adapted version of Balzac’s earlier quote: “Behind every fortune there is a crime.” No successful country can ever be entirely blameless in its roots, and certainly not after the fact. Britain’s industrial dominance in the Victorian age came alongside its imperial ambitions. America’s founding fathers were not innocents when it came to the ownership of slaves, and nor did America’s development as a country come without appalling treatment of its indigenous population. But there has to be some kind of pragmatic ‘statute of limitations’ when it comes to the past. Nobody’s bloodline can be spotless. The sins of the fathers – and of their fathers – cannot be laid against their descendants in perpetuity. What is surely important is that the more serious transgressions, where legitimate, can at least be respectfully acknowledged. But times and attitudes also change.

What makes the misbehaviour of Big Tech, for example, so egregious today is that it’s effectively happening in plain sight. As a writer as well as a fund manager, this correspondent has practically a genetic imperative to support freedom of speech. But that is not what we have today, courtesy of operations like Google, Facebook (which we don’t use) and Twitter (which we do – partly because, despite its odious censorship, in essence it offers something closest in theory to the unmediated media experience, whether for authors or for politicians or for anyone else). The problem lies in the explicit censorship that these platforms impose, whether by algorithmic manipulation, or by simply pulling the rug on views that Silicon Valley doesn’t happen to share, all as part of this giant waltz in which tech publishing platforms pretend not to be publishers of anything, yet feel free to remove expressions of opinion that don’t carry the appropriate leftist seal of approval. In Dan Denning’s original coinage of the modern ‘five families’, he distinguished between Big Tech and Media. From our perspective, they have already become fused. Mainstream media is dying on its knees, haemorrhaging both profitability and credibility, leaving the field open to social and new media and the tech giants to control increasing amounts of all those things that make their way onto the screen on which you are currently reading this.

Here, for example, is John Lanchester in a piece entitled ‘You Are the Product’ in The London Review of Books on the topic of Facebook and its morally questionable founder:

“[Mark] Zuckerberg himself has spoken up on this issue, in a Facebook post addressing the question of ‘Facebook and the election’. After a certain amount of boilerplate bullshit (‘Our goal is to give every person a voice. We believe deeply in people’), he gets to the nub of it. ‘Of all the content on Facebook, more than 99 per cent of what people see is authentic. Only a very small amount is fake news and hoaxes.’ More than one Facebook user pointed out that in their own news feed, Zuckerberg’s post about authenticity ran next to fake news. In one case, the fake story pretended to be from the TV sports channel ESPN. When it was clicked on, it took users to an ad selling a diet supplement. As the writer Doc Searls pointed out, it’s a double fraud, ‘outright lies from a forged source’, which is quite something to have right slap next to the head of Facebook boasting about the absence of fraud. Evan Williams, co-founder of Twitter and founder of the long-read specialist Medium, found the same post by Zuckerberg next to a different fake ESPN story and another piece of fake news purporting to be from CNN, announcing that Congress had disqualified Trump from office. When clicked-through, that turned out to be from a company offering a 12-week programme to strengthen toes. (That’s right: strengthen toes.) Still, we now know that Zuck believes in people. That’s the main thing.”

At a certain level, we all have the power to influence this debate, if only to withhold our capital from supporting the share prices of those listed companies duking it out on the battlefields of the world’s capital markets whose ethics we might deplore. (Our co-host on The State of the Markets podcast, Paul Rodriguez, has long suspected that the likes of both Google and Amazon, by having such a stranglehold on data, will end up wards of the US government, and he may yet be right.) For similar reasons, we have never invested in China, and for as long as the Communist Party of China controls the country, we never will.

The debate is partly one of valuation (where they even comprise listed businesses, shares in the modern ‘five families’ are simply too expensive for this value investor – and even when they don’t, the debt issued by government per se is comparably too expensive for this value investor to see the point of owning it, in a world which is already dealing with a giant reflationary wave). And of course it’s also at least partly about morality. It’s a free world, more or less, so you are welcome to invest in China. We would rather invest our capital and the capital of our clients in countries that still satisfy each and all of Niall Ferguson’s ‘killer app’ attributes, or social developments, of successful modern economies, as advocated in his book Civilization, namely:

• The adoption of scientific principles;

• Free market competition;

• Medicine;

• Consumer culture;

• The work ethic;

• Private property rights.

China remains lamentably deficient in at least one, and arguably more, of these areas.

The precise composition of the modern day ‘five families’ is up for debate. In his seminal drama  The Wire (broadcast on HBO, a subsidiary of Warner, the ultimate owner of which is AT&T), David Simon granted a separate series to each of the Baltimore police department, and then to the city’s dock workers, to its politicians, to its teachers, and to its news media. Whether you draw the line at the police force and political class or not, the Big State is indoubtedly rooted within our new ‘five families’. As is our news media, whether in the role of Big Tech or otherwise.

Our two favourite scientists of the 20^th Century were Richard Feynman and Carl Sagan – in large part because both of them were consummate communicators. Feynman himself took part in the ultimate Big State development, in the form of the Manhattan Project. But ever true to science, he also died defending it from government and administrative ‘spin’. As he wrote in the conclusion of his report to the committee investigating the space shuttle Challenger disaster,

“For a successful technology, reality must take precedence over public relations, for Nature cannot be fooled.”

In a similar vein, Sagan, whom we got to know decades ago watching his monumental documentary series Cosmos, issued the following message to readers of The Demon-Haunted World: Science as a candle in the dark (1995), which he co-authored with his wife Ann Druyan:

“I have a foreboding of an America in my children’s or grandchildren’s time — when the United States is a service and information economy; when nearly all the manufacturing industries have slipped away to other countries; when awesome technological powers are in the hands of a very few, and no one representing the public interest can even grasp the issues; when the people have lost the ability to set their own agendas or knowledgeably question those in authority; when, clutching our crystals and nervously consulting our horoscopes, our critical faculties in decline, unable to distinguish between what feels good and what’s true, we slide, almost without noticing, back into superstition and darkness..

“The dumbing down of America is most evident in the slow decay of substantive content in the enormously influential media, the 30 second sound bites (now down to 10 seconds or less), lowest common denominator programming, credulous presentations on pseudoscience and superstition, but especially a kind of celebration of ignorance..”

We can’t say we weren’t warned.

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Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com

Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks.