CFANY Book Club

The CFA Society New York Book Club met on December 12, 2017 to discuss “Why Nations Fail: The Origins of Power, Prosperity, and Poverty” by Daron Acemoglu and James A. Robinson. The authors argue that it is far from geography, culture, or ignorance that determines the wealth and prosperity of an economy. Rather, whether a nation is rich or poor is highly correlated to its type of political and economic institutions. Critical junctures in history such as the Industrial Revolution, the French Revolution, and the Black Plague were paramount in shaping the global economy to what it is today. From reading this book, it is clear why certain regions are rich or poor based on either the adoption of inclusive or extractive political and economic institutions. Wealthy nations, which tend to have inclusive institutions, are represented by a sound patent system, incentives to innovate, respected and followed rule of law, creative destruction, property rights, anti-trust, broadly distributed power, and freedoms, while extractive institutions are characterized by the opposite side of the spectrum which include monopolies, strengthening of elites at expense of the poor, and controlled decision making by the few. Overall, the book provides a solid foundation of helping to understand why some nations are wealthy and others poor while also providing some important considerations for the potential economic growth rates across the globe.

The CFA Society New York Book Club met on November 14, 2017 to discuss the story of The Oil Kings: How the U.S., Iran, and Saudi Arabia Changed the Balanced of Power in the Middle East, by Andrew Cooper. Studying the oil implications of the late 60’s and through the 70’s provided many parallels to the period around our most recent global financial crisis of 2008. The book details how Arab OPEC members retaliated against the US for aiding Israel with arms during the Arab-Israeli War. This retaliation resulted in the oil embargo of 1973 which had dramatic ramifications by quadrupling the price of oil sending inflation soaring and oil consumers into recession. After industrialized economies maxed out the borrowing potential of the IMF and World Bank, they turned to US banks which ultimately led to a severe credit crisis as fear grew that many industrial economies were unable to meet their debt obligations in the face of rising oil prices. Unemployment rose, business confidence was down, US GDP reduced to the “Greenspan pause”, and the world suffered a deep recession. It eventually got so economically difficult that most oil consuming nations couldn’t afford even another 10-15% rise in oil prices. The Shah of Iran was negotiating hard to raise oil prices in order to pay for the excessive amount of arms and weaponry purchased. Saudi Arabia was very concerned that their customers being most of the industrialized western world would fall into another recession if Iran increased oil prices by another 15%. In 1977, Saudi Arabia decided against a weakened customer base and flooded the oil markets in the late 70’s which led to lower oil prices, a more influential Saudi Arabia, and even may be the catalyst which helped ignite the Iranian Revolution.

The CFA Society New York Book Club met on October 10, 2017 to discuss the story of Amazon in Brad Stone’s, “The Everything Store”. As one of those most innovative, disruptive, and attractive firms in this age, the CFA Society NY members enjoyed adding to their understanding by reading this book. The Amazon success story is far from over, yet the author provided a sound foundation of how Jeff Bezos launched the firm in the mid-90s as an online bookseller, navigated through the tech boom/bust while adding CDs, DVDs, electronics, and toys, and then mastered distribution which led to further product offerings. The business model complexity has evolved substantially from books to offering cloud computing Amazon Web Services along with producing the disruptive Kindle tablet. Success of Amazon revolves around the brilliance of Jeff Bezos and his continued pursuit of customer satisfaction, economies of scale, and strategic long term focus.

The CFA Society New York Book Club met on September 12th, 2017 to discuss “The Age of Ambition” by Evan Osnos. The complexity of China has been broken down into the pursuit of wealth, freedom, and faith. Each has examples based on the authors extensive interviews while based in China from 2005 to 2013 while working for the New Yorker. There are many short stories based on the experiences of Chinese citizens which provide a glimpse into the growth and rise of China, yet corruption and inequality remain a concern for the future. The book covers both the economic rise and the authoritarian force of a one party state. It appears while the economic rise is expected to continue, the ambitious still feel the limits of their abilities given this authoritarian state.

The growth model is transitioning from an export and manufacturing led economy to one based on consumption and services. The double digit economic growth of the past 30 years has lifted millions out of poverty where the average income was $200/year in the 80’s to $6000/year today, and growing. The growth has come with challenges such as high carbon emissions, increasing inequality, and jail time for dissident citizens. The growth of China can be compared to the Gilded Age in the States. The massive infrastructure build out by China is highly similar to the laying of the trans-continental railway in the United States. While the double digit growth in China has been spectacular, there has also been negative impacts such as corruption, bribery, short cuts, etc. As an example, Chinese citizens were buying their way into jobs such as a railroad engineer. Or cutting corners when building bridges which led to hazardous collapses. Many of the large firms in the U.S. during the early 1900s also engaged in similar acts which should certainly be considered when viewing China’s negative consequences of accelerated growth.

The CFA Society New York Book Club met on August 8th, 2017 to discuss “The Second Machine Age” by Erik Brynjolfsson and Andrew McAfee. Approximately 10 members attended and interestingly, the first question asked was if anybody actually purchased a hard copy? Turns out 2 of the members did but most used a digital copy. The book takes you through the evolution of technology from the Ice Age in 25,000 BC, to the world warming around 14,000, to the domestication of work animals in 8,000, to writing in 3,000, then democracy in 500AD originating in Athens, and finally to about 1800 when there was 1 billion people on the planet and all of a sudden, a major growth catalyst was invented. The industrial revolution started with the creation of the steam engine which led to more efficient production, factories, and mass transport. The growth catalyst of the steam engine was followed by electricity which the authors characterized as the first machine age. The second machine age is the rise of the robots, computers, AI, autonomous cars, 3D printing, Internet of Things, the digital age, etc. The authors believe we are in the middle of the 2nd machine age which is expected to enhance productivity, wealth, and growth.

Technology has provided exceptional bounty and consumer surplus which is not necessarily accounted for in the lower GDP numbers since the financial crisis. Cell phones and internet connectivity for example have provided vast amounts of information, power, and programs at our finger tips that 20 years ago was simply not accessible unless you had a super computer, if that. However, the spread of the winner takes all market environment has led to greater inequalities. In the future, routine jobs both skilled and unskilled are most at risk as those are the ones that are likely to be automated. Idea creation, adaptability, and being flexible will be the key competitive advantages for future generations.

The CFA Society New York Book Club met on July 11, 2017 to discuss “The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters” by Gregory Zuckerman. Approximately 15-20 members attended which led to an insightful conversation considering their various backgrounds which included an energy analyst, O&G investor, O&G entrepreneur, CFA candidates/charterholders, and other people in the industry. The meeting was kicked off by each member introducing themselves and then providing comments, questions, or takeaways from the book which was followed by a deeper discussion on the O&G industry.

The consensus from the members was that the book was a solid historical representation of how the United States has gone from being highly dependent on foreign oil and gas to becoming almost energy independent. The author tells the story of several key players such as George Mitchell who focused on the Barnett and eventually extracted massive amounts of natural gas through working with his geologist and petroleum engineers on perfecting the precise fracking method. Another interesting character was Charif Souki who founded Cheniere Energy and originally intended on importing natural gas to the US but given the impact of the shale revolution, transformed his import terminal into an export terminal. Aubrey McClendon and Tom Ward who co-founded Chesapeake Energy led an extremely volatile career given the nature of O&G prices yet are credited in also helping transform the nation’s dependence on O&G. The majors such as Exxon, BP, and Chevron didn’t believe that shale could be extracted at profitable levels so they remained focused offshore and in other countries. Yet the Independents such as Mitchell, Chesapeake, and Continental utilized their entrepreneurial abilities, drive, and persistence to eventually crack the code on extracting O&G from shale and other less permeable rock. The members also discussed break even prices by geography and how they have come down considerably due to new technologies and better energy infrastructure. For all those interested in learning more about the subject matter, this book is an excellent read.

The next meeting is August 8, 2017. We will be discussing “The Second Machine Age” by Erik Brynjolfsson and Andrew McAfee. This book examines the proliferation and dispersion of robots in all aspects of work and life. The use of robots is moving beyond the factory floor and becoming more prevalent in services, health care, autos and home care. Increasingly able to perform duties once reserved for skilled labor, robots are putting the jobs of low and high wage workers at risk.

Upcoming Schedule:

February 13, 2018: “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money” by Nathaniel Popper >

  • While published in May 2016, and sound book to help provide a better foundation on the rise of Bitcoin.
  1. March 13, 2018: TBD
  2. April 9, 2018: TBD

Future Books to Consider:

  • Stress Test: Reflections on Financial Crises, by Timothy Geithner
  • Savage Continent: Europe in the Aftermath of World War II, by Keith Lowe
  • House of Debt: How They (and You) Caused the Great Recession, How We Can Prevent It from Happening Again, by A. Mian and A. Sufi
  • An Empire of Wealth: The Epic History of American Economic Power, by John Steele Gordon
  • Free to Choose: A Personal Statement, by Milton Friedman
  • Secrets of the Temple: How the Federal Reserve Runs the Country, by William Greider
  • The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando De Soto
  • The Forgotten Man: A New History of the Great Depression, by Amity Shlaes
  • Lords of Finance: The Bankers Who Broke the World, by Liaquat Ahamed
  • Boomerang: Travels in the New Third World, by Michael Lewis
  • Barbarians at the Gate: The Fall of RJR Nabisco, by Bryan Burrough and John Helyar
  • The Rise and Fall of Nations: Forces of Change in the Post-Crisis World, by Ruchir Sharma
  • World Without Mind: The Existential Threat of Big Tech, by Franklin Foer