This publication reviews a book by an author unafraid to challenge some of the standard assumptions prevailing in the wealth management industry.

Even by his standards of blending mind-bending financial concepts, scary scenarios and cultural references, James Rickards has excelled himself in his latest book, Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos.

With a title such as this, the reader knows what the prediction in broad terms is going to be: We’re going to hell in a handbasket, economically at least. Diversify. Hold gold and cash. Don’t put faith in standard risk warnings from bank salesfolk. And so on.

Rickards, who has worked in investment firms (including having a role at Long Term Capital Management in the late 1990s) and advised on international economics and financial threats to the Department of Defense and the US intelligence community, knows how to convey complicated ideas in a simple way. What is a bit different in this book from say, Currency Wars (arguably the book that made him most famous) is that each of his seven chapters concludes with a set of investment ideas that readers can put to work. 

He reprises a number of themes that have cropped up before in his books: Financial players’ approaches to risk and investment haven’t changed much since 2008 and need to do so; doctrines of global free trade and capital flows are based on false ideas; much of the developed world’s debt is unsustainable and hampers growth; behavioural finance ideas are often misused by arrogant policymakers; banks and other large organisations are often too large, getting larger and more at risk from failure, and the US dollar’s supremacy is unlikely to endure. In addition to this rich stew of analysis, leavened by colourful anecdotes (such as describing how security works at the CIA HQ in Langley) there are claims that Chinese GDP data is so suspiciously smooth that it smacks of a Madoff-style pyramid selling scam, that Arthur Laffer-style supply-side tax cut ideas are mostly bunk, and that tariffs on Chinese imports are on balance a good thing for the US. Oh, and Godzilla and TS Eliot make an appearance.

On tariffs and critiques of supply-side economics, I think Rickards gets on weaker ground. (I have critiqued Rickards’ mercantilism before.) Yes it is true that the Reagan-era tax cuts did coincide with a ballooning budget deficit, driven in many ways by huge defence spending to intimidate Moscow. However, tax rates were in the 60 per cent rate, sometimes higher when the marginal impact is factored in. This was hammering entrepreneurship. Cuts did increase revenues. That’s certainly what happened when, for instance, the Thatcher administration (1979-1990) cut confiscatory rates of income tax in the UK.

If taxes are prices, then raising them (tariffs) alters behaviour, as lowering them does. After all, Rickards favours tariffs on Chinese goods because he says the usual ground rules for free trade (he says the Law of Comparative Advantage is in most respects an academic concept, not reality) are being broken. Well let’s assume he is correct that tariffs are a smart move (this reviewer disagrees). Tariffs are taxes - as US consumers and some producers are discovering in the wake of Donald Trump's tariffs on imported steel and aluminium, for example. If raising taxes on imports reduces willingness to buy them, then raising taxes on income and capital gains, for instance, will also potentially hit economic activity. He is also dismissive of claims that cutting corporation taxes will benefit the domestic US economy. But prior to the Trump budget measures, US corporations paid taxes which were almost double the OECD average. However much clever finagling goes on, cuts surely will make a difference. Remember, taxes are always ultimately paid by people in some form.

The strongest parts of the book in my view are Rickards’ focus on how, shockingly, a lot of investment and financial risk models – of the sort still used by wealth managers today – are the same old value-at-risk (VaR) bell-curve distributions that spectacularly failed around the 2008 financial crash. It makes one wonder how many "robo-advisors" are still using some of the financial engineering models that pre-dated the crisis. He is right to point out also that the sheer inflow into “passive” investment vehicles such as ETFs and certain index funds, as well as the rise of “risk-parity” asset allocation ideas, carry significant risks. He points out that “passive” investments to some extent ride on the coat-tails of active investors. Without buyers and sellers of individual securities, there are no prices that can be used to compose an index on which an ETF sits. Some of the discussion on these issues is complex, but the takeaway broadly is that passive investing has its limits.

There is a lot to think about in this book, even if one doesn’t agree with all of it. The discussion of why the US middle classes are under pressure, the case for universal basic income and similar ideas, is one of the best I have read: humane, lucid and relevant. Rickards has gone and done it again. And it features Godzilla.

Aftermath is published by Penguin.