Greece's Rockstar Economist on How to Fix Europe

Yanis Varoufakis, former Greek finance minister, tells an enthralled audience of pension professionals of a dark future for Europe and why the UK must stay in to have any chance of fixing it.

“There is something rotten in our financial kingdom.”

Ninety seconds in and former Greek finance minister Yanis Varoufakis already has the packed auditorium audience in the palm of his hand. It might be the penultimate session of the Pensions and Lifetime Savings Association’s investment conference, but nobody is going home yet.

Yanis VaroufakisVaroufakis—described as a “rock star economist” since his sudden emergence with Greece’s left-wing Syriza party at the height of its debt crisis—knows an economic disaster when he sees one. Over six years from 2009, he saw—and at times directly fought against—a crippling austerity program enforced by the ‘troika’ of the EU, the European Central Bank (ECB), and the International Monetary Fund. It wiped out almost a third of Greece’s economic output.

The same political thinking has caused today’s environment of “financial repression,” negative interest rates, and poor yields, Varoufakis argues—the very things the delegates have spent more than two days trying to get their heads around.

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The bad news: It is going to get worse, he says.

Varoufakis likens the creation of the Eurozone to the introduction of the gold standard in the 1920s, as both systems fixed the exchange rates of various countries. A flood of capital washed through from countries running surpluses to those running deficits, but as soon as anything went wrong the money rushed straight back out again.

Gripping the podium with both hands, Varoufakis gazes intently out at the investment professionals before him. “When you try to solve this problem through internal devaluation”—austerity, in other words—“then economies crash and very soon you have deflationary forces flooding the surplus countries. Negative interest rates ensue, then negative growth rates ensue. We’ve seen all this before.”

There are a few nods around the room from those who know their economic history.

“Why do you think Greece is a basket case?” Varoufakis continues. “We had the strongest growth rate, along with Ireland, between 1998 and 2008. It was all Ponzi growth, based on this flood of capital.”

“By voting to get out you will give Brussels a bloody nose, and I will be very pleased to see that. But you are not escaping the vortex that the disintegration of the EU is creating.”We are living through “our generation’s 1929,” he argues. Asset bubbles have burst, and capital has rushed out of the previously growing southern European states. “The common currency fragmenting in the 1920s was the gold standard, now it’s the euro. And very soon after that, proud nations turned against one another. We are reliving this moment.”

Varoufakis reiterates this dark hint at a violent future as he explores the potential dismantling of Europe’s common currency. This would create a two-speed Europe, he argues, broadly split between north and south, with high unemployment in both areas. “No one can escape this post-modern version of the 1930s.”

Despite his now-global fame, Varoufakis was Greece’s finance minister for just six months at the start of last year. During that time he gained notoriety for his outspoken nature and his damning verdicts against the troika’s plans, and his talent for a soundbite is still evident, as he describes Brussels—the centre of the EU’s bureaucracy—as a “cesspool of anti-democracy.”

Sir Tim Berners-Lee, inventor of the internet, was a speaker on day one. The man in charge of a small “basket case” economy for half a year has stolen the show.

And so we come to the one word the whole audience wants to hear from the rock star economist: Brexit.

“I would like to make a plea: Stop thinking of the EU as a given,” Varoufakis says. A few eyebrows are raised, and some delegates sit forward, expectantly. “The EU is disintegrating, ladies and gentlemen, as we speak. My problem with Brexit is that it would speed up the disintegration. That disintegration would cause a vortex in the heart of the continent from which Britain cannot escape whether it’s in or out.”

The solution, we are told, is for the European Investment Bank to invest heavily in start-ups and green technology—a form of QE that is more direct than the current program employed by ECB president Mario Draghi. The barrier, however, is politics.

“This is what we need to change in Europe,” Varoufakis says. “Britain made a very wise decision to stay out [of the Eurozone], but you are not disconnected from it. By voting to get out [of the EU] you will give Brussels a bloody nose, and I will be very pleased to see that. But you are not escaping the vortex that the disintegration of the EU is creating.”

He concludes with a rallying call sure to get the British audience on his side: “I believe we should stay together and try to do something very simple: Democratize the EU. As Winston Churchill said, it’s a terrible system, democracy, but it’s the best shot we have at injecting a little bit of rationality in European economics and politics.”

Exit stage left, to rapturous applause.

You can view Yanis Varoufakis’ speech in its entirety on the Pensions and Lifetime Savings Association’s YouTube channel.

What third-world dictators and many asset managers (Dalio excepted) have in common, according to long-time industry watcher—and CIO’s founder—Charlie Ruffel.

Charlie Ruffel At a recent breakfast for a newly returned diplomat from an emerging markets posting, an observation was made about the utter imperative of succession planning. Virtually every organization across the globe—countries, companies, dynasties—make succession planning part and parcel of everyday strategy. But, the diplomat said, many third-world politicians were not as attentive to it as the common good required, except perhaps in the breach.

Add to them, I thought silently to myself, asset managers.

Starting and establishing an asset management firm is a celestial achievement these days, with regulatory requirements at a fever pitch and capital-raising a gamble that the Forty-Niners might have shrunk from. Actually, it was ever thus. For every Brinson and Bridgewater, a torrent of attempts fell short, remembered by no one. Ours is an industry sharp of tooth and red of claw.

Why is proactive succession planning so rare in our industry? For one, running an asset management firm is quite fun. A successful asset management start-up requires a founder of prodigious talent. Our entrepreneur has to burn the boats, and find like-minded individuals willing to take risk (a rarity). The founder must navigate hyper-compliance and investors who prefer the IBM option to any alternative that might get them fired. He or she must hope and pray that the chosen asset class stays in favor, and stay the course. There will be payrolls met by a penny, shouting matches over the trading desk, wounded feelings, firings, and more shouting matches. And then assets breach the one billion mark, and then five and then ten. New problems emerge, but the hardest part of the race, by far, has been run. That is, for those lucky few.

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Why ever sell these few asset management businesses that cross the magical threshold? I am a great admirer of Gary Brinson—most anyone would be who watched Brinson Partners seize the moment in the 1990s. But it was hard to fathom why he sold his business to Swiss Bank Corporation in 1994: Surely not just for more money?

These are businesses—not practices. When Brinson Partners changed hands, it might have been the ongoing expression of its founder’s investment genius. It would have wobbled but hardly imploded had Brinson decided to focus on raising koi, not returns. But he entrusted his firm’s fate to Swiss Bank Corporation, which shortly thereafter found itself in the clutches of UBS, and then the firm lost its way as the Swiss screwed the pooch. (Nothing against the Swiss: Americans, French, Britons, Canadians, or Germans could have done the same.)

Dalio Jobs Bridgewater, too, derives its success from its founder’s worldview. But almost unique among its peers, one senses that the Westport, CT-based firm—and 66-year-old founder Ray Dalio—have been grappling with the succession issue for some time. Bridgewater has found creative ways of getting stock into employees’ hands, and various executives have been floated as potential heirs to Dalio. Steve Jobs’ confrere Jon Rubinstein is the most recent, and intriguing inheritor apparent. The national press gleefully reports these succession moves. (Particular mention goes to the New York Times, which treats leaks from Bridgewater with the same salaciousness that it dissects the Republican National Committee.) But in reality, these maneuvers are simply a function of the firm’s Darwinian culture. Bridgewater is grasping a nettle—succession—that most other firms fail to clutch.

Why is this so rare in our industry? For one, running an asset management firm is quite fun. And it’s not that hard when the going is good. When all else is failing—eyesight, libido, Achilles Heels—being captain of the ship appeals greatly. And if the end is in sight—an 80-year old CEO is a stretch even for maniacal egos—well then, sell the firm. And not to fellow workers, as they’ll likely want to pay less or more gradually than outsiders. The hard truth is that even successful founders are all too human, and typically opt for the easy—and wrong—solution.

Institutional investors should be betting on firms, not individuals. Perhaps some still hand money to Bridgewater because they think Dalio is a genius, but the wisest do so because they believe the institution will deliver what it promises them. Dalio—at least from a distance—seems determined to ensure that Bridgewater will survive him, and take with it into the foreseeable future the culture he created. That is his singularity.

The industry would do well to emulate him.

Charlie Ruffel founded CIO. He is now co-CEO of Kudu Investment Management (KIM), based in New York City. KIM takes minority stakes in asset management firms.