Monday, March 16, 2015

My Amazon Review of Joseph Kanon's "Leaving Berlin: A Novel"

Spy vs. Spy

You can taste the rubble of 1949 Berlin in Joseph Kanon’s new novel. Along with the rubble there is intrigue, duplicity and the beginnings of the East German secret police, the Stasi. Alex Meier, Kanon’s protagonist, is a Jewish writer formerly of Berlin and most recently of Hollywood who has returned to his home city to spy for the CIA after suffering the wrath of Congress’ investigations of the role of Communists in Hollywood. Simply put he made a deal to return and as someone who was denounced by Congress, he has the perfect cover.

Along the way we meet several Berlin returnees who still believe that the path to a better world is through communism and the wisdom of the Party in playing traffic director. They will soon be subject to a purge that was far worse than the contempt citations handed out by the Congress of the 1940s. There are more than a few cameo appearances of Bertolt Brecht and a scene in the novel involves the opening of his play, “Mother Courage.” Of course it would not be a spy novel without the Adlon Hotel and as you would have it Meier hooks up with his prewar love interest, who is, to say the least, active in the spy business.

All told “Leaving Berlin” is a terrific spy novel in the tradition of Alan Furst and John le Carre. We might just get a sequel.

The Amazon url is:

Saturday, March 14, 2015

An Island of Stability in a Volatile World, UCLA Anderson Forecast, March 2015

Amid slow growth and currency devaluations
throughout much of the developed world, the United States
looks like an island of stability in a very volatile world. We
continue to believe that the U.S. economy is on a 3% real
GDP growth tack over the next two years. (See Figure 1)
With that, payroll employment will be increasing at a solid
250,000 jobs a month pace and the unemployment rate will
hit 5% by yearend. (See Figures 2 and 3) To be sure, the
labor force participation rate will remain far lower than what
it was prior to the financial crisis.

Figure 1 Real GDP Growth, 2007Q1 -2017Q4F
Source: Sources: U.S. Department of Commerce and UCLA Anderson

Figure 2 Payroll Employment, 2007Q1 – 2017Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Currency Wars

In a rerun of the 1930s, the developed world is witnessing
a series of central bank driven competitive devaluations
that was initiated by the United States in 2010 with what is
now known as QE2. Put bluntly, each trading bloc is seeking
to export the economic weakness they are experiencing to the
rest of the world. As a result, along with policy uncertainty
within the Eurozone, the U.S. dollar has soared, rallying 16%
from the 2014Q3 to 2015Q1F. (See Figure 4)

For the world economy as a whole, a series of competitive
devaluations cannot work unless the cumulative rounds
of quantitative easing ignite global growth. Meantime, with
Europe and Japan mired in near-zero growth, the U.S. looks
like an exception.

The combination of very sluggish growth in Europe
and Japan, near zero inflation rates and the implementation
of quantitative easing policies has created an unprecedented
environment of negative interest rates. Where the so-called
zero bound for interest rates has previously been broken in
periods of extraordinary financial crisis (i.e. 2008 and 1933)
negative short-term interest rates have become rather com-

Figure 3 Unemployment Rate, 2007Q1 -2017Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 4 Trade-Weighted Dollar with Major Currency Trading
Partners, 2007Q1 – 2017Q4F
Source: Federal Reserve Board and UCLA Anderson Forecast

Figure 5. Global Economic Forecasts, 2014-2017, Real GDP, %chya
Sources: Goldman Sachs Global Economics Weekly, February 12, 2015

mon place. Furthermore, 10-year sovereign debt for much
of Europe and Japan now trades well below 1% making U.S.
yields at 2% looking like Mount Everest. (See Figure 6)

A strong dollar that raises export prices mixed with
weak economic activity abroad is not a good recipe for export
growth. As a result, real exports will only grow a modest
3-4% pace over the next few years, well below the 9% clip of
nearly a decade ago. (See Figure 7) Concomitantly a stronger
U.S. economy coupled with cheaper import prices will suck
in imports from most of the world. Real imports are forecast
to increase at a 7% pace this year and next, well above the
3.4% average from 2012-2014. (Figure 8) Remember here
we are talking about real imports which ignore the huge
drop in the price of oil.

Figure 6 Sovereign Debt Yields for Selected Countries at
Various Maturities, February 24, 2015
Sources: CNBC and Bloomberg

Figure 7 Real Exports of Goods and Services,
2007-2017F, Annual Data
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 8 Real Imports of Goods and Services,
2007 -2017F, Annual Data
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 9 Federal Funds vs. 10-Year U.S. Treasury Bonds,
2007Q1 -2017Q4F
Sources: Federal Reserve Board and UCLA Anderson Forecast

Getting Ready to Move Off of Zero

Despite getting a major break from the dramatic decline
in oil prices and the strong dollar which are temporarily
suppressing inflation, we believe that the Fed will soon
move to end its 6+ year zero interest rate policy. Given the
strengthening labor market and the likely bottoming of inflation
in the second quarter, we think the Fed will embark on
a very gradual pattern of increasing the federal funds rate.
(See Figure 9) By this we mean that instead of raising rates
.25% at every meeting as was done in the mid-2000s, we
believe that the Fed will initially increase rates at alternate
meetings. Similarly, it seems that long-term interest rates
bottomed in early February and despite very low rates of
interest in Europe and Japan the yield on the 10-year U.S
Treasury bond is now on a path to rise from the current 2%
to about 4% in late 2016.

The very low rates of inflation we are now experiencing
will soon reverse as oil prices rebound, more on that
below. Indeed headline inflation as measure by the consumer
price index will likely rise to 3% or more by late 2016. (See
Figure 10) In a similar vein, core CPI will likely to be running
above 2.5% as well. Moreover, wage compensation
after being muted for many years is about to show more
robust gains from about 2% to somewhat over 4% during the
next few years. (See Figure 11) We believe that Wal-Mart’s
move to raise their lowest wage to $9.00 an hour in April,
above the current national minimum wage of $7.25 an hour,
of this year and to $10 an hour next year “rang the bell” to
a new regime of higher wage growth.

The Mostly Ups and One Big down from Lower Oil

The $50/barrel collapse in oil prices brings a gross
savings to the economy of about $350 billion a year and
net savings of about $150 billion a year; the latter being the
reduced cost of imported oil. (See Figure 12) More simply,
with the United States consuming 135 billion gallons
of gasoline a year, a $1.00 a gallon reduction amounts to
$135 billion. Although much of this savings has yet to flow
through to retail spending, we do note that restaurant and
bar sales were up 11% year-over-year in January and overall
consumer spending is strong. (See Figure 13)

Figure 10 Consumer Price Index vs. Core CPI,
2007Q1 – 2017Q4F
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 11 Total Compensation per Hour, 2007Q1 – 2017Q4F
Source: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 12 West Texas Intermediate Crude Oil, 2007Q1
Source: Commodity Research Bureau and UCLA Anderson Forecast

Figure 13 Real Consumption Spending,
2007Q1 -2017Q4F, Quarterly Data

It’s very obvious the drop in the price of crude oil,
has put the domestic oil industry in a world of hurt. We
estimate that the industry is losing about $200 billion a year
in revenues. Moreover, the oil intensive regional economies
of Texas, Louisiana, Oklahoma, Alaska and North Dakota
will suffer with them. However, the decline in oil prices
involves more than a loss of revenues for the domestic oil
producers; it is also causing a dramatic drop in the capital
spending associated with new oil wells. Most people including
more than a few economists do not realize that mining
nonresidential fixed investment (almost all of it related to oil
and gas production) is larger than commercial construction.
As a result, investment in this sector will plummet over the
next few quarters from an annual run rate of $140 billion to
about $100 billion. (See Figure 14)

Housing Construction Accelerating

The combined effect of lower gasoline prices along
with relaxed down payment requirements, strong employment
growth that is supporting new household formations,
low interest rates that are likely to stay lower longer is causing
us for the first time in several years to raise our estimates
for out year housing starts. For example, last quarter we were
forecasting 2015 and 2016 housing starts at 1.209 million
and 1.344 million, respectively. We are now at 1.248 million
and 1.392 million for those years. (See Figure 15) As
with prior forecasts we continue to believe that multi-family
housing starts will exceed 400,000 units a year in both 2015
and 2016. Thus, the increase from prior forecasts will be
coming from the single-family starts.

Figure 14 Real Gross Investment in Mines and Wells,
2007Q1 -2017Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

There is a lot of anecdotal evidence that housing activity
began to significantly improve in late January. Traffic
is up at new developments and builder optimism is rising.
Perhaps the drop in gasoline prices is showing up in the
form of increasing demand for housing. While consumers
are probably wisely concluding that today’s gasoline prices
might not be here forever, they are likely not to go back to
their old highs for many years to come.

Defense Spending to Increase

You don’t have to be a geopolitical strategist to figure
out that the world is in disarray. With the United States
policy facing challenges in Ukraine, the middle-east and
the South China Sea, the post Iraq War decline in defense
spending is behind us. As we have done in prior reports,
we believe that defense spending is now on the rise. (See
Figure 16) Our view is buttressed by the fact that President
Obama has asked Congress to lift the sequestration limits
on both domestic and defense spending. We believe that the
Republican Congress will be more than willing to give him
the higher defense spending he is requesting.

Figure 15 Housing Starts, 2007Q1 -2017Q4F
Sources: U.S. Bureau of the Census and UCLA Anderson Forecast


Despite weak global growth and the very strong U.S.
dollar, the economy remains on a 3% growth path for real
GDP over the next two years that will bring the unemployment
rate down to 5% by the end of this year. While inflation
is being temporarily suppressed by the drop in oil prices,
it will soon be running above 2% as oil prices gradually
recover. In response to the improved labor market and the
expectation of higher inflation, the Fed will begin a gradual
tightening process in June. The near-term downside for the
U.S. economy will come from a collapse in the capital spending
associated with oil and gas production, while housing
starts will advance more quickly than previously predicted.

Sunday, March 8, 2015

My Amazon Review of William Thorndike's "The Outsiders: Eight Unconventional CEO's and Their Radically Rational Blueprint for Success"

Too Much of a Good Thing

As I write this review there are 183 reviews of “The Outsiders…” on Amazon. Why another? It is because private equity investor William Thorndike offers keen insights in his highly readable book into what makes a successful CEO. Drawing inspiration from such CEOs as Tom Murphy of Capital Cities, Henry Singleton of Teledyne, John Malone of TCI and Bill Stiritz of Ralston he shows how great fortunes were made for their shareholders.  To him it is all about CEO's who run lean decentralized operations with a keen sense of capital allocation and the use of leverage. Appropriately timed share repurchases along with leverage is what makes for strong shareholder returns and he correctly predicted in 2012 that major tech companies would soon adopt such policies. All true, but to my mind he overstates his case because he leaves out the downside of financial engineering and ignores the role of research and development and the investment in great ideas that have built some of America’s greatest companies.

For example CEOs such as Bill Gates of Microsoft and Steve Jobs of Apple took quite a different path to build their companies. Similarly away from technology look at the great success of Wal-Mart, Starbucks and Whole Foods in retailing. Their success did not come from share repurchases and leverage. To be sure all those companies just mentioned, for the most part, benefited from strong capital allocation skills, but their success came from sourcing and developing highly profitable investment projects.

The American economy was built on such investments. While share buybacks can make sense for an individual company, it might not make sense for the economy as a whole. This I fear is what is happening today as share buybacks explode and capital investment remains tepid.

For the Amazon URL see:

Sunday, March 1, 2015

My Amazon Review of Richard Rhodes' "Hell and Good Company: The Spanish Civil War and the World it Made"

A Big Disappointment

Pulitzer Prize winning author Richard Rhodes is guilty of false advertising with his subtitle "The Spanish Civil War and the World it Made." The book does nothing of the sort. He discusses the Spanish War through the lenses of several participants on the Republican side where is sympathies clearly lay. He shows doctors Edward Barsky and Norman Bethune in action as they develop new methods of transporting blood to the battlefield. He also poignantly gives life to the British combat nurse Patience Darton.

This is all to the good, but he hardly shows the very real political motivations of his protagonists. They were all people deeply entrenched in the Left. It would have helped to get to know them before they got to Spain. As to Bethune as Rhodes notes that after he was "purged" out of Spain he goes on to provide his medical services in support of the Chinese Communists. He dies in China. Rhodes also ignores the Communist-Anarchist struggle in Barcelona highlighted so well by Orwell in his "Homage to Catalonia." and nowhere is the stark role of Stalin's NKVD brilliantly portrayed in several Alan Furst novels. Further he portrays New York Times reported Herbert Mathews as a disinterested observer which was hardly the case.

For a readers who want to get a different but better sense of several of the non-Spanish personalities (several of whom Rhodes discusses) who
supported the Republican cause I would recommend Amanda Vaill's "Hotel Florida....."

For the Amazon URL see:

Monday, February 16, 2015

My Amazon Review of Barry Eichengreen’s “Hall of Mirrors: The Great Depression. The Great Recession and the Uses-and Misuses-of History

Barry Eichengreen, an economics professor at UC-Berkeley, is a scholar of the first order on The Great Depression. His “Golden Fetters” on how the operation of the gold standard during the inter-war years was a significant cause of The Great Depression is a classic. He argues in the Keynesian tradition on what the crisis managers of 2008 learned, perhaps too well, the lessons of 1929-33. Thus readers who prefer the views of James Grant’s “Forgotten Depression…” will differ greatly with this history.

The analogues between the 1920’s and 30’s with the 2000’s are many. Here are only a few highlighted by Eichengreen:
·        *Bernie Madoff was the equivalent of Charles Ponzi.
·        *The Euro of today works the way the gold standard of the 20’s worked.
·        *The bailout of the Dawes Bank (Central Republic Trust) was similar to the Bear Stearns bailout.
·       * Letting Lehman fail was analogous to the moral hazard issue associated with allowing the Ford controlled Guardian Group of Banks to fail in 1933.
·        *There were real estate booms in both eras.

The lessons our modern day policy makers learned were to flood the system with liquidity, bailout the banks, engage in fiscal stimulus policies, avoid protectionism and avoid debacles like the London Economic Conference of 1933 through international cooperation. However, unlike the 1930s the problem in the system was not really in the banks, but rather in the shadow banking system that grew up in the 1990’s and reached full adulthood in the 2000’s.

Perhaps more important instead of four years of grinding lower in the 1930’s the economy began to recover after two years and most governments and central banks began to pull back on stimulus policies which in Eichengreen’s opinion is the reason for the slow growth the global economy has experienced since 2010. Further by preventing another Great Depression the impetus to fully reform the financial system waned and we ended up with a watered down version of financial reform with Dodd-Frank. Eichengreen is a reformer in the Polanyi tradition. Unfortunately as Keynes contemporaneously noted reform is the enemy of recovery. Reform took place in the 1930’s because the old order collapsed, but as many have noted the New Deal reforms delayed recovery. Even Eichengreen concedes that National Industrial Recovery Act of 1933 was an economic disaster.

In reading Eichengreen’s book one has to sympathize with the policy makers of the early Great Depression. They were operating in real time with inadequate information, much as Bernanke et al were doing in 2008. Eichengreen is sympathetic to New York Fed President George Harrison’s “direct pressure” approach to the stock market boom which he characterizes as an early version of “macro-prudential” policies. Unfortunately “macro-prudential” policies have yet to be tested and I suspect they might have failed in the 2000’s in halting the sup-prime mortgage boom. Why? The policy makers would have been accused of racism by preventing Blacks and Latinos from buying homes.

I have a few factual quibbles with the book. He understates the role of Hoover Treasury Secretary Ogden Mills in being the true author of Roosevelt’s early banking reforms; he fails to note the importance of the fiscal drag or tax on labor, depending on your point of view, of the introduction of Social Security taxes in 1936 without benefits being paid out until 1939. Remember at the time social security was not included in the federal budget. Lastly he sometimes confuses being long a credit default swap with being short the swap.

All told Eichengreen has written an excellent book, especially The Great Depression portion. However, because it is probably too long and towards the end he pontificates too much on the Europe of the past years, which is too recent for real history, I give the book four stars not five.

The Amazon Review appears at the following url:

Sunday, February 8, 2015

Putin's Ukrainian Salami

Vladimir Putin is devouring Ukraine like a salami, one slice at a time. The first slice was Crimea and the West stood idle. The next two slices were Donetsk and Luhansk and currently on the block is the port city of Mariupol. Putin uses his army with advanced weaponry cloaked in the garb of insurgents to give the veneer of deniability. But make no mistake Russian imperialism is on the march and if the current passivity of the West continues, it won't be long until the whole of Ukraine is gobbled up one slice at a time. And where is the West?

With Germany's Merkel opposed to the shipping of offensive weapons and the Obama Administration operating in their usual dazed and confused mode, the world watches as western oriented Ukrainians spill blood every day. Simply put the West is nowhere. All talk and very little action. It is high time that the Obama Administration wakes up from it stupor and start to ship advanced weaponry to the embattled Kiev government. Concurrently the West should amp up its sanctions regime to cut Russia off from the the international banking system one big slice at a time.

Monday, January 26, 2015

"Recent Evidence on the Interest Rate Sensitivity of REITs," UCLA Economic Letter, January 2015

The link below is to my article demonstrating that the 10 year U.S. Treasury yields accounted for 79% of REIT  relative performance compared to the S&P 500 between January 2, 2013 - November 7, 2014.