Wednesday, January 27, 2016

Memo to the Stock Market: Janet Yellen is not Your Fairy Godmother

This afternoon the Fed released what was widely characterized as a "dovish" statement. In response the all important 2-year note rallied by 2 basis points, the 10-year note closed just below 2% and the dollar declined modestly. All of this is consistent with the dovish tone of the Fed's statement.

However stocks sold off sharply with the S&P 500 down 1.1%. What gives? The answer is simple. All too many stock market participants continue to believe that Janet Yellen is their fairy godmother. They expected the Fed to be even more dovish. I hate to disabuse them of that notion but nowhere in the Federal Reserve Act does it say the Fed was put on this earth to support the stock market.

Meantime it looks like a March Fed Funds hike is off the table, but given the good data that I expect, June will be a very real possibility.

Monday, January 25, 2016

My Amazon Review of Niall Ferguson's "Kissinger: 1923-1968: The Idealist"

The Rise of Henry Kissinger

Niall Ferguson’s authorized biography ends with Henry Kissinger’s appointment as national security advisor to Richard Nixon in late 1968. Given the controversy that followed it is hard to believe today that his appointment was nearly universally acclaimed by both the Left and the Right. That appointment was a dramatic move up for an Orthodox Jewish kid from Furth, Germany, whose family fled Nazi oppression in 1938.

Kissinger’s family established their household in the Washington Heights section of Manhattan. Something must have been in the water because out of that neighborhood came Allan Greenspan and my ex-boss at Salomon Brothers, Henry Kaufman. Had not World War II intervened, Kissinger was on his way to becoming an accountant.

The army changes him. He sees combat at the Battle of the Bulge, witnesses first- hand the horrors of the Nazi concentration camps and as a sergeant in the counter intelligence corps he works after the war to round up Nazis that have gone to ground. Along the way he leaves his orthodox faith. My guess is that is seeing the violence of the front in World War II enabled him 20 years later to risk is life visiting the war zones of 1965 Vietnam. Not much has been written about his physical courage. Further during his first visit he realized that the Vietnam War was unwinnable and a negotiated settlement was required.

Through some lucky breaks and an active mentor Kissinger ends up in Harvard and it is in undergraduate years he becomes an idealist in the Kantian sense. He truly believes in democracy and human choice. He goes on to his Ph.D. and writes a very remarkable dissertation on the Congress of Vienna and its aftermath which is later published as “A World Restored.” Although not as famous as Keynes’s “Economic Consequences…” about Versailles, he offers a unique insight into the geopolitics of 1815 Europe and the key roles of Metternich and Castlereagh. One can certainly argue that this book offered a window into Kissinger’s later thinking the 1970s with respect to U.S. policy concerning Russia and China. Where he appears to lose his idealism is in seeing up close how policy is really made and the machinations of De Gaulle and the North Vietnamese. He begins to merge Castlereagh with Bismarck to form the foundations of the “realpolitik” that he would become known for.

Kissinger becomes a public figure in 1957 with his publication of “Nuclear Weapons and Foreign Policy” which places him in the center of the post-Sputnik foreign policy debate. From there it on to both Kennedy’s National Security Council and the Rockefeller Brothers think tank.  Ferguson demonstrates Kissinger’s adroitness in balancing his loyalties to both the Democrat Kennedy and the Republican Rockefeller. After leaving the administration he works as Rockefeller’s leading foreign policy wonk writing most of his speeches. He is horrified by the 1964 Republican Convention which brought back memories of 1930s Furth and goes on to vote for Lyndon Johnson over Barry Goldwater.

Ferguson highlights the importance of history to the making of foreign policy. Too many practitioners are unaware of the path dependence of the irrevocable decisions they make. He also rightly believes that Kissinger is correct that in analyzing policy it is important to look at the counter factuals. For example had Britain and France stopped Hitler in the Rhineland they likely would have avoided World War II, but they could very well have been blamed for whatever events transpired later. Statesmen have to act with incomplete information, because when you have full information it is too late.

We also see Kissinger as a man with his relationships with his parents, his less than happy marriage and his dog Smokey. In my opinion Ferguson has set the stage for his next volume, where we will see the Kissinger that most of us know, become quite a bit more controversial, to say the least.  

For the full Amazon URL see:



Thursday, January 7, 2016

Trump and the Stock Market: Connect the Dots

Since the start of the year the Chinese stock market has fallen out of bed and that has led to a worldwide fall in stock prices. According to the commentariat the reason for China collapse has to do with a growth slowdown in China, a devaluation of the Yuan and a relaxation of the restrictions on stock sales by large shareholders.

However something more fundamental maybe at work. Perhaps the Chinese market is now pricing in a Trump victory and with that the potential to wreak havoc with the global trading system. Should that happen the biggest loser would be China, but that would blow-back to the entire global economy. Not a pretty picture. Moreover with Hillary Clinton now opposed to the TPP the outlook for trade expansion is far from favorable.

Too many people I know joke about Trump, but the fact remains has consistently led the GOP field and he has to be viewed as having at least a 50/50 shot of getting the nomination. We may not pay attention, but the rest of the world certainly is.

Saturday, January 2, 2016

An Open Letter to Trump and Cruz Voters in the Republican Primaries

Forgive me for saying this, but I think you are being played. Both Trump and Cruz are tapping into our visceral dislike of the very authoritarian nature of the elite liberals who control the White House and who enforce political correctness throughout the media. It is the authoritarian Obama White House that determines which laws to enforce and which laws to ignore. Indeed it is President Obama who bypasses the Congress to change immigration, environmental and gun laws and is so beholden to political correctness that he refuses to call the radical Islamic terrorists for what they are. It is more than enough to make you angry. But remember, anger is not a policy.

So why am I so down on Trump and Cruz? Plenty! They too are authoritarians who if elected would bend our laws to suit their selfish ends. All we would be doing is substituting one set of authoritarians with another. They are on the flip-side of the Obama coin. How can a Putin worshiper like Trump be trusted with the presidency?  Given the constitutional constraints on the presidency, Trump, given his authoritarian nature, would become a very frustrated bully lashing out at innocent civilians wherever he could find them. His way of insulting his opponents is only a mere foretaste of what would come.

How can a Cruz be trusted with the presidency when he has never led a team in his life and for that matter never really played on a team? He has always been out for himself and that is why he has no friends in the Senate. To him that is a badge of honor. However with that attitude all of his ideas would be dead on arrival and he would be forced to become another Obama by subverting the Constitution. He doesn’t understand what Ronald Reagan knew deep in his bones that politics is the art of the possible. Remember a leader needs followers willing to work with him. Indeed both Cruz and Trump fail the most fundamental daycare test in the book. They don’t play well with others.


So I ask you to think back to all of the great presidents of the past. We may have different ideas of which were great, but I would say does Cruz or Trump remind you of any of them. I doubt it. So you are being played. First by the candidates and second by their cheerleaders on talk radio and the internet who are lusting for power and ratings. For our country’s sake find someone else to support. Otherwise you will end up with not King Trump or King Cruz, but rather with Queen Hillary who might luxuriate with a Democratic House and Senate that a Trump or Cruz candidacy might just bring about. Although “stick it to the man” politics may feel good, trust me, it will end badly.

Friday, January 1, 2016

My Amazon Review of Ian Kershaw's "To Hell and Back: Europe 1914-1949"

The Wheels Come Off

The Europe of 1914, at least for its bourgeoisie, represented the height of civilization, the “Belle Époque” if you will.  And of a sudden the wheels fell off the track and the continent plunged into the darkness The Great War. British historian Ian Kershaw certainly proves George Kennan’s maxim that World War I was “the great seminal catastrophe of the 20th Century.” The war arose in the milieu of ethnic nationalism, territorial revisionism and increasing class conflict growing out of mass industrialization. These three factors would remain long after the war ended and into this pot would be thrown the crisis in capitalism induced by the Great Depression.

Also arising out of the war was the successful Bolshevik Revolution that sent chills down the spines of the conservative elite. To Kershaw this was the most important event of the 20th Century because the very real fear of communism made opposition to the rise of fascism far more difficult in the West. It hardened the right and split the left.  

As a result the crisis in capitalism forced politics to the right rather than the left which is not too much different from what happened post-2008. Thus the West’s response to the rise of fascism was timid, to say the least with respect to Germany’s re-occupation of the Rhineland in 1936, the Spanish Civil War and the dismemberment of Czechoslovakia in 1938. All the while the great purge trials were going on in Moscow.

Kershaw’s view of this history seems more deterministic than say that of Zara Steiner’s. To him there is more or less a straight-line between the Versailles settlements to the start of World War II.  To be sure he gives credit to “the spirit of Locarno,” but not enough in my opinion. He also leaves out two chance events that may have altered history. The first is outside his topic and that was the premature death of New York Federal Reserve President in 1928. Had he lived, in the minds of more than a few economists the worst effects of the Great Depression might have been avoided. Within his bailiwick was again the premature death of German Foreign Minister Gustav Stresemann in October 1929. If there ever were a German politician who could have stopped Hitler, it was Stresemann.

Kershaw brings the holocaust to the forefront in Hitler’s war of annihilation in the East in his coverage of World War II. Simply put Hitler wanted to conquer the West, but he wanted to destroy the East. He almost succeeded.


Kershaw finishes his book with the beginnings of the postwar recovery, the role of the Marshall plan and the start of the Cold War. By 1949 Europe is central to the Cold War between the U.S. and the Soviet Union, but its power is but a shadow of its former self. Kershaw has done an excellent job in portraying this epochal period that this review hardly does justice to. 

For the complete Amazon URL see:

Wednesday, December 16, 2015

The Fed Moves: At Last

Seven years ago today, in response to a very real financial emergency, the Fed embarked upon its zero interest rate policy. With the emergency long over the Fed finally acted by raising the federal funds rate by 25 basis points. Because the rate rise was accompanied by very dovish comments the stock market rallied smartly and the bond market, which had correctly priced in the move, ended the day substantially unchanged.

There are three points to take note of:
1. Monetary policy remains extraordinarily accommodating. My analogy is that on a 65 mph speed limit highway, instead of going 90 mph the car has slowed down to a still excessive 85 mph. Thus today's move is unlikely to slow the economy and in fact with the Fed signalling that the emergency is over, the economy could very well speedup.
2. Markets are way too complacent about inflation. With the core CPI increasing at a 2% rate yoy it won't take much for the Fed's personal consumption deflator to be there as well. Moreover housing costs, health care and other services are reporting inflation rates well above 2%. Once oil prices stabilize and likely reverse their recent decline most of the ingredients will be in place for an upside surprise in the inflation data. Stay tuned!
3. If you closed your eyes and I told you that core inflation was 2%, the unemployment rate was 5%, GDP growth is above 2%, and the stock market is close to an all time high, what would you guess the fed funds rate to be? It would be quite a bit higher than .25%-.5%. 

Net Net. Interest rates will surprise on the upside.

Saturday, December 5, 2015

My Amazon Review of Eric Rauchway's "The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism, and Secured a Prosperous Peace"

Too Partisan to be Real History

UC Davis history professor Eric Rauchway let his rabid partisanship get in the way of some of the real history that is in his book. His cheer-leading is obvious in the subtitle and that should clearly warn less biased readers. It is not so much what Rauchway left in, but rather what he left out and in doing that he did a real disservice to his readers.

What Rauchway leaves out is as follows:
1.     Although he rightly blames the operation of the gold standard as one of the predominant causes of the Great Depression, he fails to discuss how successful it was in spurring growth in the five decades up to World War I.
2.     He fails to emphasize the fact that it was the imbalances caused by the financing of World War I that was the key element in the demise of the gold standard.
3.     He completely ignores the “forgotten depression’ of 1920-21 where recovery was rapid absent most of the Keynesian remedies that came later and he ignores the great prosperity of the 1920s.
4.     He hails President Roosevelt in his “blowing up” of the World Economic Conference in 1933, but fails to mention that far from being an internationalist, Roosevelt was an isolationist. The fascists in Europe took note of America’s withdrawal from the world.
5.     He characterizes the 1936 Tri-Partite Agreement to stabilize the French Franc as the start of an anti-Nazi coalition. Wrong! Although France was lost some gold following the German reoccupation of the Rhineland, the real cause of the Franc’s collapse was the popular front policies of Leon Blum which scared the living daylights out of French Capital.
6.     He completely ignores the fact that after all of the New Deal spending programs and the Federal Reserve money printing, the economy remained mired in depression as late as 1939.
7.     He makes way too a big deal out of the congressional vote to join the IMF. The measure passed both houses of Congress easily.

8.     Although he notes that Assistant Treasury Secretary Harry Dexter White, Keynes' negotiating partner at Bretton Woods, was a Soviet spy, he doesn’t take seriously the Soviet penetration into the highest circles in the New Deal.
9.     In his glorification of managed currencies he fails to note the debacle that came after Nixon closed the gold window in 1971. Further if you want a date to start when the United States economy became “financialized” you can do a lot worse than 1971. Whatever the real problems of the gold standard, it would certainly have acted as a very real constraint on what we call “the shadow banking system”.

For readers who want a better understanding of the Great Depression I would recommend much of the works of Barry Eichengreen, Ben Bernanke and Peter Temin.

For the full Amazon URL see: