Friday, April 4, 2014

"There Will be Growth in the Spring....and Beyond," UCLA Anderson Forecast, March 2014

The weather played havoc with the economy in the
first quarter. In a mirror image of the balmy winter of 2012
where unusually warm temperatures temporarily enhanced
economic activity, near record cold weather suppressed it.2
As a result of this year’s polar vortex the states of Illinois, Indiana,
Iowa, Michigan, Minnesota, Missouri, Oklahoma and
Wisconsin experienced among their twelve coldest winters
in the past 119 years. (See Figure 1) The cold weather was
exacerbated by unusually heavy snow falls across the Great
Lakes and into the Northeast. Interestingly, while the middle
of the country was freezing, California was experiencing a
drought along with its warmest winter in recorded history.
Indeed the entire southwest from Texas to California was
experiencing severe drought condition.

Simply put, the seasonal factors the Bureau of Labor
Statistics uses are incapable of fully accounting for extreme
weather conditions. In order to highlight the impact
of weather in January and February of 2012, we note that
payroll employment growth averaged, as initially reported a
robust gain of 256,000 jobs. 2 In contrast, this year job gains
were a far more modest 152,000 for the first two months. As
a result, we expect that first quarter real GDP growth will
come in a sub-par 1.4% annualized rate.

Nevertheless as our title suggests, there will be growth
in the spring as such weather affected activities as factory
production, automobile sales and the construction rebound
from their winter lows leading to real GDP growth of about
3%. Furthermore, as we have argued previously, we continue
to believe that the economy is poised to remain on a 3% or so
growth path through 2016 buoyed by increased housing and
business investments along with gains in consumer spending.
(See Figure 2) In this environment we can visualize the
economy creating between 200,000-250,000 jobs a month
with the unemployment rate dropping to 5.4% by late 2016.
(See Figures 3 and 4) To be sure, total payroll employment
will surpass the prior 2007 peak, but the economy will
remain well below its pre-Great Recession growth path.

Modest Inflation Ahead

While inflation has been quiescent for most of the post-
2009 recovery period, it is about to experience an uptick.
Specifically, we forecast that the core consumer price index
will increase from 1.8% in 2013 to 2.5% in 2016. (See Figure
5) Because of increases in domestic energy production, the
increase in headline inflation will be somewhat more muted.
Admittedly, food prices might pose an upside risk should
drought conditions in the Southwest and political uncertainty
in the Ukrainian breadbasket persist.

As we have written elsewhere, the increase in inflation
will come from the shelter and healthcare components
of price indices. 3 Both measures are now running at a 2.5%
rate along with a general increase in wages. To be sure,
for most Americans, the increase in wages will be most
welcome, but for those wary of inflation it will be signaling
a cautionary yellow light. Specifically, we are forecasting
total compensation per hour to increase by 2.4%, 3.5% and
4% in 2014, 2015 and 2016, respectively, compared to a very
low increase of 1.6% in 2013.

Fed Policy: From Taper to Modest Tightening

The Federal Reserve’s long experiments with zero
interest rates and quantitative easing are slowly coming
to an end. We anticipate that the monthly $85 billion bond
buying program, now down to $55 billion, known as quantitative
easing will be all but wound down by September.

Although most market participants do not expect the Fed
to actually begin to raise rates by mid-2015 at the earliest
and a few anticipate that it will wait until 2016, we believe
that the first overt tightening will begin in the first quarter
of 2015. (See Figure 7) Our view was strengthened at Fed
Chair Yellen’s recent news conference where she defined
“considerable period” as approximating six months as the
time between the end of tapering and the beginning of overt
tightening. Thereafter, we forecast that the Federal Funds
rate will rise, to use “Fedspeak”, at measured pace reaching
3% by the end of 2016. In essence, the “Yellen Fed” will be
very much like the “Bernanke Fed.”

Why? Under the Fed’s dual mandate to maintain
maximum employment and price stability there would be
little intellectual justification for continuing a zero interest
rate policy with a 6% and falling unemployment rate and a
2.5% core inflation run rate in the first quarter of 2015. We
are aware that the Fed’s official inflation target variable are
the core and overall price deflators for personal consumption
expenditures in the GDP accounts will be running somewhat
below the consumer price indices. But at that time, there will
be little doubt as to where they will be heading.

In this environment, long-term interest rates will begin
to normalize. We would not be surprised to see 10-Year U.S.
Treasury rates exceeding 3.7% by yearend and be above
4% thereafter. We would also point out that relative to the
2%-2.5% inflation rate, both the real Fed Funds rate and the
10-year treasury yield would still be well below pre-2007
levels. Our short-term interest rate forecast is broadly consistent
with the higher end of published consensus beliefs of
the open market committee after the March meeting.

Sources of Growth: Housing, Business Investment
and Consumption

As we have noted for the past several years, we believe
that housing construction is in a period of sustained, albeit
moderate recovery. After bottoming at below 600,000 units
a year in 2010, housing starts recovered to 931,000 units
in 2013 and are expected to exceed 1.2 million units this
year and approach 1.5 million units in 2015. (See Figure
8) Thereafter, housing activity is expected to plateau in the
1.4-1.5 million unit range as mortgage rates in excess of
6% exact their toll. As we have noted on many occasions,
multi-family construction will account for about 30% of
overall starts as it has in recent years, up from the 20% that
has characterized the prior decades.

Meantime, investment in business equipment and
software along with nonresidential construction will begin
to experience a sustained pickup. (See Figures 9 and 10)
Real equipment and software spending, which increased at
a very tepid 3.1% in 2013, will likely increase by 6% this
year and 10% next year. The improvement in nonresidential
construction will be even more dramatic where that sector
will rebound from a meager 1.4% growth rate in 2013 to
5.2% this year and 11% by 2016.

The rebound in corporate spending will be caused by
the need to replace aging capital equipment, accelerating
global growth, reduced domestic political uncertainty, the
on-going energy renaissance in the U.S. and “most importantly”
in the words BofA Merrill Lynch, the stock market is
no longer rewarding share buybacks.4 Put bluntly, instead of
spending big bucks on financial engineering, American companies
will step up their spending on physical engineering.

Along with increases in business spending, the long
suffering U.S. consumer will begin to spend more robustly.
The increase in spending will be driven by the improved
employment and wage picture, a very big deal, along with
the $10 trillion increase in wealth that took place in 2013.
Yes, a bull market on Wall Street is largely concentrated
in the upper income brackets, but that is where half the
purchasing power is. Furthermore, last year’s rise in stock
prices will take some of the pressure off the fiscal stress
facing most defined benefit pension plans and individual
retirement accounts. As a result, real consumer spending
gains are expected to approach 3% in 2015 and 2016 well
above the 2% recorded in 2013. (See Figure 11) Even with
the increases in consumer spending we envision the saving
rate after modestly declining in 2014 to 4.3% will be well
above 5% by 2016.


There will be growth in the spring. The economy will
shake-off the weather induced weakness and begin to grow
at a 3% growth track bringing with it rising employment
and wage gains. Growth will be led by housing, business
investment and the consumer. Along the way inflation will
modestly increase causing the Fed to begin increasing rates
in early 2015 and longer-term interest rates will begin to
normalize. Not great, but what’s not to like.

1. With apologies to Chance the Gardener in “Being There” (United Artists, 1979).
2. See Shulman, David, “Curb Your Enthusiasm,” UCLA Anderson Forecast, March 2012.
3. See Shulman, David, “The Inflation to Come in Housing, Healthcare and Wages,” Ziman Economic Letter, January 2014.
4. See “The cap-X factor,” BofA Merrill Lynch Global Research, 11 March 2014.

Sunday, March 23, 2014

My Amazon Review of Daniel Gordis' "Menachem Begin: The Battle for Israel's Soul"

The history of Israel has largely been written from a secular Labor-Zionist or a Palestinian perspective. In those histories Menachem Begin has either been air-brushed out or vilified as a terrorist by Jew and Arab alike. Daniel Gordis a rabbi from a family of rabbis and vice president of Shalem College in Israel makes a huge contribution in correcting the historical record. Simply put, although Menachem Begin was not the George Washington of Israel, he certainly was a founding father and was it not for him the State of Israel might not have been brought into being.

Begin was born in 1913 in the town of Brisk (now Brest in Belarus) under grey Polish skies compared to the sunny Mediterranean skies most of the early Zionist leadership who were either born in then Palestine or arrived there when very young. As a result Begin stood out as Polish formal compared to Israeli casual. Begin did not arrive in Palestine until he was 30. As an aside his birth was midwifed by Ariel Sharon's grandmother. Begin learned his Zionism from his father and the everyday Polish anti-Semitism he witnessed while growing up. He also, unlike the Zionists in Palestine, grows up religious and very knowledgeable in the biblical texts.  In time he would become, according to Gordis, the most Jewish of Israeli prime ministers. As a teenager he became a convert to the Revisionist Zionism of the charismatic Vladimir Jabotinsky and quickly became a leader of its Betar youth group. Revisionist Zionism differed from Labor Zionism in that it was more clear-eyed about the fate of the Jews, in Europe, market oriented versus socialist, and was pessimistic about the prospect of peaceful coexistence with the Arab population living in Palestine.

Imprisoned by the Russians in 1940 he is released after the German invasion and finds his way to Palestine in 1943 where almost immediately assumes the leadership of the Irgun. It here where Menachem Begin enters history. He adopts "an eye for an eye" policy with respect to the British. For every Irgun member executed by the British, a British soldier would be kidnapped and executed. He plots along with the more establishment Haganah the 1946 bombing of the King David hotel, the headquarters of the British Army. It was Begin’s terror campaign that forced the British out. In too many histories it is the Irgun alone who were responsible for the bombing. Prior to the imposition a temporary cease fire in Israel's War for Independence the Atalena, an Irgun arms carrying ship was fired upon by Haganah troops just outside of Tel Aviv. The government under Ben Gurion wanted to show that Israel would support the U.N. cease fire ordered the attack. The columnist Tom Friedman has cited this as an important step in establishing the credibility of the new government. However, the historical record is murkier, because the government was told by Begin that the ship was coming after the cease fire was put in place. Begin made attempts at compromise, but Ben Gurion fearing Begin as a rival, opened fire. Twenty years later Ben Gurion reconsidered.

By most histories Begin is blamed for the 1948 massacre of Deir Yassin, an Arab village near Jeruslaem. Yes, there was a massacre, but the nascent state was struggling to keep the road to Jerusalem open. Moreover the entire operation was being run by the Haganah. Thus there is plenty of blame to go around, but to most histories the blame falls fully on Begin. 

With the labor Zionists fully in control Begin spends the next 30 years in all but political exile. To be sure he is a member of the Knesset, but he doesn't enter the government until the 1967 war. He leaves it soon thereafter. However a political revolution is brewing under the surface. The population is becoming more Sephardic and become restive under the more elitist labor Zionist Ashkenazim, corruption was growing, and the early failures of the Israeli Army during the 1973 War highlighted military unpreparedness. Thus in 1977 a political revolution took place brought Menachem Begin to the prime ministership with his Likud coalition. One of his acts is to admit and make full citizens of 66 Vietnamese boat people who were picked up by an Israeli freighter in the South China Sea. No Asian country wanted to take them in; Israel did.

Begin is most well known for making peace with Egypt's Anwar Sadat. He won the Nobel Peace Prize with Sadat in 1979 for the Camp David Accords which established peace with Egypt and returned the Sinai to Egyptian control. In the Sinai he showed no hesitation in removing the Jewish settlements there. This would not be the case for the West Bank. Recall the Sinai was never part of biblical Israel.

Begin made the big call in June 1981 when he ordered the Israeli Air Force to take out the Iraqi nuclear reactor under construction at Osirak. His action was condemned by most of the world, but in the light of history it represented one of the most clear eyed acts statesmanship of the 20th Century.

Perhaps the biggest stain on Begin was his delegating too much authority to Ariel Sharon during the 1982 Lebanon War. There is a straight line from that delegation to the massacre by Christian phalangists of the Arab towns of Sabra and Shatila. Begin resigned over this. Not only was the Lebanon War a political disaster, it was also a moral one.

Begin died in 1992. He lived his life under the precept of hadar (Dignity). Gordis brings this to life.

The full Amazon URL is:

Thursday, March 20, 2014

The Comcast Whores of MSNBC

MSNBC likes to portray itself as being in the vanguard of liberal thought in America. Its slogan "lean forward" really means "lean left." However on one very important issue such "tribunes of the people" as Chris Matthews, Rachel Maddow, Lawrence O'Donnell and Ed Schultz are notably silent. That issue is, of course, Comcast's proposed merger with Time Warner Cable that would create a media behemoth with 30 million cable and broadband subscribers. From my personal point of view the proposed merger is fine and as I have blogged twice before (2/13/14 and 11/5/12) two of my family members are very happy shareholders of Comcast.

In a recent editorial (March 15, 2014) the far from left wing Economist magazine called on regulators to block the merger because  "Comcast will have extraordinary power over what content is delivered to consumers, and at what speed." The editorial further argued that the merger "would reduce competition, provide no benefit to consumers and sap the incentive to innovate."

If there ever were a "progressive cause" this is it. But the MSNBC commentators secure in their cushy jobs would rather discuss traffic jams on the George Washington Bridge. Simply put Comcast owns them in fee simple. Moreover Comcast has on its payroll Margaret Atwell Baker, a former commissioner on the Federal Communications Commission and its chief lobbyist is an influential Obama fundraiser. Indeed Comcast has contributed to to practically every Senator overseeing the proposed acquisition of Time Warner Cable. It was thus no coincidence that The Economist cover story was entitled, "The New Age of Crony Capitalism"

So next time when you tune into MSNBC remember that they are only pretending to be "leaning forward."

Saturday, March 8, 2014

My Amazon Review of Frederick Taylor's, "The Downfall of Money: Germany's Hyperinflation and the Destruction of the Middle Class"

Frederick Taylor is a historian, not an economist. In "The Downfall of Money" he writes a history of Germany from 1914 to 1925 through the lens of the great inflation that befell that country. For example the German Mark falls from 4.2 to the dollar in August 1914 to nearly 7 trillion to the dollar by the end of 1923. He tells the story of how an ordinary wartime inflation which occurred in all of the major combatants turned into a hyperinflation in the postwar era as Germany was weighed down by reparations payments along with a social democratic imperative to fund the welfare state.

He tells the story as to how the inflation impacted various stratas of society with big winners and big losers. The losers were well represented in the German middle-class who patriotically bought war bonds that were to become worthless and for many of them their wages failed to keep up with the inflation. The winners were farmers who held real assets and saw their debts erased by inflation along with the great industrialists who witnessed a stock market boom and the elimination of corporate indebtedness. By the end of the inflation the entire domestic debt of Germany was eliminated. To be sure the external debt was enormous.

Along the way we witness the rise of the Freikorps, the killing of Rosa Luxemburg and Karl Liebknecht and the assassination of Walter Rathenau, a Jewish industrialist who served as foreign minister. There is also a cameo appearance of a demobilized corporal who would one day rule all of Germany.

Harris certainly has a feel for the history of the period. However, I only wish he would have integrated charts and tables in the text in order to get a better understanding of what was going on in the macro-economy. Further he should have spent more time discussing the stabilization program that came in 1924 that broke the inflation and of its consequences. Nevertheless the book is well worth the read.

For the full Amazon URL see:

Monday, March 3, 2014

My Amazon Review of Larry Haeg's, "Harriman vs. Hill: Wall Street's Great Railroad War"

Larry Haeg brings to life an era when Wall Street was the wild west and regulation was nonexistent. The giants of finance and industry dominated the stage like never before or after. The great railroad war arises out of the the strategic dilemma faced by both Harriman's Union Pacific and Hill's Great Northern. The eastern terminus of the Union Pacific is St. Louis and the eastern terminus of the the Great Northern is St. Paul. In order to efficiently bring grain from the west and trade to and from China both needed access to the the great railroad hub of Chicago. That access could be provided by the Chicago, Burlington and Quincy which was controlled by the Northern Pacific. Each fears that control by the other would lock them out of Chicago.

Harriman starts the war by quietly gobbling up common and preferred shares of Northern Pacific though his banker Jacob Schiff of Kuhn Loeb. Hill seeing the activity in Northern Pacific starts buying too through his banker, J.P. Morgan. The war is on. Soon more stock is bought than can actually be delivered because short sellers seeing the rise in Northern Pacific stock come in and short the stock. A corner, where no deliveries can be made, ensues driving the stock of Northern Pacific up from $110 a share to an astounding $1000 a share in two days. Realizing a corner had taken place, Schiff and Morgan agree to settle at $150 a share and Northern Pacific drops precipitously to $150 a share.

The titans then settle there dispute with a three way merger bringing the railroads under the roof of a newly formed holding company, Northern Securities controlled by Hill and Harriman's Union Pacific. It is here where President Theodore Roosevelt intervenes with an antitrust lawsuit that goes all the way to the Supreme Court dissolving Northern Securities. Quite a yarn.

Along the way we get a peak into New York society, especially at the old Waldorf Astoria. There are aslo cameo appearances by Bernard Baruch and Jesse Livermore. Haeg's sympathy is with the titans and against the government and the crippling railroad rate legislation that was to come. However, he fails to fully appreciate that that the railroads of 1900 were quasi-monopolies that were in need of regulation. However, over time with federal subsidies for barges and the advent of trucking the rail monopolies would wither away and force much of the industry into bankruptcy.

Over the long run Harriman and Hill had it right. Consolidation was necessary and the Great Northern, Northern Pacific, and Chicago Burlington and Quincy along with the Santa Fe are now under one roof, the Burlington Northern owned by Warren Buffett's Berkshire Hathaway.

For those readers interested in getting a very real sense of what Wall Street was like in 1901, this book is a great read. My one and very real criticism of the book is that stock charts would have been very helpful to clarify the text.

See the full Amazon URL at: 

Sunday, March 2, 2014

The Ukraine: What is to be Done

Vlad "The Impaler" Putin has just carried out, in the words of today's Washington Post, "a naked act of armed aggression" against Ukraine. The armed occupation of the Crimea appears only his first step in dismembering Ukraine as Russian agents stir up trouble in the eastern portions of the country. Putin's obvious goal is to suck the blood out of Ukraine's nascent democracy movement and return it to being a vassal of Russia.

The question is what should the United States and the West do. The time for Obama/Kerry talk is over; it is now a time for action. I would suggest the following steps:
1. The U.S./EU should quickly put together a $15 billion aid package for Ukraine.
2. Place emissaries on the ground in Kiev to negotiate the modalities of the aid package.
3. Expel Russia from the G-8.
4. Deny visas for Russians travelling to the West.
5.Freeze all official and private Russian banking assets in the West. This would squeeze the oligarchs,               especially Vladimir Putin, the richest man in Russia.
6. Impose a trade embargo on all capital goods and technology-related products.
7. Send in NATO reinforcements to the front-lines states of Poland, Estonia, Latvia, Lithuania and 
    Slovakia. Putin's excuse of protecting Russians in the Ukraine can just as easily be used in the
    mentioned countries. And remember it was Hitler's excuse in going into the Rhineland and Czechoslovakia
    in the 1930's. 

Simply put, aggression has to be punished. Russian forces have to be removed from the Crimea and an indemnity must be paid.

Tuesday, February 25, 2014

My Amazon Review of Robert Harris', "An Officer and A Spy: A Novel"

Robert Harris brings life and real suspense to the over a hundred year old Dreyfus Case. Yes, the suspense is there, even if you know how it was all going to end up. Although it starts slow the book builds momentum like a great spy thriller. He does this through the eyes of Colonel Georges Picquart, the newly installed head of army intelligence who uncovers how Captain Alfred Dreyfus was framed as a German spy by the French high command with the full connivance of the intelligence unit he was commanding. Of course Dreyfus' crime was being a Jew in the wrong place. Dreyfus ends up in a really wrong place: Devil's Island.

Picquart is what we today would be called a "whistle-blower" as he gradually uncovers the incontrovertible fact that Dreyfus was innocent. For his efforts he is exiled to an out-of-the way unit in Tunisia and later jailed. It was his documentation that provided the source for Emile Zola's famous "J'Accuse" public letter to the French Army that puts in train Dreyfuss' ultimate release from jail and reappointment to the army.

Along the way we see Picquart's single and very modest daily life in the sights, sounds and smells of late 1890s Paris and his humanity with his affair with Pauline Monnier, a mother of two married to a French foreign service officer. We also smell the ugly stench of the French antisemitism of the period. After all it was the Dreyfus case that awakens the Austrian journalist, Theodore Herzl to the need of a Jewish State. All told I highly recommend "An Officer and a Spy."

For the Amazon URL, See: