Friday, September 23, 2016

Send Them a Message

In 1972 George Wallace was on the verge of winning the Democratic nomination for President when he was gunned down at a Maryland rally. On that day he would go on to win both the Maryland and Michigan primaries. He was running on the slogan "Send Them a Message." Now 44 years later Donald Trump is implicitly running on the same slogan.

My liberal friends are traumatized that the Clinton - Trump race is so close. They just can't comprehend that on the facts Hillary is far more qualified to be president than Trump and she should be far ahead. Now just to be clear I am on the record for Hillary. 

But I have a message for my friends, this election may not be about the facts. It is all about sending a message to the condescending bi-coastal liberal elites in the media, Hollywood, Wall Street and Silicon Valley. It is reminiscent of the 1970s movie Network, "they are as mad as hell and they are not going to take it anymore."

Simply put a vast swath of the electorate is tired of being preached to that they are racist, sexist, homophobic, Islamophobic and on and on. In other words they are told by Hillary and her supporters that they are irredeemably deplorable. Trust me rhetoric like this, which may appeal to the salons in Manhattan, is not a good way to win votes in the country at large.

Whether they a guilty of all or some of these charges is likely true, but remember we are all flawed human beings trying to make our way in an imperfect world. And note carefully the liberal elites have their own prejudices against people of faith and white working class voters who don't look like them. As I have noted previously the Democrats have thrown the white working class under the bus in favor of cultural liberalism.

So when you watch the debate on Monday keep this in mind. The message will be far more important than debating points.

Tuesday, September 20, 2016

My Amazon Review of Graham Moore's "The Last Days of Night: A Novel"

Westinghouse v. Edison

It is very hard to write an enjoyable book about a 1880s patent dispute, but screen writer (The Imitation Game”) Graham Moore brings to light the titanic struggle over U.S Patent Number 223898, Edison’s electric lamp. “The Last Days of Night” is a historical novel of the first order, mostly true with more than a few embellishments. Moore’s hero is the 26 year old lawyer Paul Cravath who goes on to found the very white shoe law firm, Cravath, Swaine and Moore. He also invents in real life the associate system that drives today’s giant law practices.

Cravath represents George Westinghouse in his fight to overturn Edison’s patent. The patent fight goes on against the backdrop of what was called the “current wars”. It was a war over Edison’s DC current versus Westinghouse’s AC current. Spoiler alert, as we know AC current wins largely because of its enormous distance advantage over DC current.

His portrait of Edison as both an inventor and avaricious businessman is acute and Westinghouse comes off as an aggressive “bet the company” businessman focused on product quality. We also meet the very mercurial scientist/inventor Nikola Tesla the prophet of AC current and of power of electromagnetic waves. It is not for nothing that Elon Musk named his electric car after him.

Because this will soon be a major motion picture Moore introduces Cravath’s love interest, the opera star, Agnes Huntington. Much of her role in the book is fictitious, but she does in real life marry Cravath.

There are cameo appearances for J.P. Morgan and Alexander Graham Bell. With them Moore brings out the merger between science and business that will literally power the American economy after the 1880s. I highly recommend the book and can’t wait for the movie.

Thursday, September 15, 2016

My Amazon Review of James Andrew Miller's "Powerhouse: The Untold Story of Hollywood's Creative Artists Agency"

Hooray for Hollywood

Journalist James Andrew Miller has a written a way to long (752 pages in the print edition) and a way too hagiographic oral history of the Hollywood behemoth, Creative Artists Agency. It is filled with anecdotes about famous actors, writers and directors. However, by the end it reads like the promotional material an investment bank would use for an initial public offering, which, trust me, is coming. In their own words Powerhouse tells the story of five break away agents from the William Morris Agency to form Creative Artists in 1975. The lead players are Michael Ovitz, Ron Meyer and William Haber.

Ovitz, of course is the most famous, and is the driving force behind Creative Artists first 20 years. Although he didn’t invent packaging, where an agent puts together all of the key elements of a television series or motion picture, he certainly refined it to a high art. He is also a visionary with respect to technology by fully anticipating video streaming and the delivery content wirelessly.

The early days of Creative Artists are very reminiscent of my days at the old Salomon Brothers. It was an eat what you kill environment and everyone was hungry. In fact Ovitz acted as an investment banker with respect to the sale of Columbia Pictures to Sony and the sale of Universal to Matsushita.

However in 1995 Ovitz leaves for Disney which turns out to be a disaster for all of the parties involved and Haber leaves to run Universal. After they leave the “Young Turks” takeover and Creative Artists continues to thrive, but changes radically when they take in the private equity firm, TPG as a partner. In the 2000s Creative Artists branches out into sports management and continues the Ovitz initiatives in brand management.

The problems with the book are that it is too long and you don’t really hear from by the many people wronged by the agency.

Wednesday, September 7, 2016

The Link to the Giliberto-Shulman paper on the Interest Rate Sensitivity of REITs

Here is the link to the Giliberto-Shulman paper on the interest rate sensitivity of REITs forthcoming in the Journal of Real Estate Portfolio Management.

On the Interest Rate Sensitivity of REITs: Evidence from Twenty Years of Daily Data

Executive Summary

This study evaluates interest rate sensitivity for equity REITs using a multi-factor asset pricing model estimated with daily data. We utilize yield changes and, as an alternative, bond betas, to measure REITs’ sensitivity to interest rate shifts. We find that the degree of interest rate sensitivity varies over time, has switched direction and that any “pure” effect is often subsumed in equity REITs beta against stocks. Despite recent high sensitivity, we conclude that there is no long-run predictive rule that applies to how equity REIT returns respond to movements in interest rates.

Tuesday, August 30, 2016

My Amazon Review of J.D. Vance's "Hillbilly Elegy: A Memoir of a Family and Culture in Crisis"

The Rise of J. D. Vance

As I write this there are 529 reviews of “Hillbilly Elegy” on Amazon’s website and many of them are better than what I have written here. Read them. So why another review? Simply put, I believe that J.D. Vance has written the most important book of the year. It is a must read.

At 32 Vance movingly tells his life story rising from his Kentucky bred family in the steel town of Middletown, Ohio to Yale Law School and to clerkships with Federal judges. He now works for Peter Thiel’s venture capital firm in San Francisco and I wish he discussed how and why he left the law for his new line of work.

Vance is largely raised by his Mamaw and Papaw, his maternal grandparents who were immersed in the tribal mentality of the Scots-Irish culture in the Kentucky hill country.  His Mom, a salutatorian in her high school class, goes through husbands and drugs like water forcing Vance to continually live under the roof with unknown men and in fear of his mother’s addictions. He notes that “instability begets instability” which is not far from the Talmudic notion that sin inexorably lead to sin. Needless to say his home life was chaotic and were it not for the unconditional love his grandparents, who trust me, had their own issues, we would have never heard of him.

Vance grows up in the milieu of a declining steel town that was dominated by Armco Steel, which is now known as AK Steel and is a shadow of its former self. His grandfather worked there from the 1960s – 1990s and thus provided sustenance for his family. Now with most of those jobs gone Middletown suffers from declining public services, unemployment and opioid addiction; a pale comparison from its glory days in the 1950s.

A critical turning point in Vance’s life is when he defers his acceptance to Ohio State to join the Marine Corps. It there where he finds the discipline and stability that was so lacking at home. He goes to Iraq and ends up working in civil affairs, a far cry from being a grunt on the line. He is unfortunately silent as to how he ended up with that assignment. The Marines also gave something he never had before, a steady pay check.

On his return from the Marines he goes to Ohio State and graduates in two years, rather remarkable. Somehow he gets accepted to Yale Law School where he finds himself in culture shock. Not only for his hillbilly working class background, but also for attending a state school. State school graduates are few and far between at Yale Law School, a most unfortunate circumstance. At Yale law Professor Amy “Tiger Mom” Chua takes him under her wing and with that and his raw smarts he finds his way to the Yale Law Journal. He is silent on how he comes to befriend Amy Chua. While at Yale he meets the love of his life who he later marries.

Not so bad for a kid from Middleton, Ohio. But remember J.D. Vance is a rare exception and the people he left behind continue to suffer from the choices they made and the forces of the global economy that they have no control over and are largely forgotten by the political system where the coastal elites hold sway.

As I said at the outset Vance offers us a window into the culture of the Scots-Irish working class and the tribulations they face. It is not pretty, but as a society we are going to have to deal with it. 

Sunday, August 28, 2016

My Amazon Review of Michael A. Cohen's "American Maelstrom: The 1968 Election and the Politics of Division"

America on the Brink of a Nervous Breakdown

Boston Globe columnist Michael A. Cohen has written a very engaging history of the 1968 presidential race and why it matters today. To me it is very personal as I remember voting for Bobby Kennedy in the California Democratic primary via absentee ballot while in the U.S. Army and my wife to (unknown to me at the time) was a student volunteer for him during the Indiana primary. America was under siege facing an unwinnable war in Vietnam with casualties mounting, the cities ablaze as a consequence of the assassination of Martin Luther King and ongoing campus demonstrations against the war which were extended to the riots at the Democratic Convention.  America was truly on the brink of a nervous breakdown.

Into this milieu comes the presidential campaign which is set afire by the unexpected withdrawal from the race by President Lyndon Johnson. Cohen’s dramatis personae are on the Democratic side Eugene McCarthy, Bobby Kennedy, George Wallace (running as an independent) and Hubert Humphrey and on the Republican side Richard Nixon, George Romney, Ronald Reagan and Nelson Rockefeller. Although Cohen is a liberal and is dismayed by some of the failures of Johnson’s Great Society which were apparent as early as 1966, he by and large treats his subject even handedly. In fact of all of the candidates the careful and calculating Richard Nixon comes off the best. He quotes at length Nixon’s acceptance speech at the Republican convention which if given today would be viewed as a breath of fresh air in a much polluted political environment. Further the 1968 convention was another stop on the road to the demise of what was once called liberal Republicanism.

We see in the Democratic primaries the forerunner of today’s Democratic Party which is an amalgam of the elitist liberals and students who backed Eugene McCarthy and the African American and Hispanic voters who backed Bobby Kennedy. It was the white working class, which at the time was the core of the Democratic Party, who were thrown under the bus. They would at first be become Wallace voters as a weigh station on their way to the Republican Party of Nixon and Reagan.

People tend to forget that Wallace running as an independent with a coalition of southern segregationists and white working class voters was running very strong in September 1968 garnering over 20% of the preferences as measured by the pollsters, but his nomination of General Curtis “Nuke” Lemay scared off planeloads of voters reducing his Election Day share to 13.5%. It is important to note four years later, Wallace was on the verge of winning the Democratic nomination. On the day he was shot he was the big winner in both the Maryland and Michigan primaries. In many respects he was the Donald Trump of his day with a brand of white working class populism.

Thus we see in 1968 the breakdown of the New Deal coalition of southern segregationists, urban workers and liberal intellectuals into ultimately a new party of liberal intellectuals, African Americans, Hispanics and a menagerie of identity politics interests. Although still there in name, the white working class voters have moved on. Where they were once the core of the party, they are now on the periphery.

In contrast the Republicans picked up the southern segregationists, much of the white working class and lost their liberal bloc as typified by Nelson Rockefeller. Remember the classic “limousine liberal” was the Republican mayor of New York, John Lindsay.

Cohen has very acute descriptions of the arrogance of Eugene McCarthy, the hold Johnson had over Humphrey, George Romney’s lack of depth, the ego of Nelson Rockefeller and the fact that Bobby Kennedy, the sainted liberal hero of today, ran to the right of McCarthy. In fact Cohen notes that Reagan spoke approvingly of Kennedy. Thus I view “American Maelstrom” as a very readable and important work of history. 

The full Amazon URL is:

Tuesday, August 23, 2016

Monetary Policy on the Eve of Destruction

The world’s central bankers will meet later this week at their annual confab in beautiful Jackson Hole, Wyoming. The meeting’s topic is “Designing a Resilient Monetary Policy.” All of that is well and good, except monetary policy has reached a dead end. Simply put after eight years of QE, zero interest rates, negative interest rates, corporate bond buying and forward guidance all the central bankers have succeeded in placing the entire financial system on the eve of destruction.

To be sure their policies likely avoided The Great Depression 2.0, but that that was six years ago and along the way asset values were boosted to levels unimaginable only a few years ago. But not only does a low interest rate policy increase asset values; it also increases liabilities and undermines the profitability of the banking system. Simply put there is very little margin left in bank lending thereby jamming the monetary policy transmission mechanism through the banking channel.

More important the decline in interest rates exploded the explicit unfunded liabilities associated with public and private pension plans which now stand at $3.4 trillion (using private sector accounting rules) and $560 billion, respectively. In Europe the situation is far worse. The fundamental issue is that plan sponsors never contemplated a sustained period of extraordinarily low interest rates. Where once an 8% rate of return on plan assets was viewed as conservative, now a 6.5% return can rightly be viewed as aggressive. Similarly discount rates have dropped from around 6% to the 3-4% range. Remember bond math the lower the discount rate, the higher the liability. As a result under the current regime most plans are effectively bankrupt which will require either a cut in future benefits or a substantial increase in contributions/taxes. How can that be conducive to growth? Similarly the same dynamics apply to life insurance and annuities.

Moreover implicit retirement liabilities have also exploded. How so? In a low interest rate regime individuals have to put more money away in their 401k’s and IRA’s to meet their retirement goals. Thus instead of low interest rates working to reduce savings, the real world result yields higher savings, thus turning on its head microeconomic time preference theory. This phenomenon of higher savings in the face of lower interest rates and higher asset prices is one of the reasons that monetary policy has not ignited a consumption boom.

Thus when the central bankers meet later this week they had better recognize they are at the end of their rope. By excessively using monetary policy over the past eight years the bankers have destroyed its efficacy. As Fed Vice Chairman Stanley Fischer noted last week, perhaps it is time for fiscal policy and regulatory reform.