Saturday, April 21, 2018

My Amazon Review of William Hitchcock's "The Age of Eisenhower: America and the World in the 1950s"

The Eisenhower 50’s

University of Virginia history professor, William Hitchcock has a written a very sympathetic, and I think accurate, history of the Eisenhower era of 1944 – 1961. I grew up as a child of the era in a middle class apartment neighborhood in Queens. To us the 1950’s was not an era of blandness and racism as liberals would describe it, but rather it was one of hope and optimism. It was truly a time of a broadly shared prosperity. We were well aware of Jim Crow in the South, but every day Jackie Robinson took the field for the Brooklyn Dodgers we cheered him on and knew that the world was becoming a better place.

Eisenhower’s opening acts were to make peace in Korea and to stay out of France’s war in Indochina. To be sure his time represented the heyday of the CIA with successful coups in Guatemala and Iran. Further he deftly dealt with Senator Joe McCarthy watching him burn out.

Just before the election of 1956 Eisenhower faced the dual crises of the Hungarian Revolution along with the Anglo-French/Israeli invasion of Egypt during the Suez crisis. Hitchcock calls Eisenhower a realist in failing to intervene in Hungary after the Soviets invade. I am not so sure, The U.S. could have done more. As to the Suez crisis he completely ignored the reason for Israel’s participation. Namely it was a reaction to the Egyptian sponsored fedeyeen raids from the Sinai into Israel attacking civilians. He is too casual in lumping Israel in with Britain and France with respect to motivation.

The Russian launching of their Sputnik satellite in 1957 triggered a major crisis in the administration and led to calls of a missile gap. Although there may have been one in 1957, by 1960 the U.S. had clear military superiority over the Russians with the development of the Atlas, Titan, Minuteman and Polaris missiles. The missile gap that JFK talked of in 1960 was a myth.

Throughout his administration Eisenhower concentrated his efforts on building up U.S. strategic forces and trying to reach a modus vivendi with the Soviets. He tried with a Summit meeting in 1954 and tried again with the planned summit meeting in 1960. That summit blew up when Eisenhower was caught lying about the failed U-2 over-flight mission over the Soviet Union. Here Hitchcock is particularly acute in going through the “tick-tock” of the entire episode.

One of the heroes of the book is Attorney General Herbert Brownell who was leading the charge on civil rights. It is here where Hitchcock differs from Caro in his telling of the passage of the Civil Rights Act of 1957. According to Caro Johnson was the prime mover, but according to Hitchcock it is Johnson who so waters down the bill to make it far less relevant. Remember the Senate was voting on the Eisenhower Administration’s bill. It is also here that Hitchcock makes an error in recounting that it took 60% of the Senate to over-ride a filibuster. That is true today, but in 1957 it took 67%.

Although many historians are critical of Eisenhower’s slow walking civil rights in the 1950s. Hitchcock rightly notes that Eisenhower used federal troops to integrate Little Rock’s Central High School in 1957 and was vilified throughout the south. Kennedy was no different as he also slow walked civil rights until 1963.

Hitchcock notes that Eisenhower leaves Kennedy with crises in Laos and Cuba where a CIA sponsored invasion is on the offing. Unfortunately Kennedy got caught up in the momentum of the moment with disastrous results. But that all takes place prior to Eisenhower’s farewell address where he warns of the power accumulating in the military-industrial complex he largely created.

All told William Hitchcock has offered a terrific history of the era and foreign policy of the Eisenhower Administration. I highly recommend it for both lay and professional readers.

For the full amazon URL see:  Awaiting Amazon URL

Wednesday, April 11, 2018

My Amazon Review of Nassim Nicholas Taleb's "Skin in the Game: Hidden Asymmetries in Daily Life"

Not another “Black Swan”

I was disappointed with Nassim Nicholas Taleb’s “Skin in the Game.” It is more a stream of consciousness than a path breaking work. It would have been much better as a long magazine article. That, at least, would have avoided his ceaseless repetitions as to why he hates academics, economists, Robert Rubin, Goldman Sachs and Monsanto.

That said there are real kernels of the book that are important. First as the title suggests that advice coming from those who have who have no skin in the game is, at best, useless and at worse harmful. Simply put those advisors suffer no consequences if they give bad advice. Simply put this is Taleb’s “BS” detector. He next notes how tiny minorities have the ability to enforce majoritarian preferences. For example making most foods in the West Halal compliant is very important to Moslems but is not material for non-Moslems so non-Moslems have no problem eating Halal compliant foods.

Finally, and this is really important, Taleb notes the difference from what I would characterize as inter-temporal probability with cross sectional probability. His example is Russian roulette. If 100 people played Russian roulette for a million dollars the expected value of the individual payoff would be $833,000 (5 chances in 6 of surviving and thus winning). However if one person played the same game with the same payoff 100 times, he/she would be dead. Thus the risk of ruin is understated in most financial models. In other words you have to stay in the game in order to ultimately win.

Thus if Taleb edited down his book into a much smaller format I would have rated it much higher. However in its current form it is a slog.

Wednesday, March 28, 2018

Mall Valuations Post GGP/BPY

This is my fifth post on high quality mall REIT valuations in less than a year. Going back to my first post on May 4, 2017 ( I noted that the 4.5% cap rates used by most REIT analysts were way to low and I argued that a 5.65% cap rate was more appropriate. This analysis did not receive much support when Unibail announced its acquisition of Westfield last fall that implied a cap rate for its U.S. assets in the high 4% range.

However, the Brookfield Property Partners (BPY) acquisition of the 64% of the shares of GGP that it did not own at an implied cap rate estimated to be in 5.8%-6% range validated my thesis. The BPY offer was valued at around $22 per GGP share, 19% below the Street consensus net asset value of $27.28. Warning: take Street estimates of NAV with a grain of salt.

If anything I was too optimistic. I argued then that high quality mall cap rates were under stress because the e-commerce challenge would require significantly high capital expenditures, lower future estimates of rent growth and cause a downgrading of approximately 15% of the those malls considered to be high quality over the next five years.  As of today the first two of my assumptions are now the conventional wisdom. I also argued that higher long term interest rates would pressure cap rates.  Since then the 10 year treasury yield has increased from 2.3% to 2.8%.

Yesterday mall stocks tanked on the GGP news. However, today the mall REIT shares are soaring on reports that President Donald Trump is out to get Amazon, their arch nemesis. As of 3:00 PM EDT AMZN was off by 5% and SPG, for example, was up by 3%. In my view today's stock market action is a transitory phenomena and the mall REITs will be revalued to reflect the GGP transaction. Simply put, AMZN ain't going away, Trump or no Trump.

What that means is that once the Street adjusts net asset values to reflect high quality mall cap rates in the high 5% range, the stocks will settle in to trade at about a 10% discount from the new asset values which implies moderately lower share prices. Why? There is still too much uncertainty in the space and in my view long term interest rates will be significantly higher by year end.

Tuesday, March 27, 2018

My Amazon Review of Amy Chua's "Political Tribes: Group Instinct and the Fate of Nations"

The Return of Tribalism

Yale law professor Amy “Tiger Mom” Chua has written an important book on the role of tribalism in our modern world. She demonstrates how U.S. foreign policy went awry in Vietnam, Afghanistan, Iraq and Venezuela because how we completely failed to understand the tribal motive behind those conflicts. In particular she highlights the role of economically dominant minorities who breed resentment among the broader population. In particular the Vietnam War was more about deposing the economically dominant Chinese minority rather than a struggle for and against communism.

She then moves on to the U.S. where after years of promoting multi-culturalism it is not surprising to see a broad section of the white community seeing themselves as being victimized by an economically dominant coastal elite. But this is not new to the rise of Donald Trump. In the 1990’s we witnessed New York City Mayor Rudy Giuliani criticizing a Robert Mapplethorpe exhibit at the Brooklyn Museum that depicted Christ in a jar of urine entitled “Piss Christ.”  The exhibit stood, but what if the museum exhibited “Piss Moses” or “Piss Mohamed.” Later “The Book of Mormon,” a satire on the Mormon religion became a hit Broadway show. I doubt if Broadway would have run “The Book of the Koran.”

What I liked about Chua’s book is that she notes that tribalism through years of evolution is built into the human psyche so we shouldn’t be surprised to see it manifested in the United States. A tribe needs to include and a need to exclude. Quite a bit of this, unfortunately, is based on race.  However, for the most part, we rose above tribalism by establishing a “super group” (her words) to rise above it to become Americans. With the return of tribalism the notion of America is pushed into the background.

I also like her noting that the coastal elites have become a tribe of their own as they dominate most of our culture. On the far left the culture has become so strict that the doctrine of intersectionality, which means to be in our tribe you have to be with us on everything to be with us at all. A world where deviation is not tolerated sounds very much like the worlds of Hitler and Stalin in the 1930s. Unfortunately that is where the left is today. To be sure Amy Chua is not as harsh as me, but is clear-eyed on the issue.

All told, Amy Chua has written an important book about where we are in America today. It should be read in conjunction with the works of NYU professor Jonathan Haidt.

Saturday, March 24, 2018

My Amazon Review of Brad Snyder's "The House of Truth: A Washington Political Salon and the Foundations of American Liberalism"

The Birth of the Administrative State

University of Wisconsin Law School professor Brad Snyder has written a very long book (824 pages in the print edition) on the origins of American liberalism. He tells his story through the collection of people who lived in and/or visited a house located at 1727 19th Street in the DuPont Circle neighborhood of Washington D.C. between 1912 -1919 and he then follows them through the early 1930’s.  Here we meet such liberal icons Justice Oliver Wendell Holmes, Louis Brandeis, Felix Frankfurter, Herbert Croly, Walter Lippmann (in his early life) and the sculptor Gertzon Borglum (think Mount Rushmore).

All of them were upset with the more conservative strain of the Taft Administration as compared to Teddy Roosevelt’s and all of them want to move  away from the laissez faire philosophy of the 19th century and to move towards a regulated economy run by disinterested experts. Their attitudes were in response to the emergence of an industrial society that was a far cry from the Jeffersonian vision of a democracy based on yeoman farmers. Simply put they wanted to use Hamiltonian means to achieve liberal ends.

It is all so remarkable to read that the Washington D.C. of those days was a very small town and many of the residents and visitors had ready access to the leading figures of government from the president on down. And boy did they use that access, especially during the Wilson Administration. We see Frankfurter running the War Labor Board, Borglum investigating fraud in aviation procurement and Lippmann writing what was to become Wilson’s Fourteen Points and become part of the U.S. negotiation team at Versailles.

Snyder shows how Brandeis and Frankfurter influenced Holmes to become a leading civil libertarian on the Court as they applaud his pro-regulatory views. The book spends far too much time on the liberal cause celeb of the 1920s, the Sacco-Vanzetti case.  To be sure in a strict legal sense they were victims of a miscarriage of justice but as Snyder tells us in an endnote, modern scholarship suggests that Sacco was guilty. He should have been more honest in noting that upfront.

Snyder also shows us how Frankfurter sent his best students to be law clerks for the Supreme Court. One notable success was Dean Acheson Truman’s Secretary of State who clerked for Brandeis. Two others mentioned did not turn out as well. Tommy “the Cork” Corcoran clerked for Holmes was an architect of the New Deal, but later be became one of Washington’s great “fixers.” Many followed in that tradition by going to Washington to do good and ended up doing well. The other clerk he sent to Holmes was Alger Hiss, the notorious Soviet Spy.

What I liked about the denizens of 1727 19th Street was that unlike too many of today’s progressives, they really believed in free speech and that Frankfurter and Brandeis were full-throated supporters of the Zionist project. Although Snyder carefully notes Lippmann’s move to the Right, he hardly spends time on how later in life Frankfurter became one of the leading conservatives on the Supreme Court. He stayed true to his belief that courts should give great deference to elected legislatures. Finally Snyder doesn’t deal with the dark side of the administrative state where nameless and faceless bureaucrats, many with heavy political agendas, dictate practically every nook and cranny of American life.

Nevertheless for readers who slog through the book, they will get a real sense of ferment of ideas that made liberalism a major force in our society.

Thursday, March 22, 2018

And What did you do in the Trade War?

With his proposed tariffs on $50-$60 billion of Chinese goods, it seems that President Donald Trump wants to start a trade war. As if on cue the S&P 500 dropped 2.5% today and export oriented Boeing and Caterpillar declined by more than 5%. To be sure the U.S. has serious issues with China with respect to trade in general and intellectual property specifically, shooting first and asking questions later is hardly the best way to settle a trade dispute.

As a result investors are rightly worrying about the broad imposition of tariffs on China on inflation and growth. Simply put a tariff is a tax that will increase inflation and slow growth as the Chinese retaliate against American made goods. It is a recipe for stagflation that will hardly be good for stocks.

Of course Trump's announcement could be an opening gambit in a very complex negotiation. That was the case with his steel and aluminum tariffs a month ago. He has since exempted our major trading partners in those commodities namely Canada, Mexico, Brazil and South Korea. Thus it is no surprise that the steel and aluminum stocks have given back all of the gains they made on the initial tariff news. But make no mistake Trump is playing with fire, and a good chunk of the global trading structure could burn down. 

Thursday, March 15, 2018

In the Wall Street Journal (online) on Fed Tightening, March 15

David Shulman, senior economist at UCLA Anderson Forecast, said investors are “underestimating the tightening cycle.”