The Purim War

 About 2,382 years ago Esther and Mordechai ousted the Jew-hater Haman, first minister of Persia; an event that is now celebrated as Purim by Jews all over the world. In an eerie coincidence Purim starts on Monday evening March 2^nd. This time, instead of Haman being killed, the bulk of the Iranian leadership including the Grand Ayatollah Khamenei was killed in precision airstrikes by the Israeli air force. The U.S./Israeli effort’s goal is to topple the Iranian regime that has long threatened the region and was yet again reconstituting its nuclear and missile programs. With Iranian negotiators practicing “rope-a-dope” tactics with U.S. negotiators, President Trump’s patience ran out, and he unleashed an air and naval armada on the Iranian regime.

 

My sense is that Trump’s logic was the Iranian regime was weakened by the mass protests against it in January triggered by its collapsing economy. The regime responded with brute force and killed anywhere between 30,000-50,000 people. As they say in China, the Iranian mullahs “lost their mandate from heaven.” It will now be up to the Iranian people to establish a new course.

 

What happens next depends on the staying power of the remnants of the regime and the willingness of the U.S. and Israel to sustain a long campaign. Meantime, by attacking U.S. bases in Saudi Arabia, Iran lost the neutrality of the Arab gulf further isolating them. The other thing to think about is whether or not Israel will take advantage of the situation to cleanup its unfinished business with Hezbollah and Hamas.

 

Of course, it goes without saying, the Democrats are up in arms against Trump making war without congressional authorization. However, a careful reading of the war powers act means that what Trump did, as commander in chief, was legal so far. However, he does have to report to Congress on the war, and Congress will have a say. My sense is that Iran 2026 is not Iraq of 2003 but then again time will tell. But make no mistake, the middle east will not be what it was as of last Friday.

My Review of Sven Beckert's "Capitalism: A Global History"

Anti-Capitalism

Harvard history professor Sven Beckert offers up a history of capitalism, but in fact he has written an anti-capitalist screed. Although never mentioned, he follows in the footsteps of Honoré de Balzac’s well-known aphorism, “behind every great fortune there is a great crime.” Beckert treats capital as a unitary bloc, rather than as a multitude of businesses in competition with each other. Further, he sets up a strawman argument that from its creation, capitalism needed state support—as if that violates the notion of a free market. So, what? Adam Smith noted that capitalism needs the state to enforce laws and contracts and provide for defense, among other functions.

He starts his history in Aden around the year 1000, where, to him, the first islands of capitalism are formed. Trust me, he has written a very long history that takes up 1300 pages. His definition of capitalism is a society where capital seeks to reproduce itself in an ever-growing accumulation. This differs, to him, from the primitive markets of 4000 years ago. What is strange to me is that he hardly discusses money and its role in creating a capitalist society. Money in the form of gold coins existed 2500 years before his Aden merchants. (See: https://shulmaven.blogspot.com/2026/01/my-review-of-david-mcwilliams-history.html) He also ignores the role of the free trade zone established by Rome, while noting the importance of the free trade zone established by Islam that supported the Aden merchants.

In Beckert’s opinion, the critical catalysts that put capitalism into hyperdrive were the Caribbean sugar trade centered around the British colony of Barbados and the great Potosi silver mine in Bolivia, which flooded Europe with money. Great fortunes were made, and those fortunes were built on slavery—in other words, Balzac’s crime. However, slavery existed long before capitalism, as in the Hebrew slaves of Egypt. He makes short shrift of the anti-slavery movements in capitalist England and the United States that brought it to an end. One thing he gets right is that capitalism is highly adaptable to changes in circumstances.

With the rise of industrial capitalism in the 1700s, he not only notes its effects on cities but also on the countryside. In the country, common land became enclosed to increase food production and drive farmers off the land into the city to supply labor for the new factories. Beckert is critical that through about 1850, real wages stagnated in England. This is when Marx wrote his famous manifesto highlighting the immiseration of the working class. Nevertheless, that very same manifesto offered a paean to the new capitalist world that was being born. Then, of a sudden, real wages started to increase. He offers no explanation.

He casts blame on capitalism for causing racism, sexism, and environmental destruction. None of these are unique to capitalism, as all three have existed for millennia. And if Beckert were fair, he would note the environmental destruction on a grand scale that took place in Soviet Russia and Communist China. Indeed, most of the progress in ridding the world of racism, sexism, and environmental destruction has taken place under capitalist auspices.

What really bothers me is his use of the Marxist term, “commodification.” He uses it over and over to denounce the growing role of markets in our daily lives. He doesn’t like dating apps. Along a similar vein, he cites such leftist economists as Polanyi, Piketty, Sraffa, Braudel, Hobsbawm, and Gramsci, for example, while spending far less time on Chandler, Friedman, Schumpeter, and Mokyr. His sympathy for socialism is obvious.

While he lives comfortably off the benefits of capitalism in Harvard Square, he just doesn’t get that capitalism involves huge risk-taking and somehow misses the spirit of enterprise that invigorates the process of capitalist accumulation that drives our society forward.

Trump Gets a Lesson in Constitutional Law

" All I can offer them is that most major decisions affecting the rights and responsibilities of the American people (including the duty to pay taxes and tariffs) are funneled through the legislative process for a reason. Yes, legislating can be hard and take time. And, yes, it can be tempting to bypass Congress when some pressing problem arises. But the deliberative nature of the legislative process was the whole point of its design."

        Justice Neil Gorsuch concurring in Learning Centers v. Trump

President Trump is learning the same way that President Harry Truman learned over 70 years ago that the power of the presidency is not unlimited. In Youngstown Sheet and Tube v. Sawyer (1952) the Supreme Court found that President Truman could not seize the steel mills under the exigency of the Korean War without the express approval of congress. Similarly the court ruled that Trump does not have the power to impose tariffs under the International Emergency Economic Powers Act (IEEPA) without the express approval of Congress. To be sure Trump has other tariff statutes available to him that are authorized by Congress and he is using them as we speak.

What all this means is that tariff are here to stay, but much of the recent arbitrariness of the process will be removed. There will of course be a series of court fights about how the refund process will work for those who paid the illegal tariffs. My guess is that will take time given the number of claimants and the huge dollar amount in excess of $100 billion.

Nevertheless, the bottom line is that for the first time the Supreme Court placed a real check on Trump's growing dictatorial powers. The next check will likely come when the court decides that he can't arbitrarily remove members of the Federal Reserve Board. Thus in a modest measure the framers of our constitution are being vindicated.

My Review of Jeremy Grantham's "The Making of a Permabear:........."

Regression to the Mean?

 

I met Jeremy Grantham of GMO fame on several occasions many years ago and I had a working relationship with Dick Mayo, the M in GMO. Thus, it was a pleasure to read Jeremy’s autobiography written with the help of Edward Chancellor. Grantham is a value investor’s value investor and as such numerous times in his career he was out of step with a raging bull market, hence the title “Permabear." In the interest of full disclosure, I would characterize myself as a value investor.

 

Grantham was born in Yorkshire, England in 1938, just at the onset of the war that would kill his father. His background was middle class and he attended Sheffield University, a far cry from the Oxbridge of the elite. However, the future Nobel Laureate John Hicks read one of his papers. Nevertheless, by the dint of his efforts and natural intelligence he ended up at Harvard Business School and ultimately into investment management.

 

He broke off from Keystone, a prominent mutual fund manager in the early 1970’s to form Batterymarch Financial where he was a pioneer in the nascent index fund industry. He left them to form his own firm, and Dick Mayo soon joined him. The mid-1970’s was a heyday for value managers as the once exalted nifty fifty cratered and practically everything else moved higher. Simply put, value was having the sale of the century.

 

Like most value managers, Grantham believes that stock valuations and profit margins are mean reverting. Simply put, when the market’s price/earnings ratio gets down to around 7 or 8, the market as a whole is a buy and when the ratio is well into the 20’s on normalized earnings, the market is a sell. Grantham backed up his investment analysis with serious quantitative research that covered international markets as well.

 

The dot.com boom of the late 1990’s tested Grantham like no other. Valuations went to the sky from 1998 to early 2000 leaving GMO’s performance in the dust. Nearly half of its assets when out the door. Here Grantham is very astute in talking about business risk and career risk. Being bearish in a bull market brings with it enormous risks to investment managers and their principals. Trust me, as a sell-side equity strategist at Salomon Brothers I felt the brunt of career risk. Nevertheless, Grantham stuck to his guns and was buying REIT stocks that were yielding up to 9% at the time. I had the same instinct at the time and built a personal portfolio holding a basket of REITs. I later became the REIT analyst at Lehman Brothers. In early 2000 the dot.com boom crashed and burned, but unlike in the mid-1970’s the overall stocks market did not get really cheap.

 

In the early 2000’s GMO recovered dramatically, but by mid-decade Grantham blew the whistle on the unsustainable housing boom. Yet again he was early, but dead right. Although stocks suffered from a vicious bear market in 2008-2009, the averages only stayed cheap for a few short months by Grantham’s reckoning.

 

As I write this Grantham is again calling out what he perceives to be the outlandish valuation of the U.S. stock market. Profit margins are at an all-time high and the cyclically adjusted price/earnings ratio is just a touch away from its 2000 peak. What’s going on? Perhaps, the economy has changed so much that it is now dominated by a few highly profitable tech monopolies that are skewing aggregate profit margins. Furthermore, the emphasis has shifted from tangible capital to intangible capital. That was true until last year when the tech behemoths started to massively spend on data centers to support artificial intelligence. The big question is whether or not those investments will be sufficiently profitable to support today’s valuations.

Grantham, through his foundation, is a very active environmentalist. He almost went to jail in opposition to the Keystone XL pipeline. He rightly worries about climate change and chemical pollution. In his private life he attacks the major oil companies, but my guess is that as a value manager he holds the stock in those very same companies. In his environmental hat he applauds the decline in population growth, but as a money manager, he realizes that might have negative consequences for future profit growth.

 

To sum up, Jeremy Grantham is quite the character. and it comes through in his book. For those readers interested in the stock market, its contrarian take is well worth the read and if you are of value bent, like me, it will gird you for the market that lies ahead.

  

My Review of Bike Bird's "The Land Trap: A New History of the World's Oldest Asset"

 Civilization held Hostage to Land

 

Mike Bird, the Wall Street editor of The Economist, has written a detailed history of the role of land in society in general and the economy in particular starting with the Babylonian Empire. He makes three broad generalizations about land: it is fixed in quantity, it is immobile and it doesn’t depreciate. Although land is definitely immobile, it is not really fixed in supply, and it can depreciate. The application of capital to land can increase its supply. Witness a good portion of lower Manhattan buildings sitting on landfills and provisioning of water to desert lands to make them productive. Phoenix is a clear example here. Although there are no depreciation schedules for land, the value of land has suffered long term declines due to changes in the broader economy and environmental pollution.

 

Because I once headed real estate research at the old Salomon Brothers, I found Bird’s narrative particularly interesting. I was a careful student of the Japanese real estate bubble in the 1980’s and I chronicled the real estate boom and bust in the United States from the early 80’s to its nadir in 1992. In the Japanese and the U.S cases the collapse in real estate values caused a debt crisis in both countries. As Bird notes the ability to borrow on real estate can put a real estate cycle on overdrive, both on the upside and the downside. The 1990 real estate bust turned out to be small change when a collapse in real estate values triggered the global financial crisis in 2008. On the other owner occupied real estate has served as collateral to fund numerous businesses, some of which have become quite large. Bird cites McDonald’s as an example.

 

If there is a hero in Bird’s book it is Henry George, the author of “Progress and Poverty.” An 1879 best seller. George rightly argued that much of the gains associated with rising land values are the result of improvements in society and are thus unearned. The landowner just sits there and takes advantage of the improvement in society and the economy. George’s solution was to tax perceived unearned increment away to fund the government. At the time he thought a single tax on land would suffice. His ideas became all the rage, and he was almost elected mayor of New York City on his single tax platform. Unfortunately, his movement faded away.  

 

Bird is very cognizant of the fact that in much of the developed world today the ownership land has become a major driver of income inequality. Simply put, those who have it are far better off than those who don’t and because the value of land is very sensitive to interest rates, the easy money policy pursued by central bankers since 2008 has sent land prices skyrocketing. In a real sense, we are living in a neo-feudal world that separates the landed from the landless.

 

Aside from discussing the history of land in the Anglosphere, Bird discusses land policies in China, Taiwan, Hong Kong, Singapore, Korea, and India with the all-time biggest bubble ever taking place in China. In his discussion of Asian land policies, he cites the work of Wolf Ladejinsky a U.S. Department of Agriculture staffer and later private consultant who was instrumental in creating the land policies in Taiwan, Korea, and India. To Bird, Singapore comes across a model where the government own the land and leases it to condominium developers that attaches pricing regulation to make the units affordable. As a result, Singapore has the lowest house price/income ratio in the developed world. Albeit it is a very expensive program.

 

In sum Bird argues that society is trapped by the high price of land. For example, policies that would lower the price of land to make housing more affordable would have the knock-on effect of lowering the wealth of existing owners and possibly triggering a financial crisis if those owners default. This policy bind will be with us for a long time.

My Review of Victor Shvets' "The Twilight Before the Storm"

 The Times They Are A-Changin* 

Viktor Shvets, an investment strategist at Macquarie Bank, doesn’t like the baby boomers, especially the neoliberal order that generation brought into being. Drawing on the work of Neil Howe and others ( https://shulmaven.blogspot.com/2023/09/my-review-of-neil-howes-fourth-turning.html ) wherein generational changeovers drive history he argues that the neoliberal order of 1980-2010 is over and we poised enter a turbulent era with the Gen-Z and millennial generations taking power. He analogizes the coming epoch to that of the 1930’s where communism, fascism and social democracy fought it out for global supremacy which set the world on fire in the 1940’s.

To Shvets the change is being brought about by the merger of financialization with the technological revolution which is creating an unsustainable income distribution that has given rise to populism on both the Right and the Left. He calls this the Fujiwhara effect where two tropical storms merge to create a monster storm. I would note that his view of fairness is horizontal equity as opposed to vertical equity where people are free to enjoy the fruits of their labor and talents.

I am a big fan of Neil Howe and I have written a thus far five part series on “Reliving the 1930’s” (See: https://shulmaven.blogspot.com/2023/11/reliving-1930s-part-5.html ) As result a read Shvets’ book with some sympathy, but in my opinion he gets more than a few things wrong. I lived the 1960’s through the rise of neoliberalism as a hippy protestor to working on Wall Street. I know I am far from being the only one. However, his boomers are the ones who went to college, not the ones who fought in Vietnam, went to work in a factory, and suffered through the divorce epidemic of the 1970’s. 

 

While Shvets is critical of the individualism of the boomers in the economic realm, he fully supports their individualism with respect to sex, drugs, and racial tolerance. Basically, the rebels of the 1960’s won a complete victory in the culture war and lost the economic war. To me it was no accident that economic freedom went hand in hand with personal freedom, although you can certainly argue there are excesses in both areas.

 

Connecting our era to that of the 1930’s, Shvets’ believes that ideally, we would have a rerun of 1930’s America along a path toward Roosevelt-style social democracy that would include a universal basic income. However, that path might not be viable and it is not the only path. The social democratic path faces the fundamental reality that in the “Blue” cities of America that are far down the road toward social democracy we see abject governmental failure in the form of high taxes coupled with poor services, failed public education, fiscal bankruptcy, governmental fraud and the widest gaps between rich and poor. That future is hardly enticing.

 

Instead, the fourth turning could lead to a major cultural revolution towards a new religiosity in society. Where the Gen-Zers and the millennials have substituted environmentalism, socialism, feminism, and new ageism for religion, in place of the market fundamentalism of the Boomers, they may ultimately turn to the real thing. It won’t be the first time America has had a religious awakening, and it won’t be the first time that history surprises.

 

*-With apologies to Bob Dylan

Kevin Warsh and the Fed

President Trump announced this week that he selected, subject to Senate approval, Kevin Warsh to be the next chairman of the Federal Reserve Board thus ending this season's apprentice competition. Warsh seems to be a chameleon because doves see in him his call for a lower federal funds rates and hawks see his past positions that called for higher interest rates and a smaller Fed balance sheet. It seems the immediate market response was a collapse in gold and silver prices that were buoyed by the debasement trade.

In my view both hawks and doves will be disappointed. In the short run I think he will support lowering the Fed Funds rate by another 50 basis points taking it down to a 3%-3.25% range in the belief that rising productivity will lower the inflation rate to the Fed's long missed 2% target. As stated here previously, I think that is a losing bet.  ( See: https://shulmaven.blogspot.com/2025/12/2026-year-of-turbulence.html )  Further, consistent with recent market behavior I do not think that long rates will move lower thereby steepening the yield curve. Rick Rieder, Blackrock's CIO and former apprentice for the job) articulated a case for a 3-4-5 yield curve with funds at 3%, the 10-Year at 4%, and the 30-year at 5.5%. That looks like where we will end up this year, but with the 10-Year closer to 4.5%.

In the short run a Warsh Fed will let the economy run hot. That will bring with it higher profits, higher inflation, higher long term interest rates, and a volatile stock market with a downward bias. But if we step back a bit, it is becoming clearer by the day that we are in an era of fiscal dominance. The Fed would thus accommodate continual deficits of 6% of GDP that will put upward pressure on inflation. When the rubber hits the road the Fed will either be forced to tighten triggering a recession or adopt yield curve control to manage the long end of the curve. It will be only then that we will find out if Warsh is a hawk or a dove. If the Fed moves toward yield curve control the debasement trade will have legs.