Tuesday, July 17, 2018

My Amazon Review of Kori Schake's "Safe Passage: The Transition from British to American Hegemony"

Passing the Baton

Kori Schake, Deputy Director-General for Institute for Strategic Studies, London has written an important book as to how a declining power peacefully passes the baton to a rising power. The operative word here is peacefully, because in most cases the two powers fall into what Graham Allison has called the Thucydides Trap where the ancient historian noted “it was the rise in Athens and the fear this instilled in Sparta that made war inevitable.” The importance of Schake’s book is that today the world is faced not with the rise of the U.S. and the decline of Britain, but rather with the rise of China and the decline of the United States.

Her book begins with the Monroe Doctrine of 1823, where she notes that it was a British idea to begin with, to the end of World War II. In the case of the Monroe Doctrine Britain was seeking to preserve its commercial interests with the newly independent Latin American countries and the U.S was more than happy to have the British navy enforce the doctrine. In fact one of the reasons for the Monroe Doctrine was the Russian presence just north of San Francisco. Both the U.S. and Britain were fortunate to have John Quincy Adams as Secretary of State and the Britain to have George Canning as Foreign Secretary.

Schake then goes on to discuss the Oregon boundary dispute of the late 1840s, the Civil War, the Venezuelan crises of 1895-1905, the Spanish American War, World War I, the Washington Naval Conference of 1922 and World War II. She highlights how Britain feared U.S. interference in British politics during the Civil War that worked to keep Britain out as many Brits sympathized with America’s republican values and the presence of Irish and Scottish immigrants in the U.S. who still had strong ties to the home country. The Brits certainly did not want to encourage secession.

By the time the Venezuelan Crises came around Britain began to fear America’s growing power and instead of fighting the powers worked together. Simply put Britain began to treat the U.S. as an equal and further it had worries much closer to home with the rise of Germany. Indeed the British Navy actually supported Admiral Dewey in the battle of Manila Bay. Again both parties were lucky to have such statesman as Hay and Salisbury. Moreover by 1900 the two countries were becoming more alike. The U.S. was become more imperialist and Britain became more democratic. Simply put The U.S. was first willing to accept Britain’s rules based hegemony and later Britain would accept the rules laid down by America.

That became apparent at the Washington Naval Conference where the once mighty British navy accepted American parity in the Pacific. It was a diplomatic victory for President Warren Harding.

With the coming of World War II Britain was forced to accept American hegemony. They had no choice and under the new rules its empire would have to go. In return for American support again the Brits had no choice.

The question for us today that would the U.S. and China be so lucky. Schake thinks not. There is far less commonality and it isn’t clear that on the U.S. side we will we have statesman on the caliber of John Quincy Adams and John Hay. One can only hope.

Wednesday, July 11, 2018

The Silence of the Lambs: The Democrats on the Trump Tariffs

Free traders Cordell Hull, Franklin Roosevelt’s great secretary of state, and John Kennedy must be turning over in their graves at the silence of leading Democrats on the imposition of the Trump tariffs. Trump has already imposed about $400 billion of goods coming in from China, the E.U., Canada and Mexico. At an average 15% rate the tariffs amount to a $60 billion a year tax on American consumers. We are talking about regular folks here, not Trump’s fat cats.

Meantime as our trading partners retaliate our export oriented farmers (think soybeans) and manufacturers (think auto workers) are suffering. So I say, where are the Democrats? Their silence is deafening.

I guess the Democrats are so enthralled with the protectionist sirens offered up by Bernie Sanders in the last presidential campaign. When Bernie was talking it was only theoretical, but there is no excuse today as the real world effects of the tariffs become obvious. Every Democrat should repeat over and over, “A tariff is a tax on consumers.”

As a result, when the tariff induced recession comes, the Democrats will stand in the docket as indicted co-conspirators. In 1932 the Republicans took the full blame for Smoot-Hawley; this time there will be plenty of blame to go around. It is time for Pelosi, Schumer and the 20 or so presidential candidates to speak up!

Thursday, July 5, 2018

My Amazon Review of Jacob Soll's "The Reckoning: Financial Accountability and the Rise and Fall of Nations"

Accounting for Accountability

I expected more from Jacob Soll’s “The Reckoning.” Soll a history/accounting professor( quite a combination) at USC and a McArthur “Genius” grant winner offers up his history of accounting from the early Renaissance to the present and the role that it played in the development of capitalism and the modern state. As an economics and history nerd the book should have been right up my alley. However the debits and credits didn’t bounce off the page. The writing is dry and text bookie.

Soll tells the story of accounting from the Italian city-states where merchants learned the secrets of double-entry bookkeeping and where Luca Pacioli wrote his foundational text. Accounting knowledge follows commerce where Spain ignored it leading to the bankruptcy of its empire and where Holland embraced it making it the most prosperous place in Europe. He takes us to Walpole’s England and Colbert’s France. It was in France where accounting was used to consolidate Louis XIV’s rule and then ignored as the cost of wars diminished the power of the state.

Soll is most acute in discussing the role Jacques Necker, Louis XVI finance minister.  As the state veered towards bankruptcy Necker published the official accounts which demonstrated the cravenness of the regime helping to ignite the revolution. He also discusses Josiah Wedgwood’s use of cost accounting to justify his use of child labor.   

Soll discusses the accounting failures of the 1920s, the late 1990s, the Great Recession and the rise of the giant accounting firms. He discusses auditing without really defining what auditors do and the clear conflicts between auditing and consulting among the accounting firms.

If there is a theme to his book it is that good accounting leads to both business and governmental accountability and without out it a host of problems arise. I just wish Soll’s writing weren’t so dry.

Monday, July 2, 2018

Sleepwalking into a Trade War

Although stocks have exhibited a degree a nervousness since early March as trade tensions escalated, most investors have been remarkably complacent about the prospect of an all-out trade war. But slowly but surely there have been tit-for-tat retaliations to our impositions of tariffs on Canada, the E.U. and China. Although in the grand scheme of things the tariffs imposed to date represent a small share of global commerce, make no mistake, sand has been thrown into the gears of global commerce. Because commerce has become so globalized the tariffs not only act as a tax on economic activity they also act as a negative productivity shock which will mean higher inflation and lower economic growth. It seems to me in the words of World War I historian Christopher Clark we are “sleepwalking” into something very much bigger than what the market now expects. (See https://shulmaven.blogspot.com/2013/04/my-amazon-book-review-of-christopher.html)

Most market participants believe that a full blown trade war would be so damaging to the global economy that cooler heads will prevail.  Think again, is Donald Trump a cooler head? He loves controversy and if he wants a full blown trade war he will probably get one. Over the weekend Axios reported that the white House has already draft legislation to pull the U.S. out of the World Trade Organization. It won’t pass, but it certainly reflects Trump’s mindset.

Sunday, July 1, 2018

My Amazon Review of Gary Krist's "The Mirage Factory: Illusion, Imagination and the Invention of Los Angeles"

The Birth of La La Land

In 1900 the city of Los Angeles had a population of 102,000; by 1930 the population had soared twelvefold to 1,238,000. Gary Krist tells the story behind this explosive population growth that took Los Angeles from being a sleepy city on the shores of the Pacific to a world famous city through the biographies of water engineer William Mulholland, film director D.W. Griffith and evangelist Aimee Semple McPherson.

He tells a good story about the city that I lived in for over 20 years and still work part-time there. William Mulholland an Irish immigrant and self-taught water engineer was a man of Napoleonic vision. He understood with the city leadership that if this desert city were to thrive it would need water. Mulholland seized the water from unsuspecting farmers in the Owens Valley 200 miles to the north. Aside from the Panama Canal it was the biggest public works project of its day. To be sure the farmers rebelled and dynamited portions of the aqueduct, but ultimately failed in stopping Mulholland.

He later came up with the Colorado River water project as well. While living in Los Angeles we mused that the city’s thirst for water so unquenchable that sometime in the future water from Canada’s Mackenzie River would be piped in to fill the hot tubs of LA. Mulholland star collapsed when he failed to do the appropriate due diligence on the soils where a major dam was constructed that collapsed killing an injuring hundreds of people.

D.W. Griffith was the leading motion picture director of his day. In part Hollywood was his creation. His racist “Birth of a Nation” was the biggest hit of its era with a showing in Woodrow Wilson’s White House. Griffith developed the film techniques that are still used to day and discovered many of the stars of the silent era. Nevertheless by the 1920s his star began to fade, but the Hollywood he was so much a part of creating went on to far bigger and better things. It was Hollywood that puts Los Angeles on the global map.

Aimee Semple McPherson was the first female evangelist with a large scale following. An immigrant from Canada she established her Four Square Church that now has 1600 affiliated churches. She captivated gigantic audiences who far away from home were yearning for some sort of spirituality. She is the precursor of the many spiritual fads that would arise out of Southern California.

My problem with Krist is that he is viewing LA’s history through his 21st century liberal biases. The world of 1900 was far different than today’s. Los Angeles, if were to grow, needed the water and they stole it fair and square. If the city didn’t do that where would it be today? He is critical of the “whiteness” of the city’s establishment and if you weren’t a white Protestant you would not get into the club. However, economically the city was wide open and it offered hope and opportunity to practically all who came. No one forced over a million people to move to Los Angeles from 1900-1930. And for many there wildest dreams were exceeded. Along the way sprawling city of today was created. Krist is critical of the sprawl, but it was the sprawl that made housing affordable.

Although he mentions the important role of oil discoveries in the region in explaining the city’s growth, he understates it. In the 1920s California was the number one oil producing state and such oil giants as Richfield, Union, and Signal Oil was headquartered there. Also the world’s leading drill bit supplier, Hughes Tool (yes that Hughes) was headquartered there. If Krist were to write a history of Los Angeles from 1920-1950, my guess he would choose Howard Hughes as one of his leads.

He also remarks that much Hollywood’s creativity was lost by the late 1920s as Wall Street money began to dominate the studios. Here I differ, in my opinion the golden age of Hollywood creativity was from 1930-1945 aided in no small part by the arrival of emigres from Berlin’s famed studios who were being forced out by Hitler. As in the prior 30 years, Los Angeles was open to newcomers; the secret of its success which comes through in Krist’s book.

Tuesday, June 26, 2018

My Amazon Review of Benjamin Carter Hett's "The Death of Democracy: Hitler's Rise to Power and the Downfall of the Weimar Republic"

The fall of Weimar and the Rise of Hitler

Hunter College history professor Benjamin Carter Hett has given us an insightful history into the collapse of the Weimar Republic and the rise of Hitler. He understands the power of myth wherein a large portion of the German population and most notably President Paul von Hindenburg believed there was unity in August 1914 at the outbreak of World War One and deceit in November 1918 when Germany surrendered. It was the power of this myth that underlay the success of the German Right.

From the outset the social democratic Weimar government was never viewed as legitimate by the German Right. Thus there was a permanent built-in opposition to the government. That was compounded by the communists in the late 1920s, following Stalin’s orders, called the social democrats “social fascists.” As a result by 1931 there was an anti-democratic majority consisting of communists and Nazis working almost in tandem to destroy democracy. Although Hett covers the communist May Day demonstration of 1929 that was put down by the Social Democrats he spends far too little time on the role the communists played in bringing down Weimar.

Although the Nazis were marginalized in the 1920s, the weakness in the farm economy, the continued burden of reparations and the onset of the global depression enabled the Nazis under Hitler’s leadership to unite the right. According to Hett German politics was based upon three “confessionals”: the Protestants, the Catholics and the socialist/communist factions. With the Left divided, Hitler utilizing the myths of August and October dominated the Protestants and picked off enough Catholics to become the leading rightwing party. As a result by 1933 the Nazis, by default, had to be part of any coalition government and with their successful bullying tactics they seized power. Of course they were aided by the deflation policies of Heinrich Bruning’s Center Party coalition government. In part the deflationary policies were designed to make things worse to relieve Germany of its reparations liabilities.

Hett gets many things right especially his view that the untimely death of foreign minister Gustav Stresemann in 1929 eliminated a democratic voice in Germany’s center-right. In my opinion Stresemann was the only politician who could have stopped Hitler. However Hett gets a few things wrong. First he over-emphasizes the opposition to globalization. He neglects to mention that globalization was at its apogee in 1914 and Germany was benefiting from it. He conflates globalization with reparations and the gold standard. Initially the real problem was with reparations which Hett notes were relatively mild relative to history, but that is a low bar, the burden on Germany was severe. He also mysteriously leaves out the 1922 assassination of finance minister Walter Rathenau by rightwing extremists. Rathenau had the confidence of both the British and French finance ministries and had he lived the reparations issue might have been ameliorated. Hett also gets wrong blaming the German farm crisis on the rise of U.S., Canadian and Australian wheat. That is not quite true. The true causes for the fall in farm prices was the return to market of Russian and southeastern European grain along with the mechanization of agriculture that reduced the need for forage crops. The farm issue is important because the core of Nazi supporters were the Protestant farmers.

Hett ends his book with the Night of the Long Knives in 1934. Here Hitler eliminates Ernst Rohm’s S.A. and more importantly much of the remaining conservative opposition. If there is a lesson to be learned from Hett’s book, it is that conservatives are play with fire when they suck up to rightwing demagogues. Hett has written an important book. Read it.

Sunday, June 24, 2018

My Amazon Review of Michael Batnick's "Big Mistakes: The Best Investors and their Worst Investments"

Learning from the Mistakes of Others

Michael Batnick, the research director at Ritholtz Wealth Management, is teaching us that it is important to learn from the mistakes from some of the most successful investors of all-time. This is not an original concept, but nonetheless it as an important one. Nevertheless my problem with his book is not with Batnick, but with his editors or his lack of editors. There are typos, math errors and outright mistakes (e.g. calling “Supermoney” author Jerry Goodman, Jerry Goodwyn.) Further it would have been very helpful to have stock charts where they would have been relevant.

That said he points out the most common of errors all of us have, even the great ones, in that we are victims of hubris/overconfidence, we get sucked in by the allure of leverage and out of frustration we invest outside of our circle of competence. His many examples include, Jack Bogle, Michael Steinhardt,  Stanley Druckenmiller, John Paulson, the Sequoia Fund, Long Term Capital Management, Bill Ackman and yes, Warren Buffett. In Buffett’s case Batnick believes Buffett became overconfident based on his prior experience in investing in the shoe business with his purchase of Dexter Shoe in the early 1990s. He compounded his mistake by paying in stock that would become more valuable over time only to see the business ravaged by foreign competition.

In cases of Paulson, Druckenmiller and Steinhardt we see them investing beyond their core competencies and the case of Bill Ackman we his very big ego get in the way with his giant short position in Herbalife. Of course leverage and hubris brings down Long Term Capital Management. These are all wonderful vignettes and there is much to learn, but I wish Batnick had a sharp penciled editor.