Monday, July 28, 2014

Geopolitics and the Stock Market: A Lesson from the Start of the Great War

World War 1 started 100 years ago today and to the stock market it seemed to come from totally out of the blue. Simply put the stock market failed miserably as a discounting mechanism. Why? The markets were unduly complacent about international affairs where from 1900 – 1914 there were two Moroccan crises and two Balkan Wars that many thought that any one of them would lead to a general war. Those crises were settled diplomatically and thus when the Austrian Archduke Franz Ferdinand was assassinated in Sarajevo by a Bosnian terrorist in the pay of Serbia, the markets thought nothing of it.

Although the U.S. was far away from the enveloping European Crisis as an emerging market, it was unduly dependent upon the inflow of foreign capital. As the crisis came to a boil European investors liquidated their U.S. holdings and the Treasury feared a run on gold. The stock exchange closing along with other measures short circuited the run and enabled the U.S. to remain on the gold standard.

The July 1914 complacency is eerily reminiscent of the world today. We are now in the midst of the second Ukrainian crisis of the year, from Libya to Iraq the Middle East is in flames, and China is making serious naval probes in Southeast Asia. In all likelihood the world will muddle through, but the lesson of 1914 is disquieting.

Here is a thumbnail history of the Dow Jones Industrial Average matched with the events of 1914. A casual reader will note that the stock market did not respond to the events in Europe until war was imminent.

Date           DJIA       Event

January 2 –  57.6       Year Opens

March 20 -   61.1       Year High

June 27    -    58.7       Day before Assassination

June 29   -     58.6       Day After Assassination (Market closed on June 28)

July 22     -    59.2       Day Before Austrian Ultimatum

July 23     -     59.0      Austria Delivers Ultimatum to Serbia

July 28     -     55.9      Austria Declares War on Serbia – WW 1 Begins

July 29    -      56.2       Relief Rally

July 30    -      52.3       Russia Mobilizes

July 31    -                    Stock Exchange Closes

Aug  3     -                   Germany Invades Belgium

Dec 12    -       54.6        Market Reopens

Wednesday, July 23, 2014

My Amazon Review of Frederick Lewis Allen's, "The Lords of Creation"

This is far from Frederick Lewis Allen’s best books. “Only Yesterday,” his social history of the 1920s was his best and “Since Yesterday,” his history of the 1930s and “The Big Change,” his social history of the first half of the 20th Century come pretty close. Nevertheless if readers want to get a real flavor of the big business and high finance milieu in America from 1900-1930, “The Lords of Creation” does a credible, if biased, job. You see the House of Morgan, the other New York bankers, the railroad magnates and the new Wall Street men of the 1920s in full flower. They were “the 1%” of that era. He vividly illustrates the stock manipulation that was almost taken for granted and the way commercial banking was integrated with investment banking though affiliated organizations. Those abuses led to the Securities Acts of 1933 and 1934 and the Glass-Steagall Act of 1933.

Remember Allen wrote his book from the vantage point of 1935. In the popular imagination big business and big finance were the leading players in causing the depression the nation was then experiencing. To him and President Roosevelt the causes of the depression were domestic in origin. We have since learned as President Hoover thought at the time, that the depression had its origins in the dislocations caused by World War I and the transmission of deflation through the workings of the gold standard.

My criticism of the book is that Allen only pays lip service to the very real improvements in the living standard of the average American from 1900-1929. Unlike today real wages were consistently rising and we saw in the 1920s the glimmers of the kind of prosperity that occurred in the 1950s.

One last point, I would avoid the very snarky introduction to this edition written by New York Times columnist Gretchen Morgenson. 

The Amazon URL is:

Saturday, July 12, 2014

My Amazon Review of Amanda Vaill's, "Hotel Florida: Truth, Love and Death in the Spanish Civil War"

Amanda Vaill has written a terrific book about the romantic attachment the western Left during the heyday of the Popular Front period had for the loyalist cause in the Spanish Civil War (1936-39). She tells her story through the eyes of three couples:  the writers Ernest Hemingway and Martha Gellhorn, the war photographers Robert Capa and Gerda Taro, and the chief censor of the foreign press Arturo Barea and his Austrian companion Ilsa Kulcsar. They are all people of the Left who utilized their exceptional skills to promote the loyalist cause. In their zeal, with the notable exception of Barea, the truth was sometimes shaded, bent or completely distorted to present the Republic in the most favorable light.

Little do they realize that despite all of their zeal they are pawns in a titanic struggle between Hitler and Stalin. Spain is a proxy war designed to further their respective foreign policy interests and when Stalin had a need to cozy up to Hitler he cut his Spanish pawns loose and kept Spain’s gold reserves. Along the way the purge trials then underway in Moscow found their way to Spain where all too many loyalist supporters were summarily executed or simply disappeared. Vaill, to her credit, is very clear about all of this.

Although “Hotel Florida” is not a history of the Spanish Civil War, there is much history to be learned. Its locus of attention is on the Hotel Florida where many of the journalists along with NKVD operatives hung out and it was there where the “war” tourists of the Left would pass through. Think Lillian Hellman, for example. In a way the book is analogous to Orwell’s classic “Homage to Catalonia” where the locus of action was Barcelona; here most of the action takes place in and around Madrid with side-trips to Paris, New York and Key West.

The most interesting character, all of 26, is the blond crop-haired Gerda Taro. She was always where the action was trying to get the best photograph and showed little concern for her own personal safety. She had both grit and verve to overcome the very real hardships faced by a war photographer. Unfortunately she dies in what can be characterized as a battlefield accident and is given a martyr’s funeral in Paris.

For all of this and much more, including appearances by the Soviet Spy Kim Philby and the future German Prime Minister Willy Brandt, I highly recommend “Hotel Florida” to readers interested in Spain and the prelude to World War II.

The Amazon URL is: