Tuesday, June 20, 2017

In the Sacramento Bee, "Think rent is really high in California? Here's why it probably will get higher," June 19

“President Trump wants to keep people out by building a wall. California is more sophisticated – it uses zoning and development laws to keep people out, but they have the same effect,” Shulman said.

For the full article see, http://www.sacbee.com/news/politics-government/capitol-alert/article156864219.html

Read more here: http://www.sacbee.com/news/politics-government/capitol-alert/article156864219.html#storylink=cpy

Sunday, June 18, 2017

Amazon, Whole Foods and Shopping Center REITs

Amazon’s proposed takeover of Whole Foods sent shock waves through the grocery, packaged food and shopping center REIT industries. The instant judgement of the market was that the deal is very good for Amazon and bad for the three industries named. Seemingly oblivious to the true import of the deal were stock analysts who cover the REIT industry. To them the deal ratifies the value of what they characterize as high quality real estate. To be sure the 460 or so Whole Foods’ locations mostly sit on some of best shopping center real estate in the country, but that is a tiny segment of the industry.

Nevertheless that really misses the larger point. Amazon’s roll in life is to destroy the gross margins of its competitors. Thus if Amazon succeeds, and it doesn’t always, the 21% gross margin of supermarket operator Kroger will be a relic of the past. My guess is that under Amazon, Whole Foods’ industry high 35% gross margin will give way to something much lower. Although most analysts use sales/square foot as metric for rent paying ability, the true metric is gross margin/square foot and that is about to collapse for most food retailers. As a result rents will fall. Just think of all the grocery stores that will face pricing and market share pressures from the combined behemoth. Trust me, it is not going to be pretty and investors will soon find the safety they sought in grocery anchored centers to be illusory.

What Amazon appears to be doing is to link up the high income consumers who are Amazon Prime customers with the equivalent Whole Foods customer. In fact of all of the supermarket chains in America there is probably the greatest overlap between Whole Foods shoppers and Prime. Simply put Amazon wants to own the high income consumer which will make it easier for the Whole Foods customer to buy goods on Amazon Prime while shopping with the physical store becoming either a delivery point (where the customer takes physical delivery) or a distribution point (where the goods are shipped out to the customer). In essence Amazon will be placing its digitally sophisticated integrated global logistics capabilities at the service of the high income-time constrained consumer.

One last point, to the extent that Amazon will “own” the high income consumer it will be bad news for the operators of A+ regional malls.

Friday, June 16, 2017

My Amazon Review of Martha Gellhorn's "A Stricken Field: A Novel"

Obituary of a Democracy

Martha Gellhorn’s 1940 novel is not a great book, but an important one. Her book can be viewed as a novelized version of her December 10, 1938 Collier’s Weekly article entitled “Obituary of a Democracy” which described life in post-Munich Prague. Gellhorn arrived in Prague just after covering the Spanish Civil War where she established her reputation as a war reporter and was Ernest Hemingway’s lover. She would become his third wife in 1940 and go on to become one of the great war reporters of the 20th Century.

The novel’s protagonist is reporter Mary Douglas, Gellhorn’s alter ego if you will. She is there to cover the demoralization of Czechoslovakia after being sold out by England and France at Munich. As a result the Czechs surrendered the Sudetenland to Hitler. With that the Czech’s lost their defensible border with Germany and it became inevitable that the Germany would ultimately swallow up the heart of the country.

Mary Douglas notes the demoralization of the Czech Army which was not defeated in battle as the soldiers return home. It is one thing to lose a war; it is another to surrender without a fight. With the German occupation of the Sudetenland, Prague is flooded with refugees who join other fleeing Hitler from Germany and Austria. Among the Germans are two communists, Peter and Rita who Douglas befriends. Little did they know that their resistance to Hitler would soon be sold out by Stalin. Those two organize safe houses for the refugees but with European borders closed they are trapped when the Czech government orders them all home. Rita and Peter then go on the run and Peter would soon face a horrific torture by Gestapo agents operating with seeming impunity in Prague. Democracy is dying.

Gellhorn’s prose puts you in the place of the demoralized soldier, the struggling resistance and the hopeless refugee. In a way it is a lesson for our time.

For the Amazon URL see:

Thursday, June 8, 2017

An Open Letter to President Donald Trump: It’s Time to Go

I hate to break it to you, as one kid from Queens to another, it aint working. The trouble is that you are still acting like a 14 year old kid, not an adult much less a president. The American people know it, Congress knows it, your cabinet knows it, the White House staff knows it, Melania knows it and yes, Ivanka knows it.

Let’s face it you don’t understand our constitution and how our government functions under it. Your decision to fire F.B.I. Director Comey violated Lyndon Johnson’s rule with respect to J. Edgar Hoover. President Johnson understood that it was far better to have Hoover inside the tent pissin out rather than outside the tent pissin in. Put bluntly you are not up to the job and it is time for you to go before making an even bigger mess.

Your foreign policy is a wreck and is putting our country in grave danger. You have managed to give the middle finger to our European allies, Mexico, Canada and most of Asia. The only country in the world that seems to be happy with you is Russia, who under Putin is our enemy. Meantime with three carrier groups approaching Korea a real war looms. Do you really think you are up to this? Remember we are not talking about a real estate deal here. At home hardly anyone wants to work in your administrations as key positions remain unfilled. Further nothing is happening in Congress with no real progress being made on healthcare, tax reform and infrastructure legislation.

You can claim credit for appointing Neil Gorsuch to the Supreme, Court, the rollback of Obama-era regulations, bringing a much needed increase to defense spending and in rethinking our trade deals to better understand their impact on the American worker. So why don’t you claim victory, call it a day and leave. The country will be in good hands with Mike Pence.

Yours in making America great again,

David Shulman

Monday, June 5, 2017

My Amazon Review of Henry Hemming's "Agent M: The Lives and Spies of MI5's Maxwell Knight"

Inside MI5

Henry Hemming introduces us to Maxwell Knight a jazz playing naturalist with his own private menagerie who turns out to be a great talent spotter and spy runner for MI5. He is the model for Ian Fleming’s “M.” He marries three times, but none of them were consummated. In other words he was quite the quirky guy.

Hemming’s biography largely focuses on the 1920’s and 1930’s where Knight is recruited into a private spying operation that infiltrates the British fascisti. Knight is well suited for this because he largely sympathetic to their goals and was a firm anti-communist. There he meets William Joyce who would go on to become the pro-Nazi broadcaster Lord Haw-Haw in the 1940's.

When Knight formally joins MI5 his main focus is on Soviet espionage and its handmaiden the British Communist Party. There he pioneers the use of female agents and with the great work of Olga Gray he breaks a major Soviet spy ring that infiltrated the naval armaments industry. He stays focused on the Soviets until Italy invaded Ethiopia and then, and only then, does he wake up to the threat of fascism.

Hemming focuses on Knight’s successes, but Knight, despite suspecting Anthony Blunt, he completely misses the notorious Cambridge Five spy ring. He comes close to detecting the Soviet infiltration of the British nuclear program, but objectively he fails.

Hemming offers us great insight into the operations of MI5 and the life of one of its best agents. For those interested in this topic, though a bit long, his book is well worth the read. 

Monday, May 29, 2017

A New Look at Mall REIT Valuations: Part 2

Earlier this month I posted my view on how to approach mall REIT valuations given the stresses engendered by online competition. (See https://shulmaven.blogspot.com/2017/05/a-new-look-at-mall-reit-valuations.html) Since then the mall REITs drifted lower rallied and then fell back a bit. Nevertheless I believe that the burden of proof is on the bulls with the mall REITs continuing to trade at substantial discounts to Street net asset values. (See below) If the Street is right then back up the truck, but my question with the world still awash in a sea of liquidity, where are the sovereign wealth funds and private equity? This is especially true for GGP whose CEO all but announced the company is for sale and where Brookfield already owns 29% of the company. The silence, up to now, is deafening. Thus if private equity or sovereign wealth funds don't come in soon to scoop up the apparent bargain, the Street, as I argued, is way off.

REIT   Street   Market Price   Discount   Mkt. Cap.
             NAV                                              (in $bil)

SPG       214                 157             27%        50
GGP         32                  23              28           20
MAC        79                  59              25              8.5
TCO         95                  62              35              4

In my view sophisticated buyers understand two things. One, there is a structural revolution going on in retail as result of online commerce and two, the retail bankruptcies that we have seen this year will look like child's play during the next recession. Remember we are witnessing an onslaught of retail bankruptcies when income, consumption and employment data are relatively benign, what will happen when the economy turns more hostile.

As a result the clock is ticking. In the absence of a major deal or a portfolio sale/jv (a one-off transaction won't really count) over the next few months, Street estimates of net asset value will have to come down. As they say, time will tell.

Thursday, May 25, 2017

My Amazon Review of Richard Bookstaber's "The End of Theory: Financial Crises, the Failure of Economics and the Sweep of Human Interaction"

Stuff Happens

Richard Bookstaber a long time finance practitioner/risk manager who has worked for Morgan Stanley, Salomon Brothers, Moore Capital and Bridgewater as well as the Financial Stability Oversight Council and the Office of Financial Research has written a broad-based attack on financial economics and the DSGE models now used by most central banks. Trust me he knows what he is writing about and in the interests of full disclosure I interacted with him when I worked at Salomon Brothers.

Although not cited he is writing in the tradition of Nicholas Nassim Taleb (“The Black Swan”) with his fundamental disagreement with the theoretical underpinnings of financial economics. Simply put in a world of radical uncertainty we don’t know the underlying probability distributions of future financial returns and we don’t even know the potential states of the world needed to calculate a probability distribution. He argues that modern finance theory is built around top down axioms based on deductive reasoning where an all knowing representative individual calculates the future probabilities for all of the known states of the world. And importantly the future probability distribution is based on historical evidence. Under radical uncertainty that simply does not work.

Instead he argues for agent based models built upon inductive reasoning where the actors are “reflexive” in the word used by George Soros, in that they respond to the actions of others. As much as economists envy physics, Bookstaber turns the Heisenberg uncertainty principle on them. Thus while financial theory works in normal times, in a crisis all bets are off as “stuff happens.”

What Bookstaber would like is to use agent based models that are used to model automobile traffic and schools of fish, for example, through the use of complexity theory. All this is fine and good, but aside from a narrative Bookstaber does not offer up a formal model for the financial markets. Perhaps he has one, but it is not here. Nevertheless he offers a road map for future research.

At times Bookstaber’s writing style is clear and lucid with analogies from literature motion pictures and military combat. He is a student of “OODA”, observe, orient, decide and act. He is particularly acute in his discussion of the origins of the financial crisis and is highly critical of the role played by Goldman Sachs in their failure to honor a small “novation” request from Bear Stearns, which brought that firm down. However, at other times his writing is dull and staid

Bookstaber has written an important book and it should be read by risk managers and policy officials. The old models failed in 2008, now almost ten years later it is time for new ones.

Sunday, May 21, 2017

My Amazon Review of Henry Kaufman's "Tectonic Shifts in Financial Markets: People, Policies and Institutions"

Too Big to Fail is Still with Us

Henry Kaufman, my former boss at Salomon Brothers, has written an easy to read and an important book about our nation’s financial structure. Simply put, Dodd-Frank did not solve the “too big to fail problem” and in fact made it worse by ratifying the undo concentration of the giant “financial conglomerates” that rule finance today. He further argues that this financial concentration impedes Federal Reserve policy. In a crisis that might be true, but it is not clear whether that is true in more normal times. After all Canada has run monetary policy for decades with a highly concentrated financial system with few issues than what occurred in the United States.

His book is part autobiographical as well in that he discusses his years at Salomon Brothers where in the late 1970s and early 1980s the financial world waited with baited breath for his comments. He notes his great friendship with Paul Volcker where he is very kind; he is not so kind to Alan Greenspan where the he believes the Fed became more political. This is not to say it wasn’t political in earlier times.
He makes an acute observation about Margaret Thatcher who impressed him with her sophisticated knowledge of macroeconomics.

What troubled me about his book is his discussion of Lehman Brothers where he was a board member before and at the time of its high profile bankruptcy. He argues that the Fed had more options than letting the firm go bankrupt and suggested that Treasury Secretary Henry Paulson was driving the bus, not the Fed. That could very well be true, but I wish he discussed what happened in the Lehman boardroom when the firm ran up its debt/equity ratio to 33-1 and loaded up their books with highly illiquid real estate, including the giant Archstone transaction. Further in late 2007 Lehman had a chance to walk from that transaction, but didn’t. Were it not for their real estate heavy transactions in both physical real estate and what was to become highly illiquid positions in commercial mortgage backed securities, the firm could very well have survived. In the interests of full disclosure I left Lehman in 2005.

Thus having opened the discussion about Lehman, I wish he would have given us more details. Otherwise this is a fine book for those interested in how our financial system evolved over the past 60 years.

The full Amazon URL is:

Tuesday, May 16, 2017

My Amazon Review of Duff McDonald's "The Golden Passport: Harvard Business School, The Limits of Capitalism, and the Moral Failure of the MBA Elite"

Put the Blame on HBS

Duff McDonald has written a very long (672 pages in the print edition) minutia filled anti-American business and anti-Harvard Business School screed. For the most part he believes that American business can’t do almost anything right and he places the blame on the “West Point of Capitalism,” the Harvard Business School for practically everything that is wrong with America.

He doesn’t like the managerial capitalism of the 1950s that ran aground in the 1970s and the shareholder capitalism that began to evolve in the 1980s. What he would prefer is some broad version of “stakeholder” capitalism that protects the environment and combats income inequality, but my question is whether business is the vehicle to do that. My guess is that if business tried as it did minimally in the late 1960s he would use the leftist pejorative term “corporate liberalism.”

The villain of his piece is finance professor Michael Jensen who laid the intellectual foundations for shareholder capitalism in the late 1970s. Out of this flows leveraged buyouts, mass layoffs and the philosophy of short-termism with respect to the undo focus of corporate management on meeting quarterly earnings expectations. He however conveniently ignores such successful corporations as Amazon, Google and Berkshire-Hathaway who invested for the long run and mightily succeeded.

McDonald is highly critical of HBS’ case method of instruction which by its very nature lacks real theoretical underpinnings. That is true, but the case method is useful in organizing how to think about very real business problems. It also leads to superb teaching. He admits that pretty much every professor at HBS is a great teacher, a skill that is lacking at other business schools.

He does favorably mention Harvard professor General Georges Doroit who was an expert on logistics and went on to found the venture capital industry in the early 1950s with his American Research and Development. He also singles out for praise Arthur Rock who was one of the earliest venture capitalists in Silicon Valley.

In the interests of full disclosure I have an MBA, not from Harvard, and taught MBAs. As a professor I used discussion of formal finance theory with an occasional case study in corporate finance. Indeed in the most case intensive course I taught, I so inspired one student that many years later he endowed a teaching award in my name. As a result it is hard for me to get too worked up about McDonald’s criticism of the case method.

With McDonald continually in the attack mode his book makes for a very difficult read so I would recommend readers to find better things to do with their time.  

The full Amazon URL is:

Thursday, May 4, 2017

A New Look at Mall REIT Valuations

As most REIT practitioners know all too well, the mall sector has been hammered of late by fears of obsolescence engendered by the explosive growth of e-commerce causing the group as a whole to trade at a 30% or so discount to Street net asset value estimates. My explanation is that the estimates of value are way too high. How so?

At the present time the Street seems to be assuming that high quality malls are valued at a 4.5% cap rate, but in my opinion that doesn't take into account the increased capital spending required by mall owners to compete with the likes of Amazon. So instead of using a 4.5% cap rate lets use 5%. There is more though. Simply put some of the high quality malls are going to be degraded over time. My very rough estimate is that about 15% of the high quality malls will be re-rated over the next five years causing a cap rate increase to say 6% for those malls. Thus the weighted average cap rate should be 5.15%.

Now lets add another 50 basis points to allow for higher long term interest rates over the next few years yielding an adjusted cap rate of 5.65%. When you do this exercise you end up with a net asset value approximating current market prices. The arithmetic is below.

Net Operating Income   $45
Cap Rate Today                 4.5%
Firm Value                    $1,000
Debt @30%                       300
Equity Value                      700
Market Value                      490  (30% discount)

New Cap Rate                     5.65%
Firm Value                         $796
Debt                                     300
Pro forma Equity                  496
Market Value                        490

Thus the market might just have it right. You can play with my assumptions to your heart's content, but I think this is a reasonable analytical framework.

Monday, May 1, 2017

My Amazon Review of Charles R. Morris' "A Rabble of Dead Money: The Great Crash and the Global Depression: 1929-1939

The Great Depression: Who done it?

Charles R. Morris has presented us with a very thoughtful popular history on the origins of the Great Depression. He pulls together the thoughts of four really good books on the subject without getting too bogged down in technical jargon. They are Barry Eichengreen’s “Golden Fetters,”  Liquat Ahamed’s “The Lords of Finance,” Robert Gordon’s “The Rise and Fall of American Growth,” and Frederick Lewis Allen’s popular history of the 1920’s “Only Yesterday.”

To Morris and most of the economics profession the cause of the Great Depression was the imbalances that arose out of World War I with its interaction with the gold standard. This is more a Hooveresque version of the cause compared to Roosevelt’s view that causes were domestic; namely rampant speculation, the unequal distribution of income and the 1920’s depression in agriculture. Morris debunks all of the Rooseveltian causes and notes that agriculture wasn’t that bad off in the late 1920s. He does not however note the revolution in agricultural technology caused by the introduction of tractors eliminated the need for forage crops that accounted for 40% of the U.S.’s agricultural output. That alone would have triggered a fundamental restructuring of the industry.

Morris is very good at discussing the impact of electricity, automobiles and radio on production and the lifestyles of average Americans. The 1920’s truly brought with it a revolution in production and consumption. He also has vignettes about the rise and fall of the Samuel Insull, the utility mogul and Ivar Kreuger, the global match king as there empires collapsed under a mountain of debt.

If he holds out one party for special opprobrium it is Germany in its failure to step up to its reparations obligations after the 1924 Dawes Plan knocked them down enough to satisfy Keynes. Simply put they never were going to pay and it was the entire reparation process that put an inordinate amount of stress on the global financial system. However it is unrealistic to assume that any 1920’s social democratic government would have put on such a squeeze on their domestic economy as the French did following their defeat in the Franco-Prussian War of 1870.

As a result if a lay reader doesn’t want to slog through the four books I mentioned above, Morris’ alternative is well worth the read.

For the complete Amazon URL see:

Sunday, April 23, 2017

My Amazon Review of Michael Sims' "Arthur and Sherlock: Conan Doyle and the Creation of Sherlock Holmes"

When Dr. Doyle Became Sherlock Holmes

Michael Sims has written a very long biography of Sir Arthur Conan Doyle centered around his most famous character, Sherlock Holmes. It is a book that I wanted to like. The beginning of the book is terrific discussing Doyle’s as an avid reader with an alcoholic father and his medical school training at the University of Edinburgh medical school. There he comes under the sway of Professor Joseph Bell, a very shrewd diagnostician with dominant personality.  It is Bell along with Edgar Allan Poe’s detective Auguste Dupin that the Sherlock Holmes character is molded.

Also of interest are the original illustrations for the Sherlock Holmes series. It is those illustrations from the 1890s that for our image of Holmes and Watson today. Moreover Holmes’ dear stalker hat is a creature of the illustrator, not Doyle himself.

This is all to the good, but the book goes on and on dealing with Doyle’s medical practice, his life in Portsmouth and the problems of getting published. For me the book is way too long. Thus I can only recommend Sims’ book to a real Sherlock Holmes geek.

For the complete Amazon URL see:

Monday, April 17, 2017

My Amazon Review of Richard Haass' "A World in Disarray: American Foreign Policy and the Crisis of the Old Order"

A Foreign Policy for Clinton, not Necessarily for Trump

Richard Haass, a person I like (From TV) and respect has written a very long Foreign Affairs article on a foreign policy for the United States. It would be very appropriate for Hillary Clinton, not so much for Donald Trump. After all Haass is a pillar of the establishment, being president of the Council on Foreign Relations for the past fourteen years.

He is a student of Henry Kissinger and, as such, he goes back to the 1648 Peace of Westphalia which represents the beginnings of the nation state system as we know it. He believes that system which is based on the non-interference of the internal affairs of a state is inadequate for the 21st Century. He believes that states have the “sovereign obligation”, to reign in terrorism, fight drug trafficking, prevent nuclear proliferation, and deal with climate change. This is a far cry from the Westphalian System and it necessarily breeds suspicion of the established powers trying to enforce their codes on smaller states.

He is rightly critical of the Obama policies in Syria, Libya and Iraq. And in the 1990s he was prescient in proposing a preventive strike against North Korea’s then nascent nuclear program. The Clinton Administration failed to hear is warning and we are now suffering its consequences.

Haass opens his book with the Brexit vote. However, there is no real follow through. This is a real failure of his book because in my opinion the foreign policy challenges are not external, but rather internal. There is a revolt going on against the global elite of which Haass is an exemplar and I am a mere plebian. It is that revolt that is reordering foreign policy: witness France, Turkey, Hungary and above all the election of Donald Trump. Thus as Dr. Kissinger has taught us, in order to be successful a foreign policy has to have domestic support. I fear Haass’ ideas have yet to convince the general public. It is here where work has to be done.

For the Amazon URL see:

Monday, April 10, 2017

My Amazon Review of Catherine Merridale's "Lenin on the Train"

Riding the Locomotive of History

One hundred years ago this month V.I. Lenin boarded a train in Zurich that would take him through Germany, Sweden and Finland to ultimately arrive at Finland Station, Saint Petersburg, Russia. As history professor Catherine Merridale describes, Lenin arrives in a city racked by three years of war and rapt in the chaos of a new revolutionary government struggling to govern and a Bolshevik Party torn between participating in governing and advocating another revolution.

Merridale vividly describes the collapse of the Czarist regime at home and on the war front and Lenin’s life in exile in Switzerland. It is the German government who seizes upon the idea of transporting Lenin into Russia with the goal of fomenting a revolution that would take that country out of the war. The plot succeeds brilliantly. The go between was a Bolshevik/ speculator Alexander Helphand also known as Parvus, who is quite a character. With the deal orchestrated Lenin and his entourage occupy three rail cars as they travel through Germany and beyond. Although it was known as a “sealed train” it was far from sealed and passengers actually disembarked on occasion. It was quite a menagerie and the passengers included such luminaries as Karl Radek, Grigory Sokolnikov and Grigory Zinoviev. All three would later die in the Stalin purges of the 1930s.

The interesting thing is that it was no secret. The Russian government knew, the British knew and the Bolsheviks knew that Lenin was coming. With his boisterous arrival he grabs the Bolshevik Party by the throat and with the force of his will he sets them on a revolutionary course. Lenin truly was the “plague bacillus” that Churchill described him as, because in his wake you can count the deaths in the tens of millions.

Although the book is slow going at times, Merridale tells the story with great verve and you get a sense of the drama building as the locomotive of history goes on its journey through northern Europe.

Thursday, April 6, 2017

Reliving the 1930s - Part 4

Yet again it looks like we are reliving the 1930s as we watch the U.N. sit idly by as the Assad government in Syria continues to make war on its own people with poison gas. The Obama red line of 2013 has come and gone and now President Trump stated yesterday that Assad went well beyond it. We'll see what Trump's apparent reversal of U.S. policy actually means. Hopefully the leadership of U.N. ambassador Niki Haley will prod him in the right direction.

But what is happening is Syria has an eerie parallel from the 1930s. In 1935 Italy invaded Abyssinia (now Ethiopia) and the League of Nations instituted sanctions. However in 1936 the British and French in the Hoare-Laval Pact chose to appease Italy and lifted sanctions. Meantime with the war on the ground not going well for the Italians, Italy resorted to the use of banned poison gas on the hapless Ethiopians. The war soon ended, but not before Ethiopian Emperor Haile Selassie made a dramatic plea before the League of Nations in Geneva. The delegates sat in silence because they knew that collective security and the League were dead. 

It looks like the U.N. is going down the same path unless America acts alone as we did with respect to the slaughter in Kosovo twenty years ago.

Tuesday, April 4, 2017

Bezos vs. Trump

Today's front page story in the Washington Post (https://www.washingtonpost.com/world/national-security/blackwater-founder-held-secret-seychelles-meeting-to-establish-trump-putin-back-channel/2017/04/03/95908a08-1648-11e7-ada0-1489b735b3a3_story.html?hpid=hp_hp-top-table-main_seychelles-0438pm-1%3Ahomepage%2Fstory&utm_term=.101c69598045) highlighting a meeting with Blackwater founder Erik Prince (brother of Education Secretary Betsy DeVos) and an emissary from Putin in the Seychelles Islands deep in the Indian Ocean signifies the lengths to which the Washington Post is going to investigate the Trump Administration. With sources in the Seychelles and the UAE, which brokered the meeting, a four reporter team pulled together a story that began in December with Trump triumvirate of Flynn, Bannon and Kushner meeting with a UAE representative in New York. The result was a January 11 meeting in the Seychelles.

To do a story like this requires substantial resources and it demonstrates the commitment Post-owner and Amazon founder Jeff Bezos has made to investigative journalism. Put bluntly Trump is in the cross-hairs of a multi-billionaire willing to go after him. However as the rivalry escalates do not be surprised to see Amazon in Trump's cross-hairs.     

Sunday, April 2, 2017

My Amazon Review of William Walker's "Danzig:A Novel of Political Intrigue"

To Die for Danzig

Cameron Watt in his “How War Came” devotes an entire chapter to Danzig: “Hitler Steps up the Pressure: “Die for Danzig.”” The events in William Walker’s book occur prior to 1939; more specifically the period between 1934 -1936 when Sean Lester was the League of Nations High Commissioner for the “free city” of Danzig. Walker places Danzig at the fulcrum of the growing struggle between Hitler and the rest of Europe.

The mostly German city of Danzig (pop. 400,000) was established by the Treaty of Versailles as a “free city” that would give Poland an outlet to the Baltic Sea. Today it is the Polish city of Gdansk. The League of Nations was responsible for maintaining its constitutional safeguards which would have worked well in more harmonious times, but with the rise of Hitler the German majority of the city moved sharply in the direction of the NDSAP (Nazi Party) thereby creating a crisis for the League.

Although this is far from the best written historical novel Walker integrates the actions of some very real people with his protagonist, Paul Muller an upper-class League diplomat of Swiss-English parents.  In the novel he is Lester’s chief aide and we find him fighting battles in Geneva, the League’s headquarters and on the streets of Danzig. He sees up close the role of Nazi thugs intimidating their opposition and the appeasement policy of Anthony Eden in Geneva as he continually sells out Lester. Eden would later break with that policy, but early on he was an appeaser.

Through Muller we become a fly on the wall in meetings at the League and in Danzig where Lester tries to negotiate with NDSAP leaders Arthur Greisser and Albert Forster who are following direct orders from Berlin and we also get a sense of the opposition Social Democrats who are fighting a losing battle. We also see which is timely for today, the very real risks diplomats and their families take in difficult environments.

I recommend William Walker’s book to those readers who want to get a sense of what dealing with the growing Nazi threat diplomats faced on a day-to-day basis as they struggled to maintain a semblance of collective security.

For the complete Amazon URL see:

Tuesday, March 21, 2017

My Amazon Review of Noah Isenberg's " We'll Always Have Casablanca: The Life Legend and Afterlife of Hollywood's Most Beloved Movie"

The Best Book about the Best Movie Ever

I have to admit at the outset that I am a sucker for Casablanca. It has always been my favorite movie and one of the defining moments when I was dating my wife was the time we watched it on a small black and white TV while she was suffering from a very bad cold. Reading Isenberg’s book brought back memories of that moment and all of the quotes from the movie that I still know by heart.

Isenberg begins at the beginning with the never produced Broadway play, “Everybody Comes to Rick’s” which is picked up by Warner Brothers for the then astounding sum of $20,000. In the Warner factory the Epstein twins, Howard Koch and others turn it into the movie we now know. Director Richard Curtiz as is most of the cast are emigres from Nazi-occupied Europe.  The movie stars Humphrey Bogart as Rick, Ingrid Bergman as Ilsa Lund, who never looked more beautiful, and Paul Henreid as Victor Laszlo.

Casablanca opened to rave notices in late 1942 and Warner Brothers was helped by General Eisenhower landing troops in North Africa a few weeks later and then with Roosevelt holding a summit meeting with Churchill in early 1943 in Casablanca. Jack Warner never had better advance men. It would go on to win the academy award for best picture of that year.

But this book is more than about the history of making Casablanca, it is about what made so popular to this day. For example, why did a movie about World War II become so popular with the anti-Vietnam War college generation of the late 1960s. As Isenberg tells us, it is about the universal themes of love, glory and making the right moral choices in a very difficult environment. Further Rick Blaine is the typical American hero, a loner who rises to the challenge with just the right amount of comic relief.

Isenberg also tells us that Casablanca had to end with Ilsa ending up with Victor. Simply put the Production Code at the time would not have allowed a married woman to run off with another man and the Code forgives Ilsa’s adultery in Paris because she thought Victor was dead and allows it in Casablanca in the service of the war effort. Also of note is Casablanca’s treatment of the African American piano player Sam (“As Time Goes Bye”), played by Dooley Wilson. The black-owned Amsterdam News wrote, “…no picture has given as much sympathetic treatment and prominence to a Negro character…”

To sum up to any lover of Casablanca, Isenberg’s book is a must read!  

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Thursday, March 16, 2017

My Amazon Review of David Downing's "Lenin's Roller Coaster"

Romance and Revolution in Lenin’s Russia

In his third novel about the improbable romance of socialist-feminist journalist Caitlin Henry and MI-6 agent Jack McColl set during World War I, author David Downing finally finds his voice reminiscent of his Station series about prewar and World War II Berlin. Here the setting is primarily in the Russia of 1917-19.  Aside from Moscow and Saint Petersburg we see our protagonists in Siberia, southern Russia and Ukraine where we witness the impact of the revolution in vast distances of the Russian Empire.  And in one chapter when Caitlin is back in the U.S. we get a real sense of the persecution of America’s anti-war left as war fever envelops the country.

Several real historical figures make their appearance, most notably Alexandra Kollontai the leading feminist of the Russian Revolution who would found the Women’s Department in 1919. She and Caitlin are soulmates. In Moscow McColl runs into Sidney Riley, the Ace of Spies while plotting to overthrow Lenin’s regime.  How McColl ends up in Moscow is an adventure in of itself. Through the eyes of both Henry and McColl we see the growing role of the Cheka (secret police) in the day-to-day lives of urban Russia; a portent of things to come.

Given their ideological differences and their long periods of geographical separation caused by the war, it remains to be seen whether or not their romance will survive. We await Downing’s next book, if there is one, to see if they make a go of it. 

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Monday, March 13, 2017

My Amazon Review of Dennis Ross' "Doomed to Succeed: The U.S. Israeli Relationship from Truman to Obama"

Myth Buster

Diplomat and former national Security Council member Dennis Ross has busted three important myths that have been guiding U.S. –Israeli policy since 1948. They are:
1   1)  Distance from Israel engenders Arab cooperation towards the U.S.  Ross convincingly notes that Arab states follow their own national interest irrespective of U.S. relations with Israel.

2   2)    U.S. cooperation with Israel will lose Arab support.  Fails for the same reason as above. And it doesn’t explain the growing Israeli-Saudi rapprochement.

3   3)    Solving the Israeli-Palestinian issue will lead to a transformation of the Middle East.  This myth obviously fails because settling that issue has nothing to do with the ongoing Sunni-Shia split.

Ross presents us with a clear-eyed view of U.S. –Israeli relations since 1948 as he thoughtfully reviews the policies of all of the presidents from Truman to Obama. Ross had a ringside seat in the formation of policy from Carter to Obama and he worked for all of the presidents since Carter with the exception of George W. Bush in various Pentagon, State and National Security Council capacities where he was for the most part up to his eyeballs in U.S. – Israeli relations. Of special note for me was that he worked for the legendary Andrew Marshall in the Pentagon’s Office of Net Assessment and he was Director of Policy Planning in the State Department. He is especially good when he was “inside the room” where the decisions were actually made.

He characterizes the various administrations as having policies of either cooperation or competition with Israel and those policies typically alternated. For example Truman was cooperative while Eisenhower was competitive; both Kennedy and Johnson were cooperative while Nixon initially was competitive. However when Nixon saw the potential of Soviet arms winning the 1973 war, he tilted dramatically in favor of Israel. Thus objectively he was cooperative. On the other hand, in Ross’ view, Carter was outright hostile to Israel. Ross theorizes that Carter felt so guilty about not fully supporting the civil rights revolution in his home state of Georgia; he tilted U.S. policy towards the Palestinians.  In contrast Reagan had a deep affinity towards Israel establishing a strategic cooperation arrangement. However that did not stop him in pushing through the AWACS deal over Israeli opposition and in censuring Israel for its invasion of Lebanon.

Although President George H.W. Bush moved the relationship back towards a more competitive one and was extremely unpopular with American Jewry, he continued the strategic cooperation agreement and worked a diplomatic miracle in keeping Israel out of the Iraq War all the while Israel was under rocket attack. Ross has extraordinarily kind words for the first President Bush.

President Clinton also had a deep affinity for Israel and thought of Israeli President Rabin as the father he didn’t have. He was crushed when Rabin was assassinated. He also learned not to trust the Palestinians after a series of Camp David meetings.

President George W. Bush continued the cooperative relationship with Israel while President Obama continued the high degree of cooperation on the military side; he was far from cooperative on the diplomatic side. On his first trip to the Middle East for his Cairo speech, he intentionally avoided going to Israel. Ross’ book ends before the U.S. abstention on the Security Council resolution condemning Israel for its settlement policy.

Two thoughts come through loud and clear from Ross’ important book. First the Israeli’s live up to their biblical forebears by being a “stiff-necked people.” It is hard to make a deal giving up tangible land for an intangible peace. In contrast the Palestinians come across a duplicitous. They say the right words, but when it comes down to it, they won’t make a deal. For them it remains “from the river to the sea.” They just can’t accept Israel as a Jewish State.

Ross has written an important book that should be read by all serious students of the Middle East. I highly recommend it.

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Friday, March 10, 2017

"Extreme Makeover: Second Pass at Trumponomics," UCLA Anderson Forecast, March 2017

Despite all of the chaos coming out of the early days of the new Trump Administration stocks continued to rally on the prospects for “pro-growth” tax cuts, regulatory reform and infrastructure spending. (See Figure 1) However, the rally in bond yields and the dollar stalled as those markets began to exhibit a higher degree of skepticism about President Trump’s still vague proposals and the ability of the Congress to expeditiously pass them. (See Figures 2 and 3) As a result we have pushed back the effective date of the tax cuts to the first quarter of 2018 compared to the third quarter of 2017 that we previously forecast.[i]

Figure 1. S&P 500, Feb. 25, 2016 – Feb. 24, 2017, Daily Data

Source: Standard and Poor’s via Bigcharts.com

Figure 2. 10-Year U.S. Treasury Bond Yield, Feb. 25 2016 – Feb. 24, 2017, Daily Data
Source: Bigcharts.com

Figure 3. Dollar Index, Feb 25, 2016 – Feb. 24, 2017, Daily Data

Source: Bigcharts.com

Similar to last quarter we are still penciling in about $500 billion/year in personal and business tax reductions, a repatriation holiday for accumulated foreign earnings, increased defense and infrastructure spending, Medicaid cuts, relaxed regulations, modest changes to trade and immigration policies, and reductions in food and aircraft exports as several trading partners react to the policy changes. It remains to be seen to what extent the Affordable Care Act will be amended and its impact on the giant healthcare sector. Further because of the controversy that it has engendered we do not believe that Congress will pass a border adjustment import tax combined with exempting export sales from corporate taxation.

We have, however, become more concerned about the administration’s tone with respect to trade and immigration policies. The changes could be far more drastic than what we are now anticipating thereby increasing the risk level to our forecast. The roll-out of the administration’s partial travel ban and the scandal surrounding the firing of the national security advisor certainly were not a confidence building measures.

Trillion Dollar Annual Deficits Ahead

The impact of a large tax cut on an economy at or very close to full employment will be to explode the federal deficit. We expect the federal deficit to exceed a trillion dollars in 2019 which would amount to about 5% of GDP. (See Figure 4) Simply put there is not enough slack in the economy to enable the 4% economic growth the administration is calling for and it will likely lead to more inflation.

Figure 4. Federal Deficit, FY 2007 – FY2019F
Sources: Office of Management and Budget and UCLA Anderson Forecast

The Fed will become More Aggressive

As of April there will be three vacancies on the seven member Federal Reserve Board which will likely be filled by more hawkish and less economics oriented members.  The era of the very easy Bernanke-Yellen Fed is over and that will be confirmed when Chair Yellen’s term expires in January 2018. Moreover with inflation rising we expect that even under Chair Yellen the Fed will become more active in raising the Fed Funds rate and we believe that the Federal Open Market Committee will increase the fed funds rate by 25 basis points in March. By yearend the funds rate is expected to approach 2% and reach 3% by the end of 2018. (See Figure 5) Similarly the yield on 10-year U.S. Treasury bonds is forecast to increase to 3% by year end and exceed 4% by yearend 2018.

Figure 5. Federal Funds vs. 10-Year U.S. Treasury Bonds, 2007Q1 – 2019Q4F
Sources: Federal Reserve Board and UCLA Anderson Forecast

2018 GDP Growth Spike that Fades

With $500 billion in tax cuts arriving in the first quarter of 2018 we expect a short term growth spike that will soon fade as the economy bumps against its full employment ceiling. Our forecast calls for real GDP growth of 2.4%, 3.0% and 2.2% annual growth in 2017, 2018 and 2019, respectively. (See Figure 6) And note that real growth really trails off on a quarterly basis in 2019 as higher interest rates weigh on the economy. As we noted last quarter, in order for growth to be sustained at 3%, the economy requires a “productivity miracle.” The administration believes that its tax and regulatory reforms will enable a sustainable growth pick up. We, on the other hand, remain skeptical, but, of course, we can’t rule it out.

See Figure 6. Real GDP Growth, 2007Q1 – 2019Q4F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast
In this environment, the labor market will remain robust with job growth coming in on the order of 170,000 a month in 2017 and 2018, before trailing off to about 110,000 a month in 2019. The recent increase in the labor force participation rate has made us more optimistic about job growth over the near term. (See Figure 7) In tandem with the job gains the unemployment rate now looks like it will bottom out at 4.1% in late 2018, before gradually rising. (See Figure 8) Of course if the administration embarks on a large scale deportation program for unauthorized immigrants employment growth will be far slower than what we are now forecasting. Moreover should the administration restrict the issuance of H1-B visas for highly skilled immigrants there would be negative consequences for high technology industries.

Figure 7. Payroll Employment, 2007Q1 -2019Q4
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 8. Unemployment Rate, 2007Q1 – 2019Q4F
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast
Inflation on the Rise

Both headline and core inflation rates as measured by the consumer price index are already increasing at a 2%+ clip. It will not take much for inflation to ramp up to between 2.5% - 3%. (See Figure 9) Oil prices continue to rebound and the very tight labor market will bring with it rising wages. (See Figure 10) Although we were too early in our prior forecasts in predicting accelerating wage inflation, we now believe that the table has been set for sustained 4% annual increases in compensation. (See Figure 11) We believe that the unusually slow 0.1% increase in average hourly earnings reported for January was a fluke and it was inconsistent with other labor market data.

Figure 9. Consumer Price Index, Headline vs. Core, 2007Q1 – 2019Q4
Sources: Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 10.Compensation/Hour, 2007Q1 – 2019Q4
Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast
 Consumer Strong, but Housing Stalls

The growth in consumer spending has been strong since 2014 and automobile sales have been running at a record rate. (See Figure 11) Now throw in a large tax cut and real consumer spending will ramp up from a forecast 2.8% increase this year to 3.6% in 2018. In this tax cut fueled environment the saving rate will exceed 7%. (See Figure 12)However, housing starts will plateau out in the 1.2 – 1.3 million unit range. (See Figure 13) Simply put the rise in interest rates will offset the positive factors of higher employment and wages. By 2019 the rate on the 30 year fixed rate mortgage is forecast to exceed 6%, up from the current 4.25% and the recent low of 3.5%. Moreover, because there are numerous signs that high income multi-family housing is becoming over-supplied, that once white hot sector of the economy will soon cool.

Figure 11. Real Consumption Spending, 2007 -2019F

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 12. Saving Rate, 2007 -2019F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 13. Housing Starts, 2007Q1 -2019Q4F
Sources: U.S. Bureau of the Census and UCLA Anderson Forecast

Capital Spending Rebounds in the Face of Export Weakness

With the prospect of a general reduction in corporate income taxes and the likelihood of 100% expensing, equipment spending is forecast to rebound from 2.8% decline in 2016 to increases of 3.5% and 7.1% in 2017 and 2018, respectively. Equipment spending will also be buoyed by the recovery in oil and gas drilling being spurred on by the rebound in oil prices.

Figure 14. Real Equipment Spending, 2007 -2019
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

On the other hand, despite all of the rhetoric coming out of the administration the strong dollar and the large tax cuts will ignite an import boom. After increasing by only 1.1% in 2016, imports will increase by 4.3% and 7.3% in 2017 and 2018, respectively. (See Figure 15) On the other hand export growth will be minimal as the high dollar and retaliation from the administration’s protectionist views by some of our trading partners will limit export growth especially in the aircraft and agricultural sectors. (See Figure 16)

Figure 15. Real Imports, 2007 -2019F
Sources: U.S. Department of Commerce and UCLA Anderson forecast
Figure 16. Real Exports, 2007 -2019F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Moreover the administration’s outspoken hostility to NAFTA, especially with respect to Mexico risks a major disruption in economic activity. In 2015 the U.S. exported $236 billion to Mexico while importing $309 billion. Aside from disrupting supply chains, a significant reduction in U.S.-Mexico trade would have significant macroeconomic effects. (See Figure 17)

Figure 17. Schematic of NAFTA Trade
Source: Geopolitical Futures

Defense Spending on a Roll

As we have been discussing for several years the geopolitical threats coming from Russia, China, Iran and ISIS will force the U.S. to increase defense spending. After six years of real declines, defense purchases are forecast to increase by 1.2% in 2017 and then increase by 4.1% and 2.5% in 2018 and 2019, respectively. (See Figure 18) As we noted last quarter, this is one spending priority that is expected to receive broad support, especially with the increased hostility toward Russia coming from the Democratic Party. Further with the administration pressing NATO members to increase defense spending to 2% of GDP, domestic defense outlays will be augmented by increased international demand.

Figure 18. Real Defense Purchases, 2007 -2019F
Sources: U.S. Department of Commerce and UCLA Anderson Forecast


We continue to believe that the election of Donald Trump represents a major regime change with respect to economic policy. We expect significant reductions in personal and corporate income taxes along with a relaxing of regulation in the energy, environmental and financial arenas. However, because the economy is already operating at or close to full employment, the growth spurt caused by the policy changes will be short-lived but the deficits that it will create will be with us for a long time. Moreover the policy changes will elevate both inflation and interest rates that will have a negative effect on the housing sector.

Because of the Trump administration’s rocky start, we have become more concerned about the risks associated with their stated trade and immigration policies. For the time being we have not modeled in serious trade disturbances with our major trading partners and a reduction in the labor force caused by a significant change in deportation policies. Nevertheless those risks are rising.

[i]  See Shulman, David, “First Pass at Trumponomics: From a Reckless Monetary to a Reckless Fiscal Policy,” UCLA Anderson Forecast, December 2016.