Gerrymandering Won't Save the Republicans in a Wave Election

Although many political analysts believe that the Republicans will lose House seats this November, more than a few are reluctant to concede that the Democrats will take the House. Why? They believe the Republicans have a lock on the House because of all too many seats are gerrymandered in their favor. That is true in a normal election year, but it is not true in a wave election.

Below you will find an example of a gerrymandered state with 10 House seats where the electorate is evenly divided. In this example the Republicans normally will win seven out of the ten seats. I would note that in the real world there are independent voters and many Democratic districts have a far lower number of voters relative to their populations. 

                                         Example of a Gerrymander
                                            (Thousands of Voters)
                                            
                                       Dems                   Reps

District 1                        350 (70%)              150 (30%)
District 2                        350 (70%)              150 (30%)
District 3                        280 (56%)              220 (44%)
District 4                        180 (36%)              320 (64%)
District 5                        200 (40%)              300 (60%)
District 6                        220 (44%)              280 (56%)
District 7                        230 (46%)              270 (54%)
District 8                        230 (46%)              270 (54%)
District 9                        230 (46%)              270 (54%)
District 10                      230 (46%)              270 (54%)

Total                          2500000 (50%)       2500000 (50%)

In the above example all it would take is for 10% of the Republican voters in Districts 7-10 to flip for the Democrats to achieve 7-3 advantage thereby completely reversing the current line-up. In the example in those four contested seats the Dems would win by 253,000 - 247,000. The other six seats would remain as they were. Simply put any seat the Republicans now hold with a 55% or less majority is at huge risk.

As a result, as of today, given the amount of open seats currently held by Republicans and the number of other contested seats, it is very easy to visualize the Dems to pick up 50-60 House seats. That would be typical of what happened during the wave elections of 2006, 2010 and 2014.

My Amazon Review of Marc Ambinder's "The Brink: President Reagan and the Nuclear War Scare of 1983"

Eyeball to Eyeball

Marc Ambinder tells a tension packed Cold War story as to how the United States and the Soviet Union faced off against each during 1982-84 when war fears were at their height. He does this against the backdrop of the NATO “Able Archer 83” war game where the NATO forces were defending Germany against a Warsaw Pact invasion. He uses the war game exercise to bring in all of the command and control issues associated with a Soviet nuclear first strike down to the level of the local army commanders who control tactical nuclear weapons on the ground. He also brings in the role of spies on both sides trying to understand the intentions of their opponents. One of the best was Oleg Gordievsky who, before being betrayed, rose to be the KGB Rezidentura in London. Quite a coup for MI-6.

Recall those were the years where the Soviets deployed intermediate range nuclear missiles and NATO countered with its own deployment. The latter giving rise to Soviet supported anti-American demonstrations throughout Europe. In 1983 President Reagan delivered his “evil empire” speech by noting that the Soviet Union “was the focus of evil in the modern world” and shot down Korean Airline Flight 007 when it strayed into their air space. As an aside I thought contemporaneously the Reagan speech was one of his best. 1983 also brought with it the ABC movie “The Day After” which highlighted the impact of a nuclear attack on Kansas City. My wife and I watched it in horror.

I was pleased to see how well Ambinder treats President Reagan and Secretary of State George Schultz. Despite his Cold War rhetoric Reagan sought to understand Soviet motivations and brought in academics and read Russian history to get a sense as to why the Soviets would fear a first strike by the United States. All he needed was a partner and he finally got that partner with Michael Gorbachev.

Ambinder goes into a great deal of the United States’ command and control structure in the event of nuclear war. The logic of nuclear war practically dictated a first strike because the command and control after a nuclear strike would be chaotic. I wish he would have quoted that great geopolitical strategist, Mike Tyson, who said, “Everybody has a plan until they get punched in the face.”  When reading about the procedures involving our nuclear codes, it scared the living daylights out of me to think that Donald Trump is anywhere near close to them.

My few criticisms of the book is that Ambinder should have given a chapter backdrop about the Soviet nuclear buildup during the 1970s and the legitimate fear it raised in the United States. He goes after what he calls “the nuclear priesthood” without going into real detail. Although he mentions the Pentagon’s Office of Net Assessment, nowhere in his book does mention the critical role played by its leader, Andrew Marshall. Those criticisms aside, Marc Ambinder has written a well-researched history where small miscalculations could have led to nuclear war.

The full Amazon URL appears at: https://www.amazon.com/review/R8IGH7Y35KB14/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Cristina Alger's "The Banker's Wife"

Panama Papers Redux

Cristina Alger’s “The Bankers Wife” is not a work of literature, but it makes for a good summer read. There are three very strong female characters that make the novel work. And it is these three women who uncover a vast money laundering scheme created by the Swiss United bank to hide the cash behind mobsters, fraudsters, terrorists and the Bashir Assad family of Syria.

The women are Annabel the wife of Matthew a Swiss United banker who dies mysteriously in a plane crash; Marina the fiancé of Grant the son of a New York real estate developer who is running for president and Zoe, Matthew’s assistant who collects documents outlining Swiss United’s scheme.  Marina worked previously as an investigative reporter whose boss dies in a presumed robbery gone bad in Connecticut.

Alger interlaces her plot by going back and forth between the three women who are all working independently to find out the extent of Swiss United’s nefarious deeds. Of course Annabel is highly interested in how and why her husband died and she puts to good use her art curator skills in examining evidence.

There is a fast paced conclusion with a few people dying along the way as the truth is ultimately revealed. The book is entertaining.

The full Amazon URL appears at: https://www.amazon.com/review/R1V6GHDJ3MXBAZ/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Seth Klarman's "Margin of Safety: Risk -Averse Value Investing"

A Primer on Value Investing

Seth Klarman through his Baupost Fund is one of the greatest investors of the current generation, perhaps of all-time. This 1991 book is an investing classic, so much so that it sells for $780 on the secondary market. The key insight for most value investors is the all investments must have an inherent margin of safety. That means looking at the downside before looking at the upside. The notion of risk is asymmetric, not the standard deviation of returns as modern portfolio theory suggests. For example for any given stock under modern portfolio risk is independent of price; for a value investor risk is extraordinarily dependent upon price.

Klarman is focused on absolute performance, not relative performance. Thus unlike the bubbleheads on CNBC he doesn’t have to be invested all of the time. He is rightly skeptical of Wall Street research and the exotic products their investment bankers come up with.

The key earnings metric for Klarman is rightly free cash flow. It is not earnings per share and it is not EBITDA. Depreciation is real and so too are capital expenditures which do not enter the income statement.

The reader has to remember that this book was written in 1991 against the backdrop of the 1987 crash, the junk bond collapse and the 1990 bear market. He is critical of newly issued junk bonds (high yield in today’s terminology). Little did he realize that 27 years later high yield would dominate the new issues. He is also critical of the index funds that now dominate today’s stock market. For the average investor index funds make a great deal of sense.

Why? Simply put the average investor doesn’t have the talent or the time to be a value investor like Klarman. To be another Seth Klarman takes more than a few brains and much hard work.

“Margin of Safety” is written in clear and concise language. My two criticisms are that there are far too few examples of value investing in action and it is obviously dated. Nevertheless the lessons to be learned from reading the book are timeless.

The full Amazon URL appears at: https://www.amazon.com/review/RLBRF216819WU/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

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.

The full amazon URL appears at: https://www.amazon.com/review/R1OM24BW8GQPI1/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

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!

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.

The full amazon URL appears at: https://www.amazon.com/review/R3OLG7A2YHWIEH/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

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.

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 21^st 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.

The complete Amazon URL appears at: https://www.amazon.com/review/R2R2L0MAJWGGGN/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv