My Amazon Review of Andrew Gross' "Button Man: A Novel"

Standing Up to the Mob

Andrew Gross has written a novelized biography of his grandfather, a pioneer in the garment industry. His protagonist is Morris Raab, born Rabishevsky, who as a boy of 12 on the lower eastside starts working in a garment factory and ultimately rises to become a major manufacturer of women’s coats and later dresses. For me the book is especially poignant because my furrier father manufactured linings, collars and cuffs for high end cloth coats, the very product made by Raab. In fact there is furrier in the book who supplies Raab.

What makes “Button Man” so interesting is Raab’s encounters with the mob that was dominating the garment and fur workers unions of the 1920s and 1930s. We see such mobsters and Murder Incorporated founder Louis Lepke Buchalter and his sidekick “Gurrah” Shapiro doing their best to intimidate Raab and his brother partner, Sol. We also run into Albert Anastasia, Legs Diamond and Dutch Schultz.

At first Raab fights the mob and then is prepared to give in and ultimately he stands up to them. He does this by linking up with special prosecutor Tom Dewey through one of his lower eastside lawyer friends. And at great peril to his life and the lives of his family he plays a role in bringing down the mob.

What Gross’ novel does is that it shows the real life consequences of what happens when the mob controls the unions. Everybody, but the mob loses with workers and bosses alike suffering as worker wages and boss’ profits are drained away through protection payoffs, forced buying from mob controlled firms and fraudulent union welfare funds.  For those who don’t play ball they face fires, acid attacks on their garments and their persons and murder. Gross brings to life what it was like to be a small business owner in the garment industry of that era. As the son of a furrier whose business started in 1930 the novel rings true.

The full Amazon URL appears at: https://www.amazon.com/review/R2K6PXYT7REFXE/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

"A Wile E. Coyote Economy?" UCLA Anderson Forecast, September 2018

A Wile E. Coyote Economy?                

David Shulman

Senior Economist, UCLA Anderson Forecast

September 2018

          “In 2020, Wile E. Coyote is going to go off the cliff, and

          he’s going to look down, and that (stimulus) will be

          withdrawn at that point.”

                                           Ben Bernanke

                                           Business Insider, June 8, 2018

Wile E. Coyote is, of course, a famous Warner Brothers cartoon character who had a way of running well beyond a cliff before looking down and then falling straight down. (See Figure 1) Our view is perhaps not as dramatic, but directionally consistent with Bernanke’s remarks, we are looking for a decided slowdown in 2020. For example on fourth quarter to fourth quarter basis our forecast call for real GDP growth to sow from 3.1% this year to 1.9% in 2019 and a near recession 1.0% in 2020. (See Figure 2)

Figure 1. A Wile E. Coyote Moment

Source: WiffleGif. com

Figure 2. Real GDP Growth, 2010Q1 – 2020Q4F

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

The obvious question here is why are we so pessimistic about the outlook for growth beyond 2018, especially after coming off a 4.2% real GDP growth rate in the second quarter?  Too be sure there is enough momentum in the economy to generate 3% growth in the second half, but growth will not be sustainable. Simply put when an economy is already operating at full employment it is very difficult for it grow above trend which we estimate to be somewhat above 2%, which is higher than what the Federal Reserve is now forecasting. Further, the economy is currently benefiting from the massive tax cut and spending increases passed late last year. As Bernanke noted the stimulus coming from that will run out in 2020, but the deficits it created will linger on for over a decade. (See Figure 3) The federal deficit, under current policy, will exceed a trillion dollars a year for as far as the eye can see.

Figure 3. Federal Deficit, FY 2010 – FY 2028F

Source: Congressional Budget Office and UCLA Anderson Forecast

Meantime, employment growth continues to chug along with job gains approximating 200,000 a month this year and then declining to 125,000 a month and a much lower 30,000 a month in 2019 and 2020, respectively. (See Figure 4) In this environment, the unemployment rate will decline to 3.5% in early 2019 and then gradually rise to around 4% in 2020. (See Figure 5) Although we have been consistently wrong as to when wage inflation will ignite, we believe we are now at that moment. Although it is only one data point average hourly earnings increased by a very strong 0.4% in August over the prior month and are now up 2.9% on a year-over-year basis. We forecast that private sector wage compensation will increase from 2.6% this year to 3.2% and 4.0% in 2019 and 2020, respectively. (See Figure 6)

Figure 4. Payroll Employment, 2010Q1 -2020Q4F

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 5. Unemployment Rate, 2010Q1- 2020Q4F

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 6. Employee Compensation, 2010Q1 – 2020Q4F

Sources:  U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Fed Remains on Normalization Path

With most inflation measures running above the Fed’s 2% target and with the economy operating at full employment, we believe that the Fed will continue on its path of interest rate normalization. (See Figure 7) Although our view might be a touch on the aggressive side, we forecast that the federal funds rate will top out at 3.25%-3.50% in late 2019 or early 2020. (See Figure 8) Our reasoning is underpinned by our view that the inflation rate will approach 3% in 2020.  

Concomitantly, the Fed will continue on its path of shrinking its bloated balance sheet from the current $4.2 trillion to $3.5-3.8 trillion by the end of 2020. (See Figure 9) Although there are many forecasters concerned that the yield curve will soon invert, we are not of that view because longer dated treasury yields will rise to reflect the heightened inflationary environment.  However, we would not rule out an inversion in 2020.

Figure 7. Consumer Price Index vs. Core CPI, 2010Q1 -2020Q4

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 8. Federal Funds vs. 10-Year U.S. Treasury Bonds

Sources: Federal Reserve Board and UCLA Anderson Forecast

Figure 9. Federal Reserve Assets, Dec. 02-Sep. 18, Weekly Data- In $millions.

Source: Federal Reserve Board via FRED

Strength in Consumption, Investment and Defense with Housing Lagging

Over the near-term, the economy is exhibiting broad-based strength. Real consumer spending has rebounded nicely from 0.5% in the first quarter to 3.7% in the second quarter and it is on track to grow at a 2.5% pace in the second half. (See Figure 10) Of particular note is the surprising strength the restaurant and bars category, which was up 9.7% in nominal spending in July compared to a year ago. (See Figure 11) Our cheeky explanation for this is that the Trump people are out celebrating by eating and drinking and the anti-Trump people are acting out their depression by drinking and eating. Nevertheless, regardless of your political point of view the tax cuts are having an impact.

Figure 10. Real Personal Consumption Expenditures

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

Figure 11. Retail Sales at Food Services and Drinking Places, July 2013 – July 2018, Percent Change Year Ago.

Source: U.S. Department of Commerce via FRED

Similarly, business investment, especially equipment spending, remains a source of strength. After declining by 1.5% in 2016, equipment spending increased by 6.1% in 2017 and is on track to increase by 7.5% this year, the best performance since 2013. The rebound in oil and gas activity and the recently enacted corporate tax cuts are helping here. (See Figure 12) However, as the tax cuts run their course and the oil activity rebound slows, real equipment spending is forecast to increase at a more modest pace of 5.9% and 4.0% in 2019 and 2020, respectively.

Figure 12. Real Equipment Spending 2010 – 2020F, Annual Data

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

Adding to the private sector strength, defense spending is surging. After years of decline, real defense purchases are forecast to increase 3.7% this year and 4.7% in 2019. (See Figure 13) In 2020, the surge will end with only a modest increase of 0.7%. Because most of the increases involve long lived capital goods, the increase in defense purchases is reinforcing the growth in private sector capital equipment.

Figure 13. Real Defense Purchases, 2010 – 2020F

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

The one disappointing sector of the economy remains housing. To be sure, housing starts are modestly increasing, but because of growing affordability problems and restrictive zoning practices in major employment centers, housing starts remain below the underlying demographic demand. Instead of producing about 1.5 million units a year housing starts are forecast to peak at around 1.35 million units in 2019 (quarterly peaks at 1.38 million units, SAAR) and then rollover as higher mortgage rates exact their toll. (See Figure 14) This is a far cry from the super boom level of in excess of two million units a year over a decade ago. Moreover, multi-family starts will account for about one third of the overall activity.

Figure 14. Housing Starts, 2010Q1 -2020Q4F

Sources: U.S. Bureau of Census and UCLA Anderson Forecast

The Trade and Currency Wild Cards

Looming over our forecast is the uncertainty with respect to the trade policies of the Trump Administration and the beginnings of a currency contagion that is enveloping a few of the developing economies (.e.g. Turkish Lira and Argentine Peso). And do not forget the Italian economy remains problematic and could spill over into the Euro at any time. Although progress has been made with respect to renewing NAFTA, it remains to be seen whether or not Canada will join Mexico in making a deal with the U.S. Similarly, with tariffs expected to be extended to an additional $200 - 467 billion of goods (meaning 100% of imports from China), up from the current $50 billion. With tariffs averaging about 15%, this could amount to about an $80 billion tax on the U.S. economy.  And with China retaliating, the U.S. farm economy is in a world of hurt requiring the administration to offer aid to soybean producers.

Further, although a trade war with the European Union has been temporarily avoided, it still remains on the administration’s plate, especially with regard to automobiles. Make no mistake that in the short-run, the Trump tariff policies are both inflationary and output restricting.  Indeed, the open question remains how uncertainty over trade policy will affect business investment.

However, one thing remains clear. The trade deficit is going to explode. Real net exports, a measure of the goods and services trade balance in 2012 dollars, amounted to -$860 billion in 2017. That will rise to -$900 billion this year and it will exceed minus one trillion dollars in 2019 and 2020. (See Figure 14) Simply put, instead of importing stuff from China the global supply chains will adjust and import from other countries. What the administration doesn’t understand is that the trade deficit is largely a result of macroeconomic policies caused by the lack of domestic savings and the ever growing budget deficit.

Figure 15. Real Net Exports, 2010 -2020F

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

Conclusion

Over the near-term, the economy remains on a broad-based strong 3% growth track, but that will slow to 2% in 2019 and a near recession 1% in 2020. The slowdown will be caused by the natural constraints of a fully employed economy with a 3.5% unemployment rate next year and a waning of the administration’s stimulus policies. Moreover, with the inflation rate moving closer to 3% than 2%, the Federal Reserve will continue to pursue its interest rate normalization policies that will bring the Fed Funds rate to somewhat above 3%.

The major near-term risk to our forecast remains the administrations trade policies that are both inflationary and output restricting with yet unknown effects on business investment.

My Amazon Review of Greg Lukianoff's and Jonathan Haidt's "The Coddling of the American Mind....."

Spoiled Children go to Elite Universities

Free speech lawyer Greg Lukianoff and N.Y.U. professor of “Righteous Mind” fame Jonathan Haidt have written a very important book about what ails our elite universities and our society as a whole. The authors build on Nassim Nicholas Taleb’s work on the concept of antifragility. Put bluntly by overemphasizing safety we have raised a crop of very fragile middle-class children who find great difficulty in dealing with life in the real world. These kids have become oh so sensitive to anything they perceive as a slight and that sensitivity is exacerbated by the all-encompassing presence of social media.

Haidt and Lukianoff note the three great untruths of our age:

1.     What doesn’t kill us makes us weaker.

2.     Always trust your feelings

3.     Life is a battle between good and evil.

There is no subtlety here and this gives rise to a collegiate culture that is hostile to ideas and words that are outside of the mainstream. Although there is a great push for diversity by race, gender, and sexual orientation there is strong opposition to any notion of diversity of thought. Hence conservative speakers are subject to a heckler’s veto across most of America’s campuses. This situation is amplified by faculties that are overwhelmingly liberal.

The authors recount the all too many instances where conservative speakers were disinvited, shouted down, or precipitated a riot. However I would note that where there were significant disturbances at the University of Missouri and Evergreen State College freshman enrollment is way down.

The safety culture starts at a young age. Parents keep peanuts away from children out of fear of a potential allergy. In fact by doing this it makes peanut allergies far worse. Better to expose children to peanuts when they are young and they will build up a resistance to the allergy. Hence the concept of making kids antifragile.

Similarly the authors applaud the concept of “free range kids.” Kids should be free to explore their neighborhoods and play together without parental supervision. This teaches them how to work things out among themselves rather than seek out authority figures. Children looking to outside authority will become adults who do the same thereby impairing our democracy.

So what is to be done? The authors   recommend that colleges endorse the Chicago Principles on free speech and urge parents to limit their children’s use of social media. They also call for less homework in the early grades and less structure in the life of teenagers to give time for free play. The authors know that this goes against the grain of every hyper-competitive parent. Lastly they encourage college students to take a gap year to give them time to grow up in the real world.

I haven’t done justice to the book. It should be read by parents, college professor and administrators and citizens concerned about the future of our country. Although the book is too long the message is too important.

The full Amazon URL appears at: https://www.amazon.com/review/R1G8DL3Q5N4MZ7/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Bob Woodward's "Fear: Trump in the White House"

LOSER

Famed journalist Bob Woodward has written a book about an undisciplined narcissist who also happens to be a congenital liar; unfortunately he is the President of the United States. Much of the juicy tidbits in Woodward’s book have already been widely disseminated in the media so I won’t bore you by repeating them.

What comes across loud and clear is that Trump hates trade. He even writes in a briefing packet “Trade is bad”.  Like a stubborn 14 year old he is unyielding in his beliefs about trade even the face of strong evidence placed before him by his staff. As was widely noted Trump was ready to blow up the Korea –U.S. trade agreement just when we were working hand in glove with South Korea on the North Korea nuke problem. Woodward demonstrates how that jerk, Peter Navarro with his mercantilist views, plays to Trump’s worst instincts and somehow has easy access to the Oval Office.

Woodward was very successful in getting leading administration figures to talk to him mostly on deep background, but sometimes on the record. We can hear the voices of Steve Bannon, Gary Cohn, Trump lawyer John Dowd, Lindsay Graham, John Kelly, H.R. McMaster, Rob Porter, Reince Priebus, and Rex Tillerson. We continually see Priebus, Cohn, Porter and McMaster valiantly trying save Trump from his worst instincts. Although they had some successes, in the end they failed. It is a shame that Porter’s domestic difficulties forced him out; he was a real check on Trump.

The book ends in March so there is no discussion of the North Korea, G-7 and Putin summits. Hopefully Woodward will soon give us some insights into those events. Further for those looking for evidence of a Trump-Russia conspiracy, it is not here.

Let me close with what Steve Bannon said with respect to the effects of #MeToo on the coming election.

  “Trump is the perfect foil. He’s the bad father, the terrible first husband, the

     boyfriend that f*****d you over and wasted all those years and (you) gave up

     your youth for, and then dumped you. And the terrible boss that grabbed you

     by the p***y all the time and demeaned you.”

Woodward gives the reader a real flavor of how the Trump White House works and he proves that Jeb Bush was dead right when he said that Donald Trump would be the “chaos president.”

The full Amazon URL appears at: https://www.amazon.com/gp/customer-reviews/R3T7G4N8GXMMXZ/ref=cm_cr_getr_d_rvw_ttl?ie=UTF8&ASIN=B075RV48W3

A Funeral in Washington

We buried John McCain yesterday and most of our Nation mourned and many watched on live television the four days of services celebrating his life. We won’t know for a while whether his passing represents the end of a once noble era that has been trampled under the ever-increasing weight of tribal politics shamelessly lead on by our President or a renewal of the American spirit. The realist in me suggests the former while the romantic in me hopes for the latter.

Sometimes funerals signal major change such as those of Julius Caesar of Shakespearian fame and Edward VII’s in 1910 which heralded the end of the European Century, although few realized it at the time. In contrast Ted Kennedy’s funeral in 2009, whose memorial was also held in the Capitol Rotunda, left nary a mark on our politics. In fact in his absence the political discourse continued to worsen.

While watching McCain’s memorial service in the Capitol is was difficult not to notice the supreme hypocrisy of Paul Ryan, Mike Pence and Mitch McConnell. Their conduct stood in complete contrast to McCain’s. All three are, what I have characterized before, moral eunuchs. Similarly John McCain’s great friend Lindsey Graham has become a Trump toady. I just wonder what McCain thought of Graham’s new relationship with Trump.

Nevertheless because I still have faith in our better angels, perhaps the motley crew mentioned above might have been moved just the slightest by the example of John McCain’s life. One can only hope. A harbinger will be who Arizona governor Doug Ducey appoints to fill McCain’s shoes. Will he/she be a McTrump or will he pick someone in the style of Meghan McCain?

In the Jewish religion we are now entering the season of repentance.  There is still time for Ryan, Pence, McConnell and Graham to see the error of their ways and repent. Otherwise in their faiths they will learn that the cost of a tax cut or Supreme Court Justice will be their immortal souls.

My Amazon Review of Jonathan Haskell's and Stian Westlake's "Capitalism Without Capital: The Rise of the Intangible Economy"

UK economics professor Jonathan Haskell and UK consultant Stian Westlake have written an important book on the ever growing importance of intangible assets in the modern economy. Unfortunately the book is too long and it would have better been written as a long magazine article. Nevertheless they succeed in pointing out that the values of firms are now largely dependent upon intangible capital and that society at large is increasingly being ordered around it. In very simplified terms the mode of production has shifted from hardware to software and we witness that every day with our use of Google, Facebook, Amazon, Netflix, and yes Starbucks. Why Starbucks? In the case of Starbucks it is the managerial software behind their organizational instructions that makes each coffee shop run.

Unlike tangible capital, intangibles are readily scalable, offer huge spillover effects and generally work synergistically with other intangibles. However in order to create intangible capital the sunk costs are unusually high and risky which makes debt finance difficult to obtain. A bank will lend on a machine, but not on in process software code.

This book should be read in conjunction with Baruch Lev and Feng Gu’s “The End of Accounting” where they establish new rules for dealing with intangible capital.( https://shulmaven.blogspot.com/2016/07/my-amazon-review-of-baruch-lev-and-feng_19.html)    In the case of the public sector, national GDP accounting has introduced intellectual capital as a form of investment. That category includes such things as computer software, research and development and filmed entertainment, for example.

On the societal level the growth of intangible capital tend to exacerbate income inequality. Success no longer flows to the tinkerers and mechanics of the 19^th century but rather to the degreed knowledge workers of the 21^st century. I would note one small error in the book. The authors called Robert Reich a future Treasury Secretary when, in fact, he was future Labor Secretary. All told Haskell and Westlake have given us a good overview as to how modern economies are being transformed.

The full Amazon URL appears at: https://www.amazon.com/review/R3JEO64PYDQCJS/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv