My Amazon Review of Tom Nicholas' "VC: An American History"

An Ode to Risk Taking

Harvard Business School Professor Tom Nicholas adds some new insights into the history of venture capital in general and the role of the Silicon Valley venture capitalists in particular. The story has been told many times before, but Nicholas adds some new insights. Especially interesting is his view that the 19^th Century whaling industry operated in a similar manner of venture capital today where specialized agents booked the captains and the ships and received funding from investors willing to take a chance for a big payoff. Just as today the agents were experts in their field and were very active in recruiting talent and what is most interesting the level and pattern of returns in 19^th Century whaling was very similar to that of the recent history of venture capital.

Nicholas also discusses the all-important role of government, first as a purchaser of high technology equipment and second in creating legal structure that enabled pension funds to invest in venture capital and allowing carried interest gains to have favorable tax treatment for the venture capital promoters. He also discusses the now forgotten role of government sponsored small business investment companies that both created an interest in venture capital and developed executives who would go on to bigger and better things.

He is quite good at describing the early roles of Georges Doriot’s American Research and Development who hit it out of the park with its $70,000 investment in Digital Equipment (later worth $350 million) and such Silicon Valley greats as Arthur Rock and Tom Perkins. He highlights the key mantra of the Silicon Valley venture capitalists as “people, technology and markets.”

Where he goes astray is that either some of his numerical examples of the gains achieved by the venture capitalists versus the market as whole is wither not clear or may even be wrong. He also shines on the huge investor losses taken by public investors as a result of the 1990’s bubble. The VC’s were hardly innocent in this process. Further he doesn’t really go much beyond 2000 to gives us a picture of where venture capital is today. To me it seems most VC’s are chasing asset-light software and although they talk a big game on green technology they are not really there. Why? Green technology especially carbon capture is extraordinarily capital intensive. Lastly Nicholas has to make his obligatory pitch for more gender diversity in the industry.

Simply put Nicholas has given us a good history, but it could have been better.

For the full amazon URL see: https://www.amazon.com/review/RH523PJHU6QL1/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Tobias Straumann's "1931:Debt, Crisis and the Rise of Hitler"

Annus Horribilis

Although most scholars put the focus of the Great Depression on events in the United States, Swiss historian Tobias Straumann turns his keen eye on the role Germany had in making the Great Depression “Great.” In fact the 1932 annual report of the Bank for International Settlements noted “In the circumstance of the German problem- which is largely responsible for the growing financial paralysis of the world – call for concerted action Governments alone can take.” To Straumann there is a straight line from the May 1931 failure of the Credit Anstaltt, to Germany suspending convertibility in the wake of bank runs in July, to Britain abandoning the gold standard in September which was followed in September and October by the Federal Reserve raising its discount rate for 1.5% to 3.5% in the teeth of the depression.

He tells part of his story through the eyes of Viennese economist and Swiss banker Felix Somary. As early as 1926 Somary was warning about the unsustainability of the reparations regime establish after the Dawes Plan and as the 1920s roared on he became even more bearish. Unfortunately to be right early is sometimes viewed as being wrong. Trust me, I have experience with this. As a result his warnings went unheeded, even from Keynes.

Although the title of this book is 1931, it really starts in 1930 with the adoption of the Young Plan which modestly reduced German reparations, but made the payment structure more rigid. The plan was predicated on a growing world economy that was quickly turning into a tailspin. From the outset both Hitler and the Communists became severe critics of the plan.

The man caught in the middle was German Chancellor Heinrich Bruning, a centrist. Straumann is more sympathetic to Bruning than many historians. Simply put he had limited options and was hemmed in by the gold standard which left him only one choice, austerity. As a result in the September 1930 elections the Nazi Party received 19% of the vote and becomes the second largest party in Germany. Although we now think of Hitler with his militaristic racist screeds, in 1930 he was offering very serious criticism of the Young Plan in his speeches. Hitler’s electoral gains terrify foreign investors leading to a run on Germany’s gold reserves. Put bluntly, Bruning was in a box and the countdown began.

By 1931 the downward spiral continued with even more austerity coming from Bruning. To maintain domestic popularity Bruning plays the nationalist card in returning the Rhineland to German control and proposing a customs treaty with Austria. Of course the French go crazy and that limits the availability of banking credits from France. Hence both German and French politicians were prisoners of their own electorates. The lesson here is that international agreements must have domestic support in order to work.

After the July 1931 banking collapse the way was open for Hitler. In the October election the Nazis receive 37% of the vote and become the largest party in Germany. With the Communists achieving 15% of the vote, the two extremist parties work hand in glove to bring down Bruning. And the rest as they say is history.

Straumann has written an important history that should be required reading in the capitals of Europe. Although the EU succeeded in Greece, at least for now, it might not be so lucky with Italy. It should heed the lessons of “1931.”

For the full amazon URL see: https://www.amazon.com/review/R3CO3LP16KVA4M/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Tim Boverie's "Appeasement: Chamberlain, Hitler and Churchill and the Road to War"

Chamberlain in the Dock of History

In his first effort writer Tim Bovererie has written an extraordinary narrative history of the machinations of Britain’s ruling Conservative Party to first appease Hitler and then gradually turn toward a full confrontation with the evil dictator. Boverie is not a professional historian and is probably under 30 years of age, yet his book jacket has encomiums from such stalwarts as Margaret Macmillan, Ian Kershaw and Max Hastings. They are all deserved.

Although the story has been told many times before, Boverie brings us fresh sources that go to the motivations of the major players. He puts us in the room with Chamberlain, Halifax, Eden, Baldwin and of course, Churchill. The villains of the piece are Prime Ministers Neville Chamberlain and Stanley Baldwin. Baldwin ignored the peril of Hitler and while Chamberlain recognized the danger he simply did not want to fight. He truly was the architect of the appeasement policy thinking against all logic that Hitler could be reasoned with. By failing to heed the warnings of Churchill he sentenced Europe to the abyss of World War II.

One of the things I learned from Boverie’s book is that Anthony Eden was not the anti-appeasement hero I thought he was. In reality he was kind of a wimp. I didn’t realize that Hitler thought the abdication of Edward VIII was a big loss. In fact he was part of coterie pro-Nazi anti-Semites within the upper strata of British society. That along with their anti-communism made it very difficult for Chamberlain to make a deal with Soviet Russia.  

On the other hand, I would have liked to know more about how the Labour Party switched from its pacifism of the early 1930s to its full-throated opposition to Hitler by 1939.  This turnabout enabled Labour to become partners with Churchill in the unity government of 1940.

With this very well written book Boverie has proved himself to be a historian of the first order. I wish him well in his future endeavors.

The full amazon URL appears at: https://www.amazon.com/review/R3639OEBYMSYX3/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

The Gang of Four Insurgency within the Democratic Party

Although the press refers to them as “The Squad”, I refer to Congresswomen Ilhan Omar, Alexandria Ocasio-Cortez, Rashida Tlaib and Ayanna Pressley as “The Gang of Four.” For those of you too young to remember the original Gang of Four were leaders, one of whom was Mao’s wife, of the Maoist Cultural Revolution in China that lasted from 1966-1976 which nearly destroyed the Chinese economy as they sought to return to the Maoist ideals of the 1930s.  However within a month of Mao’s death all four of them were put on trial for treason.

Although the congresswomen are far from being rabid Maoists, they are serving a similar function in the Democratic Party as they seek to purge the Democratic Party of its more moderate members by first publicly attacking them and then by promoting primary challengers to incumbents. This is a formula for electoral defeat because the country as a whole is far more moderate than they are.

Just like the 2018 congressional elections the 2020 election will be won or lost in the suburbs and the more the Democratic Party is identified with The Gang of Four the easier it will be for Trump to win re-election  and for the Republicans to regain control of the House. Thus there was a method to Trump’s racist madness in calling for the Gang to go back to where they came from. While it is important to support the Gang as citizens it is even more important for the Democratic Party candidates to disassociate themselves from their ideas. Simply put, the “loony left” is not going to win in 2020.

My Moon Landing Memories in the WSJ, July14

I watched the moon landing in my orderly room upon returning from leave at Fort Bragg, N.C., on a portable and very grainy black-and-white television. I stood in awe as I watched Neil Armstrong walk on the moon and I will never forget it. The moon landing offered a ray of hope that there were a few things right in the world.

The WSJ URL is: https://www.wsj.com/articles/the-moon-landing-was-a-moment-of-hope-and-achievement-11563153322?tesla=y

Mr. Powell Throws Some Gasoline on the the Stock Market Fire

In his monetary policy testimony this week Fed Chairman Jay Powell all but told us there will be rate cut later this month. Perhaps more importantly he noted that the Phillips Curve that relates the unemployment rate with the inflation rate is broken. That is why he sees no problem with cutting rates in an environment where the unemployment rate is at a 50 year low.

But the real kicker in his testimony was his concern about economic weakness abroad, especially in Europe. We wrote in this space four years ago to the day ( https://shulmaven.blogspot.com/2015/07/two-history-lessons-for-janet-yellen.html) that when the Fed lowered rates to ease the burden on Europe, especially for the U.K., in July 1927 it set the stage for the late 1920's blow-off in stock prices. At the time NY Fed President Benjamin Strong noted to Deputy Bank of France Director Charles Rist that the Fed's move would be a "coup de whisky" for the stock market. He was so right and that move put the roar in the Roaring 20's.

So my guess is that with the economy still growing at a somewhat below 2% pace, in an environment of low real interest rates and low credit spreads, the Fed is pouring gasoline on a stock market that has already been making new all-time highs on a daily basis. The stage is set for a blow-off.

My Amazon Review of Jonathan Rodden's "Why Cities Lose: The Deep Roots of the Urban-Rural Political Divide"

The Geographic Roots of Political Polarization

Stanford political science professor and sometime Democratic Party consultant Jonathan Rodden has written an important book on how and why urban Democratic voters appear to be under-represented in Congress and state legislatures. At its very essence the median congressional/legislative district is more conservative than the median voter. This phenomenon is a result of urban liberals being geographically concentrated in overwhelmingly Democratic districts while more conservative rural and suburban voters are more geographically spread out in majority Republican districts. Thus the elimination of partisan gerrymandering would help, but not cure the fundamental disadvantage urban voters’ face.

Rodden’s data driven book goes back to the late 19^th Century where urban working class oriented parties established themselves around worker housing near major railroad lines and mines. He not only discusses the U.S., but he is international in his outlook with case studies from the U.K., Australia, New Zealand, Germany and the Netherlands. He notes that where there is proportional representation urban voters are not under-represented, but with community based winner take all districts, the urban voter is under-represented.

His solution to the problem in the U.S. is for urban Democrats to be more tolerant of the views of their country and suburban cousins and therefore allow “blue dogs” into their party. That was true in the 1970s and 80s, but far less so today. In fact there are little Robespierre’s seeking to eliminate those Democrats through the primary process who don’t hold to the current liberal orthodoxy.

My guess is that the logjam will be broken when the dominant Republican and Democratic parties break up into three parties which I would name a Trumpist Populist Party, an establishment Democratic Left Hamiltonian Party and a Social Democratic left party.

Rodden’s book is very dense with data and sometimes the read is a slog, but an interested reader trying to understand the polarization of American politics can do no worse than to read his book.

The full amazon URL appears at: https://www.amazon.com/review/R2NCFHO2516E4C/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Fiona Hill and Clifford Gaddy's " Mr. Putin: Operative in the Kremlin"

Putin: The New Tsar

Former National Security Council staffer Fiona Hill and Brookings foreign policy fellow Clifford Grady have written a deeply researched very important and very dense book profiling Russian President Vladimir Putin. It is America’s loss that Fiona Hill left the National Security Council only a few weeks ago. The one very critical lesson to be learned from this book is that Donald Trump should not be allowed to be alone in a room with Putin. Simply put, Trump is short-term and transactional while Putin is long-term and strategic.

The authors trace Putin’s life from growing up in the deprivation of postwar Leningrad to his rise to power in Moscow via his work as a KGB operative in East Germany. Putin comes into his own working for Anatoly Sobchak, a reform minded mayor of now Saint Petersburg in the early 1990s. From there he goes to Moscow where he has a ringside seat into the disintegration of the Yeltsin government and the economic failure of post-Soviet Russia. In succeeding Yeltsin Putin’s mandate is to restore order and to restore the economy.

Putin sees himself as the CEO of Russia and as an heir to the early 20^th Century Russian reformer Prime Minister Pyotr Stolypin. What they have in common is that they both viewed themselves as modernizers within the context of authoritarian capitalism. Although Putin may view himself as a free marketer, he really runs a crony capitalist society where he has leverage over the oligarchs by having the ability to throw them in jail for tax law violations.

Above all else Putin is a statist. Everything has to be done in service of the state. He is critical of the Bolsheviks in that they betrayed the Russian state by fomenting revolution while its soldiers were dying in World War I. As an heir to the Tsars Putin sees Russia as a bulwark against western liberalism and he has allied himself with the Russian Orthodox Church against the perceived licentiousness of the West.

In thinking strategically Putin first had to put Russia’s fiscal house in order. In doing that he was aided by one of his Leningrad buddies, Alexie Kudrin who served as his finance minister. Widely respected in the West, Kudrin paid off Russia’s foreign debt and thereby removed a major leverage point the West had over Russia. Putin learned that from the forced withdrawal of Russian troops from the Baltic States in 1994 when the West threatened to withhold funding for Yeltsin’s government. He learns from history.

With respect to foreign policy Putin’s goal is to restore Russian greatness and to gradually prevail in the independent states that were formed after the breakup of the Soviet Union. Hence that annexation of Crimea and the war in eastern Ukraine.

The book ends in 2014 so there is no discussion of Russian involvement in our 2016 presidential election.  But is seems to me that involvement is part in parcel to the very patient long game that Putin is playing against the West and thus far he appears to be winning.

As I said at the outset this book is a hard read, but if you want to get great insights into how Putin thinks and Russia’s role in the world it is well worth the slog.

For the full Amazon URL see: https://www.amazon.com/review/RL6SWVSWLS0GM/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv