My Amazon Review of Steve Inskeep's "Imperfect Union: How Jessie and John Fremont Mapped the West, Invented Celebrity and Helped Cause the Civil War"

1840’s Power Couple

NPR host Steve Inskeep records the history of one of America’s first power couples. The western explorer John Fremont then 29 married Jesse Benton, then 17, the daughter of the powerful Missouri Senator Thomas Hart Benton. Jessie acts as Fremont’s promoter in the press and in the halls of Congress as John explores the west from St. Louis to California and Oregon. His description of the Great Salt Lake basin inspires Brigham Young to uproot his Mormon clan from Illinois to Utah. Why John leaves her so much is a mystery to me. My guess he had ADD and had a wanderlust for the West. Nevertheless Jessie puts up with this and faithfully publicizes his letters. Indeed she takes a hazardous trip to California with her four year old daughter, a trip that involved an overland haul across Panama. She was quite a woman.  

While in California his small band links up with a small detachment of Naval/Marine forces to seize California from Mexico not knowing that the Mexican War had already started. And remember it was the annexation of Texas, the Mexican War and the admission of California that heightens the tensions over slavery. While in California he names the entrance to San Francisco Bay the “Golden Gate.” He also has time to speculate in California real estate and gold mining. His gold mining venture makes him rich for a while.

Inskeep is very good at describing the hardships Fremont’s bands faced while traversing the West especially the snow covered Sierras. One of Fremont guides is Kit Carson, a personage whom Inskeep doesn’t take all that kindly towards as he projects his 21^st century sensibilities on to the brutal environment of the mid-19^th century west. He is also not all that kind to President James Polk, who in my opinion ranks among the great presidents of the United States as he implemented the policy of manifest destiny by making America a continent spanning nation.

In 1850s America the crisis of slavery comes to a boil. Jessie Fremont from her a youth was strongly anti-slavery and pushes John even more in that direction. In 1856 the newly formed Republican Party chose Fremont as its nominee under the banner of “Free Soil, Free Labor, Free Speech, Fremont.” It is an ugly campaign where the Democrats vilify his illegitimate birth to a presumably Catholic father. It is the anti-Catholicism of the time that weighs heavily on his campaign in his defeat to James Buchanan, a former neighbor of the Benton’s.

After the campaign the Fremont’s gradually disappear from history and their money runs out as they age, a real shame. Inskeep tells a great story and it is well worth the read.

The full amazon URL appears at: https://www.amazon.com/review/R19N2QY7Y0MKFP/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

A “Rational” Basis for Supporting Today’s Stock Market Valuation

With the S&P 500 trading at an historically high 19X estimated 2020 earnings many stock market commentators have raised a cautionary flag about today’s stock market valuation. They may, of course, be correct but something more fundamental maybe going on that would justify an even higher price/earnings ratio.

In December 1995, when I was chief equity strategist at Salomon Brothers, I penned a piece entitled “1996: Stock Market Bubble or Paradigm Shift?” In that piece I argued that there were two prior valuation shifts within the memory of investors at that time. The first one was in 1958 when dividend yields fell below bond yields for the first time since 1929. My explanation and also Ben Graham’s in 1962 was that investors then realized that Keynesian policies would prevent depression thereby making stocks much less risky allowing the P/E ratio to expand 13X to 18X.

The second valuation shift took place in 1974 when investors witnessed runaway inflation in the presence of high unemployment. Their faith in Keynesian economics was broken and instead of depression, inflation became their biggest fear. By 1979 the P/E ratio collapsed to 6.5X.

As I argued in 1995 a third valuation paradigm shift took place that year. Simply put 14 years after Paul Volcker broker the 1970s inflation, the inflation trauma that investors so feared was healed. With inflation fears in abeyance P/E ratios on current earnings could rightly expand to a 14X-17X range and to 16X-20X trend earnings. Of course investors got carried away in the dot.com boom temporarily taking the P/E multiple up to 30X by late 1999.

Subsequently a fourth valuation shift took place in 2008 when investors became so complacent with the Great Moderation orchestrated by the Fed excessive risk taking in the fixed income and derivative markets nearly brought the economy to its knees reviving fears of a new Great Depression. To revive the economy the Fed through caution to wind and adopted a host of measures to maintain liquidity in the banking system and established a regime of extraordinarily low interest rates well past the crisis years of 2007-2010. When the initial shock passed multiples returned to a more normal 12X-15X earnings.

So what do we make of today? We could be cruising to another bubble where excessive risk taking brings the economy down or, alternatively, investors now expect that the very low interest rate regime of the past decade will be permanent just as investors in the 1960’s believed that Keynesian economics would keep depression away and investors in the middle 90’s that the moderate growth-low inflation environment would last forever.

It seems that investors now believe that the Fed, after learning the lessons of 2019, will have a very high bar to raising interest rates in the future and because the fear of deflation is stronger than the fear of inflation 10-Year Treasuries will be locked in a narrow range of 1.5%-2.5%. I am not sure I buy into all of this, but if my thesis is roughly true it would not be too difficult to envision P/E multiples in the 20X-25X range. Thus using, say a $185 earnings for the S&P 500 in 2021, and placing a 22.5X multiple on those earnings you end up a with valuation of 4100-4200. This valuation is not my forecast, but it does make for a plausible bullish case which rests on inflation staying low.

My Amazon Review of Owen Matthews' "An Impeccable Spy: Richard Sorge, Stalin's Master Agent

The Greatest Spy of the 20^th Century

Utilizing new Russian and Japanese sources journalist Owen Matthews has given us the best biography of Richard Sorge, perhaps the greatest spy of the 20^th Century. Born in Baku of German parents in 1895 Sorge becomes a communist after his World War I service and is recruited to become a spy for the Comintern in 1924. While in Moscow in the late 1920s he meets such Comintern big hitters as Zinoviev, Radek and Bukharin, all of whom would later be executed by Stalin. He is then recruited by the Red Army’s 4^th Department that has since been relabeled as the GRU. Yes, the same folks who released the DNC emails in 2016.

What makes Sorge so interesting is that he takes great risks as a spy. He drinks to excess and is a notorious womanizer including having affairs with his friends’ wives. But he is such a charmer that the wronged husbands continue to befriend him even after they find out about his affairs. He also was reckless on a motor cycle which caused a major hospitalization while he was carrying incriminating documents. You can hear the James Bond music in the background.

The 4th Department first sends him to China, but he makes his real bones in Japan. There he works as a correspondent for the Frankurter Zeitung and as an agent for the Reich. His reports to Berlin are vetted at the highest levels and he is regarded as the most informed foreigner in Japan. With his German connections he befriends Eugen Ott, the German military attaché who ultimately becomes ambassador. Sorge beds his wife. His information is so good that in the spring of 1940 he warns his masters in Moscow that Hitler was about to invade Russia and by June he knows the exact date. Stalin, of course, ignores Sorge’s and other warnings of the coming invasion.  

Sorge recruits Japanese journalist and leading intellectual Hotsume Ozaki into his ring. Ozaki becomes a leading member of Prime Minister Konoe’s brain trust. Indeed he becomes one of the inventors of Japan’s Greater East Asia Co-Prosperity Sphere. His motive is not benign, because the main purpose of Sorge’s ring at the time was to prevent Japan from invading Siberia triggering a two front war for Stalin. Their goal was for Japan to move south not north. That is ultimately decided by America’s oil embargo which forces action on Japan’s part to seize the Indonesian oil fields. It was information from Ozaki in August 1941 of the Japanese decision to go south that enabled Stalin to transfer troops from Siberia to Moscow and Stalingrad that helped turn the tide of war.

Another interesting piece of information is that the German embassy in Japan using a sand table to map topography came up with a plan for Japan to attack the British naval base in Singapore on land via the Malay Peninsula. That information was relayed to Ozaki and it became the basis for the Japanese attack in 1942.

There are also tidbits as to how Sorge financed his operation and paid for all of his mistresses. It wasn’t only Moscow gold that financed the operation. Sorge’s radio operator Max Clausen set up a very successful blueprint business that generated profits above and beyond what Moscow was sending.

Sorge’s game ends when lower levels of his ring get caught and one by one his ring is rolled up by the Japanese police. Sorge, suffering from acute alcoholism, is arrested in October 1941 and after a lengthy trial he was hanged in 1944.

Matthews tells the story with great verve and drama and even though he goes into great detail, a reader will not lose interest. From the point of view of pure spy craft, Sorge was the greatest.

For the full Amazon URL see: https://www.amazon.com/review/RHRM5FPTQYGVF/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

A Shakeup in the Kremlin

Yesterday Russian President announced a major shakeup in the Kremlin hierarchy putting him on the road to essentially be president for life. He did this by upgrading the the State Council which he heads and removing Dmitry Medvedev as prime minister. In Medvedev's place he announced that tax commissioner Mikhail Mishustin will become the new prime minister.

What all of the press accounts I have seen ignore is the fact that Mishustin has long been Putin's enforcer over the business oligarchy. As tax commissioner Mishustin has the power to put in jail any recalcitrant member of the oligarchy on charges of tax evasion. He knows where the bodies are buried. Mishustin represents the core of Putin's economic power and my guess he is being rewarded for being such a loyal servant. As an added bonus he might just be useful in helping to put some life into Russia's very lethargic economy. The question is whether it will be attempted by economic liberalization or coercion. Time will tell.

My Amazon Review of Terry Golway's "Frank and Al: FDR, Al Smith, and the Unlikely Alliance that Created the Modern Democratic Party"

Politics Makes for Strange Bedfellows

                      

Politico editor Terry Golway tells us of how and why Al Smith, an uneducated kid from the lower eastside of New York and the to the manner born Franklin Roosevelt forged the modern Democratic Party through the crucible of New York state politics. Golway tells a great yarn as to how Al Smith, a creature of Tammany Hall, became a great social reformer as a state assemblyman after the Triangle Shirtwaist Fire of 1911 by leading the way in establishing workplace standards. He worked with state senator Robert Wagner who later would become as a U.S. senator and one of the leading architects of the New Deal.

We meet Franklin Roosevelt as an effete reformer in the state senate with a great animus to Tammany Hall. Roosevelt soon leaves Albany to become the Assistant Secretary of the Navy and becomes the Democratic Party’s nominee for vice president in 1920. However, the very canny Roosevelt maintains his political contacts with New York even while recovering from polio, so much so that he nominates Smith for president at both the 1924 and 1928 Democratic conventions.

As governor of New York throughout the roaring 20’s, Smith expands worker protections, establishes a safety net, encourages park development all the while streamlining government and cutting taxes. He was ably assisted by his aide Belle Moskowitz, probably one of the most under-rated political geniuses of the 20^th century, labor reformer Francis Perkins and by young up and comer Robert Moses. Smith’s record is so strong that he overcomes the bias against his Catholic faith and his “wet” position on prohibition to become the Democratic nominee in 1928. He gets slaughtered by the Coolidge boom and vitriol of anti-Catholic bias. However, underneath the 1928 election returns Smith actually received a majority of the vote in most of America’s largest cities. In essence Smith represents the new urban-ethnic America that would come to dominate American politics for the next 40 years. He is in fact the percusser to John Kennedy’s win in 1960.

However, it is Roosevelt who adds the Democratic south along with western farmers to the coalition that makes it a winning one. Roosevelt was enabled by being Smith’s hand-picked choice to be the Democratic nominee for Governor of New York in 1928. He barely wins in a very Republican year. Just to show the power of the emerging coalition the Democratic lieutenant governor nominee was the Jewish Herbert Lehman and the Republicans nominate Albert Ottinger, who is also Jewish. Two years later as the depression takes hold. Roosevelt wins in a landslide setting him up for a presidential run.

Smith and Roosevelt break in 1932 when both run for president. Smith becomes embittered and attacks the New Deal with its “alphabet of agencies” and later joins the very rightwing Liberty Lobby. It is not pretty.

Despite his apostasy Smith was early (1933) in speaking out against Hitler and was fully supportive of Roosevelt’s prewar defense and foreign policy. Although he endorses the Republican Wendell Willkie in 1940, Smith and Roosevelt reconcile with his strong support of Roosevelt’s foreign policy.

Golway tells a great story and he puts you inside many a smoke and drink filled room. Because Golway has previously written on Tammany Hall I wish he would have gone into the compromises Smith had to make with Boss Murphy in order to do the great things he did. That aside Golway has written a wonderful book on how political change came to America from 1910-1940.

for the full Amazon URL see: https://www.amazon.com/review/R32OUML0S5T64P/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Is the Stock Market too Complacent about Iran?

After briefly falling after a United States drone attack killed Iran Republican Guard Major General Qaseem Soleimani, the stock market quickly regained its footing. It was as if nothing really important happened. My guess is that investors should not be lulled into a false sense of security as an inevitable counter strike from Iran will soon be coming. It will be then that we will know whether or not the current complacency is justified. Unfortunately the Mar-a-Lago generals are not the best ones to give us even a modicum degree of confidence.

I would also like to note a lesson from history. After the assassination in Sarajevo of Austrian Archduke Francis Ferdinand on June 28, 1914, there was little reaction on the London stock market for three weeks. To investors then it was just another day in the Balkans where three wars were recently fought. It was only in the fourth week that investors began to realize that a general European war was imminent. Thus investors should not take all that much comfort from the current benign reaction in the stock market to the justified killing of Soleimani. It might not be just another day in the middle-east.

My Amazon Review of Norman Lebrecht's "Genius & Anxiety: How Jews Changed the World, 1847-1947"

Changing the World

Music critic and novelist Norman Lebrecht tells the story of how the marginalized Jewish community in 1847 moved to the center of Western culture within one hundred years, yet continued to live under the shadow of antisemitism. His history starts with the death of composer Felix Mendelssohn and ends with U.N. resolution establishing the State of Israel.

The book is written is a stream of consciousness style that chronologically highlight different ways in which Jews entered the cultural mainstream. Simply put, in order to be accepted Jews had to be better and more innovative than their contemporaries. Early on we see the actress and daughter of a prostitute Sarah Bernhardt establish herself as a pop star. He tells of how Georges Bizet’s “Carmen” was influenced by his Jewish wife Genevieve. After Bizet’s death Genevieve would establish a Paris salon which introduces Marcel Proust to the world. Lebrecht highlights the importance George Eliot’s (not Jewish) novel “Daniel Deronda” in influencing jump-starting the Zionist movement and how the Dreyfus Affair shattered the complacency of the rising Jewish middle class.

Because Lebrecht is a music critic he has many vignettes on Irving Berlin, George Gershwin, Leonard Bernstein, Kurt Weil and Arnold Schoenberg, among others. Although he really doesn’t get into the Jewish role in Hollywood he leaves space for director Michael Curtiz’s “Casablanca.” Thus this book covers much more ground than covering the obvious personalities of Marx, Freud, Disraeli, Trotsky and Einstein. He especially notes the tragic figure of chemist Fritz Haber who invents the chemical fertilizer industry but also plays a role in the development of poison gases first for World War I and then later for the death camps.

There are three vignettes that especially struck me. The first is how Eliza Davis, a friend of Charles Dickens, get him to edit out Jewish references to Fagin in his “Oliver Twist.” Second he sheds new light on the murder of Jewish diplomat Victor Arlozorov on a Tel Aviv beach in 1934. Jabotinsky’s revisionists were initially tried and later acquitted. Here Lebrecht fingers German intelligence agents under the direction of Goering. Lastly he tells the very improbable, but true story, of how Admiral Wilhelm Canaris chief of the Abwehr (German military intelligence) gets the Lubavitcher Rebbe Yitzchak Schneersohn out of German occupied Poland thereby enabling the sect to thrive in the United States.

I have a few minor quibbles with the book. First Lebrecht leaves out the Talmudic injunction that Jews teach their male children to read, making literacy an important attribute that gets embedded into the DNA. Along with literacy, numeracy become important to maintain the far flung trading relationships of Diaspora Jewry. And second, it was the Gaon of Vilna who in the late 1700s opened up the yeshivas to secular subjects that enabled Jews to catch the wave of the Enlightenment when emancipation finally came in the 1800s.

Quibbles aside, there is much more to Lebrecht’s marvelous book than described here. In this time of rising antisemitism is important to remember how it was overcome.

For the full amazon URL see:https://www.amazon.com/review/R1DXIIJN2321J1/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv