The Republican Convention's Politics of Fear

When Donald Trump ran for president four years ago his enemies were foreign, namely illegal immigrants and China. You remember "rapists" coming in from Mexico. However at this year's convention the enemies are now domestic designed to bring fear into the hearts of white suburban voters. He offers up a vision of black rioters taking over cities and "woke" white socialist hordes riding in Joe Biden's Trojan Horse set on creating a dystopia on the Potomac. Given what happened in Kenosha, Wisconsin and Portland, Oregon it might just work. However, unlike prior Republican conventions there was no scare talk about Obama Care. Perhaps going negative on Obama Care does not poll well.

The convention was a made for TV affair with slick production qualities. The producers were wise not to have emcees, unlike the Democratic Convention. This enabled viewers to see the convention unfiltered by TV commentators who normally cut in when an emcee was on stage. The whole production was to portray Trump's "soft side" with respect to gender and race while at the same time aiming to scare the daylights out of the viewers as to what an anti-law and order socialist Biden presidency would mean.

The convention also highlighted that Ivanka, not Don Jr. is the true heir to the Trump throne. Ivanka had the prime speaking spot and she portrayed herself as a key assistant to the President. Her speech overshadowed her father's way too long and boring 70 minute oration.

The convention was designed to obfuscate Trump's criminal negligence with respect to his handling of the COVID-19 pandemic and the economic collapse that came with it. (See:  https://shulmaven.blogspot.com/2020/05/criminal-negligence-in-white-house.html) Contrary to all public health rules his 1500 person audience sat close together largely unmasked on the White House lawn. Time will tell if this turns out to be a super-spreader event.

I drew two lessons from the convention for the Biden campaign. First he has to take the civil unrest issue seriously. He has to come out strongly and firmly against the violent disorders that have occurred in several American cities. In a strange quirk of history his choice of Kamala Harris for vice-president could turn out in a way he never predicted. Put bluntly, she can return to her law and order roots as San Francisco D.A. and California Attorney General. Second the title of my review of "Dewey Defeats Truman" ( https://shulmaven.blogspot.com/2020/07/my-amazon-review-of-ajbaimes-dewey.html) was "Never Give Up, Never Sit on a Lead." Trump is not going to give up so Joe Biden has to get out of his basement and make his case to the country, just as Truman did in 1948.

The Fed Green Lights the Stock Market

 On January 22 I posted a blog arguing that the stock market might not have been over-valued as many commentators at the time thought. (See: https://shulmaven.blogspot.com/2020/01/a-rational-basis-for-supporting-todays.html) By mid-March I looked a complete idiot as the the COVID-19 pandemic crashed the market. With that the Fed came out with guns blazing and rescued the market from an abyss that many feared. Since then the stock market rallied by more than 50% making new highs.

Today Fed Chairman Jerome Powell in announcing new policy procedures ratified the advance and then some. The new procedures did three things:

1) Buried the Phillips Curve which means the Fed will now be concerned only with "shortfalls" in employment and won't worry about exceptionally strong labor markets unless inflation was a clear and present danger.

2) This means that the Fed won't act preemptively to prevent inflation. In a nutshell good news for the economy is good news for the stock market; a huge boon for cyclical stocks. In other words interest rates will be lower for longer.

3) The Fed's 2% inflation target will represent a multi-year average of inflation, not a specific point in time target. As a result the Fed will not be concerned from what it perceives to be a temporary period of say 2.5%-3% inflation. In a zero nominal rate environment the real Fed Funds rate could be -3%; an extraordinarily bullish environment for stock prices and yes, gold.

Thus if we assume a reasonable economic recovery over the next two years that would bring S&P 500 earnings to around $180 one can visualize a S&P value of between 4000-4500, implying a PE ratio in the range of 22X-25X.  The one fly in the ointment would be a resurgence in inflation which would put a kibosh on the Fed's zero rate policy. The bond market sensed that today with 10-year Treasuries rising from .68% to .74% and 30-year Treasuries rising from 1.42% to 1.50%. 

In the meantime the Fed has green lighted the stock market.

The Democrats Put on a Good Show

The Democratic Party’s virtual convention worked in both form and substance. If you will it was a very successful infomercial highlighting the diversity and the policy positions of the party. Joe Biden came off as a deeply caring person and contrary to the Trump campaign’s attacks on him, he delivered a very presidential acceptance speech. He also made clear that he was not a captive of the party’s loony Left. Thus the way is open for him and his running mate Kamala Harris to attract a broad swath of the electorate.

 

My two qualms are that way too much time was spent on attacking Donald Trump rather than discussing the mass unemployment crisis our country faces and the near complete absence of any discussion on foreign policy. Ohio senator Sherrod Brown acted as an off-screen narrator in one of the few pieces on the economy; instead he should have had an on camera role. Hillary Clinton lost in 2016 because she largely ignored white working class voters. Biden has the ability to speak to their pain and hopefully he will. As to foreign policy most Americans are not interested in foreign policy, but soon foreign policy will be interested in us.

 

My sense is as of today, the Democrats are on their way to a substantial victory in November that will lead to a conclusive Biden win along with gaining control of the Senate and adding seats in the House. Of course the Democrats sometimes have the habit of snatching defeat from the jaws of victory, but that looks less likely as Trump continues to implode with each passing day.

My Amazon Review of Fergus Bordowich's "Congress at War....."

 

The Civil War Congress

 

Instead of focusing on Lincoln, historian Fergus Bordowich turns his trained eye on the role of the Republican Congress during the Civil War. He tells his story through the eyes of Senate Finance Chairman William Pitt Fessenden (R-ME), staunch abolitionist and House Ways and Means Chairman Thaddeus Stevens (R- PA), Joint Committee on the Conduct of the War Chairman and staunch abolitionist Ben Wade (R-OH) and traitorous Democratic Congressman Clement Vallandigham (D-OH). It is Fessenden and Stevens who come up with the wartime tax and borrowing measures that kept the Union financially afloat during the darkest days of the war. Wade’s committee shines the light on General George McClellan ineptitude that leads to the appointment of General Grant. And we see Vallandigham spreading defeatist propaganda and raising every possible civil liberties argument against Lincoln’s suspension of Habeas Corpus and restrictions on antiwar speech. I wonder where today’s ACLU would be in that context?

 

Congress is way ahead of Lincoln on emancipation. Straight off it passes the confiscation act which frees the slaves captured from the Confederate army. This happens in 1861 well ahead of the draft Emancipation Proclamation that was written in mid-1862 and not formally released until January 1863. But we also learn that many abolitionists harbored deeply racist beliefs, though not true of Wade and Stevens.

 

While engaged in wartime issues the 37^th Congress, perhaps the most productive in history passes the Morrell Act (land grant colleges), the Homestead Act, the Pacific Railway Act and the National Banking Act which created federally chartered banks. As a result, although rapidly depreciating, a national currency in the form of greenbacks was created. The next Congress passes the 13^th Amendment which abolishes slavery. Bordowich also discusses the fate of the Republican Party from its triumph in 1860 to its suffering a major defeat in the 1862 midterms to its great victory in 1864 following Sherman’s military successes in Georgia and the Carolinas.

 

Of note his discussion of Nathan Bedford Forrest who has once again become known in his role as founder of the Ku Klux Klan. What I didn’t know was that Forrest was a slave trader before the war and he conducted perhaps what was the greatest war crime of the war with his massacre of Union troops ( both black and white) Fort Pillow, Kentucky. His is one statue that should come down.

 

For those readers interested in a different take on the Civil War, Bordowich has offered up a very insightful book.

For the full Amazon URL see: https://www.amazon.com/review/R1Z7DLD4IL9YH1/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Benjamin Carter Hett's "The Nazi Menace............"

 

Hitler Starts a World War

This book is a follow up to Benjamin Carter Hett’s 2018 “The Death of Democracy” that I reviewed here two years ago. ( See: https://shulmaven.blogspot.com/2018/06/my-amazon-review-of-benjamin-carter.html  ) In this instance Hett jumps ahead from Hitler’s rise to power in 1933 to the 1937-1941 period. This territory has been covered by numerous authors and I have reviewed many of the recent books on the period including the works of Todman, Boverie, Roberts, Kershaw, Ulrich, Olson, Dunn, Kotkin and even “The Maisky Diaries.” As a result Hett’s task to come up with something new is a difficult one.

 

He succeeds with his discussion on the post-1937 dissatisfaction with Hitler in the upper reaches of the German General Staff and its officer corps who feared a German defeat in a future world war. There were many half-hearted plots to depose Hitler with the most active being at the time of the Munich conference. Chamberlain’s appeasement makes Hitler a hero and the plot falls apart. As they say nothing succeeds like success. It is not clear that any coup would have been successful given Hitler’s mass popularity, but if he were killed history might have taken a hairpin turn.

 

His discussion on the methods of war of England and Germany helped drive diplomacy is intriguing. The Germans, following the theories of Heinz Guderian, become expert on the offensive potential of tank warfare. The use of tanks changes the dynamic of the set piece artillery battles of World War I to a war of mobility. By contrast England develops radar and the Spitfire fighter plane to fend off air attacks. That along with its navy prepares England for a long war. Thus in order for Germany to win it has to do so quickly otherwise it would and did lose slowly.

 

Hett starts each chapter with a series of vignettes including the 1939 German-American Bund rally in 1939 and to me one very poignant one was that on the life of Clare Tisch who was one of the few great female economists of the era. She was a student of Schumpeter and her widely cited Ph.D. thesis was on the economics of a planned socialist economy. She could have gotten out of Germany, but stays to work with orphaned Jewish children. She is deported and dies in Russia in 1941.

 

Where I would disagree with Hett is that he is way too kind to Neville Chamberlain. He calls Chamberlain a realist who understands England’s residual weakness from the Baldwin years by rebuilding its defenses especially with respect to air defenses and the reintroduction of conscription in still peacetime 1939. Chamberlain also understands that economic strength is a cornerstone of military strength and therefore over-spending on defense could wreck the economy. All to the good, but Chamberlain is not really a realist because he does not understand that Hitler does not represent the Kaiser’s Germany, but rather he represents a revolutionary power seeking to overturn the international order. Simply put, he can’t be reasoned with. Further given the Hitler threat, Chamberlain was unwilling to cut domestic spending to fund the needed military expansion. It is up to leaders to change public opinion, not follow public opinion. In this regard Chamberlain was a failure.

 

One last point is that Hett ignored the infamous Hitler-Molotov meeting in December 1940. Although Hett argued that Hitler started planning his attack on Russia in the summer of 1940, the real planning didn’t begin until after that meeting. Remember from “Mein Kampf” on Hitler was always planning to attack Russia.

 

There is far more to Hett’s book than what I have commented on particularly his discussions on Roosevelt, Stalin and Churchill. However he does put to rest the view that Roosevelt was ready to challenge Hitler early on in his administration. That challenge didn’t take shape until his Quarantine Speech in 1937. Hett offers up a world similar to ours in the sense that the law based international order featuring democracy and free trade was under challenge by autarkic dictators. Scary!

For the full Amazon URL see: https://www.amazon.com/review/R3AEQTO5HB44WI/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Ted Mann's and Thomas Gryta's "Lights Out: Pride, Delusion and the Fall of General Electric"

 

The Tragedy of General Electric

 

For a century General Electric was one of America’s most iconic corporations with roots going back to Thomas Edison and J.P. Morgan. Yet over the past two decades it has shriveled up into a shadow of its former self. Wall Street Journal reporters Ted Mann and Thomas Gryta  vividly tell a deeply researched story of GE’s slow motion collapse that began at the at the start of this century. Let me say at the outset that several years ago I was a preliminary Loeb Awards judge for the best business book of the year. Although they no longer offer an award for books, if they did, this book would most assuredly be a finalist.

 

The seeds of GE’s demise starts with their rock star CEO of the 1980’s and 1990’s, Jack Welch. Wall Street uniformly admired the house that Jack built, but in many respects its foundation was shaky. Specifically Welch created a “make the numbers” culture and he used the ever growing GE Capital subsidiary to meet his quarterly earnings target by coming up last minute financial transactions. Thus by 2000, 40% of GE’s earning were coming finance; not generators, jet engines and appliances.

 

During that era GE kept a close watch on the analysts who covered GE stock. Mann and Gryta’s comments on this process ring true to me. It 1997 as Chief Equity Strategist for Salomon Brothers I remover GE from the firm’s recommended list of stocks. Within minutes Russ Leavitt, Salomon’s analyst covering GE, received a complaining call from investor relations. He had to grovel before them by saying it wasn’t him, but rather it was me.

 

Welch wanted to end his career with the mega-acquisition of Honeywell. That would have created an even bigger electric behemoth, reduced the role of GE Capital as a relative source of earnings and in, my opinion, it would have created accounting opportunities to sweep under the rug past mistakes via a special charge that analyst usually ignore. This last proposition is mine, not the authors.

 

After a drawn out selection process, Welch selects Jeff Immelt to be the new CEO. Those passed over include David Cote who would soon run Honeywell, Bob Nardelli who would go on to Home Depot and Jim McNerney who would run both 3M and Boeing. Yes, GE’s vaunted management had a very deep bench. In picking Immelt Welch got probably the best salesperson in the company. I met Immelt once at a charity function, and in a very short conversation his sales personality came through and that experience was very consistent with what you get from the book.

 

Unfortunately Immelt was not really strong on finance; he didn’t really understand GE Capital and he was a deal junkie with a penchant to overpay for acquisitions. He did that when he ran the health care equipment division in the 1990s and would do that in spades later with acquisitions in media, oilfield equipment and power generation when he ran the whole company.

 

Immelt had the misfortune of starting to run GE just a few days before 9/11 which signaled the end of the 1990’s boom that so propelled the Welch era. The environment made it more difficult for GE to reach its earnings targets and the passage of the Sarbanes-Oxley accounting reforms in 2003 made it much harder to generate earnings with the stroke of a pen. Thus Immelt had to rely more and more on GE Capital expanding its balance sheet, so much so that by 2007 it accounted for half the company’s earnings. Then in 2008 as the financial crisis hit with full force, GE could not roll over its commercial paper and had to be bailed out by the Fed. With that GE became known as a finance company that made industrial equipment and its multiple suffered.

 

To get out of this fix, Immelt began to slim down GE Capital and went on an ill-timed acquisition binge buying into oilfield equipment at the top of the market and grossly overpaying for the French generator company Alstom. The deal was predicated on cost synergies that the French government wouldn’t allow, but Immelt when ahead anyway. Much of the details on this transaction comes from the author’s version of “deep throat,” a deal team member they identify as “Adam Smith.” To make things worse the conventional power market was entering a secular decline as wind and solar were gaining market share.

 

It is downhill from there. In order to make their numbers the power division rejiggers its service contracts to generate accounting earnings as opposed to cash earnings. It seems that GE was utilizing something akin to gain on sale accounting for their service contracts where they booked earnings upfront rather than over the life of the contract. It this accounting that triggered a very negative analyst report from J.P. Morgan’s Steven Tusa that opened up the gates of hell for GE.

 

Then, of a sudden, GE discovers it had a long term care insurance problem that the executive team, the board and market thought was behind them with the spin-off of Gentworth in 2004. Yet it was there to the tune of $15 billion. That was the end of Immelt. In his place John Flannery was appointed in 2018. He tried his best, but he was gone in 18 months. Then the board appointed Larry Culp, GE’s lead director and formerly a very successful CEO at Danaher. He had his work cut out for him.

 

Perhaps what is most staggering is that from 2004-2018 GE bought back $108 billion worth of stock as the market value collapsed to $56 billion at this writing. All the while GE’s board was mindlessly approving the share buybacks and Immelt’s acquisitions. You could say that that it was complete abdication of authority while they were collecting their $300k a year annual retainers. They weren’t the only ones who missed the mark. I too owned shares of GE during most of Immelt’s reign as I was blinded by the firm’s iconic image and reputation for good management.

 

As I said at the outset, Mann and Gyrta have written an important book and should be read as a case study for investment professionals and corporate managements alike. My one quibble would be that an annotated stock chart would have been very helpful in visualizing the history presented here.  

For the full Amazon URL see: https://www.amazon.com/review/REM986Q7TZ4RO/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Judith Bishop's "Changing Channels:From Just the Facts to Outrageous Opinions"

Newsmakers and Noisemakers

 

Long time television news producer Judith Bishop has offered up a serious critique of the news business in the age of Trump. Her book is more like a long magazine article, but it is worthy just the same. Although the issues she cites long predates Trump, it has been especially hard on serious journalists who have to report the consistent stream of lies put out by the Trump Administration. We are truly living in Orwellian times.

 

Bishop’s focus is largely on television news where she recounts the well-known story of the three network oligopoly being decimated by the rise of cable and later the internet. We can’t go home anymore back to the days of Walter Cronkite. Her well researched book highlights her interviews with such luminaries as veterans Ted Koppel of ABC and Frank Sesno of CNN to newbie Katy Tur of NBC.

 

She discusses the rise of Fox News as a rightwing alternative to the more liberal networks along with CNN and MSNBC. She understates the genius of Roger Ailes in finding a market for his views. She also is very acute at highlighting the cost pressures facing media as viewers found other alternatives. Those pressures engendered the rise of opinion journalism as it is far less expensive to have four talking heads around a table in a studio than having real correspondents in the field in say Berlin, Beijing or Bagdad. As a result outrageous opinion dominates the delivery of facts. And outrage generates ratings. That is why CNN and MSNBC covered Trump like a glove in 2016.

 

I largely agree with Bishop’s thesis but I think she leaves out an important issue and that is what is not covered is sometimes far more important than what is covered. To me part of the reason why the mainstream media lost its way is that it does not cover a host of issues. For example a center-right viewer like myself would like to see coverage on the Marxism and antisemitism of Black Lives Matter, the risks of COVID spread arising from the demonstrations around the horrific death of George Floyd, and the huge hit to small businesses in Portland, Seattle and Minneapolis arising from the demonstrations. If the mainstream media is to be rehabilitated it has to look itself in mirror.

 

Lastly I would highlight the rise of the “woke” culture in the news business. If Trump’s lies are Orwellian so too are the “woke” censors policing journalists and the language they use. It’s a real mess but I remain hopeful that television journalism finds a way out of this morass. Judith Bishop points us in the facts-based direction.

For the full Amazon URL see: https://www.amazon.com/review/R3VQE1C6KL8C02/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Robert Gerwarth's "November 1918: The German Revolution"

The Socialist Center Holds

University College of Dublin historian Robert Gerwarth has written an important book on the creation of the Weimar Republic that rose out of the ashes of Hohenzollern Empire in 1918. Although many historians have viewed the new republic as doomed from the start, Gerwarth rightly believes it had a fighting chance to succeed. His history is largely written through the lens of the MSPD (Majority Social Democratic Party) and its leader Friedrich Ebert.

His story begins in 1914 with the start of World War I with the Social Democratic Party unified save for Karl Liebknecht in supporting war credits to finance the war. The party splits a year later between pro-war (MSPD) and anti-war factions (USPD) with the majority supporting the war. In late 1917 and early 1918 with Russia’s withdrawal from the war a wave of optimism sweeps Germany. That was quickly dispelled as the Americans enter the war and the final German offensive is crushed in August of that year. Nevertheless, even with potential defeat Germans remain optimistic that President Woodrow Wilson’s Fourteen Points would lead to a just settlement.  

With Germany headed for defeat in the fall of 1918 a revolution starting with sailors in Kiel spreads throughout the country. Unlike the French and Russian revolutions which started in the capitals, here the German revolution starts in the periphery and ends up in Berlin in November.  On November 9 a republic is proclaimed in Weimar with Friedrich Ebert as its president.

Then things go to hell in a handbasket. A revolution from the Left is orchestrated by the Spartacists Karl Liebknecht and Rosa Luxemburg. That revolution is crushed by the army with the rightwing paramilitary Freicorps. Similarly the so-called Bavarian Soviet Republic in Munich is again crushed by the army and the paramilitaries. Here we see Ebert showing no mercy for his former colleagues on the Left. From the Right there is the Kapp Putsch which is put down by Ebert calling for a general strike. Ebert and the MSPD genuinely believed in democracy and order and even though they were men of the Left, they rightly feared the chaotic consequences of a Bolshevized Germany.

So here we have new government challenged from the Left and the Right and further it is demoralized by the harsh terms of Versailles in complete contradiction of what they believed to be the moderate terms of a Wilsonian Peace. Simply put, they were sold out by Wilson. And if that were not enough the government faces a French occupation of the Ruhr, a runaway inflation and the assassination of its highly regarded finance minister, Walter Rathenau.  Yes despite all of this by 1925 the government is stable, the center parties are in control and the extreme parties of the Right and Left are marginalized. It would take a global depression and a conspiracy of the Right and the Left to bring down Weimar. Absent that, sitting from the vantage point of 1925, the prospects for Weimar looked good.

My two quibbles with Gerwarth’s book is that he spends way to little time on the events of 1920-23 that he advertises in the beginning and he doesn’t spend much time on the role of the nonsocialist center parties had in forming the government. Otherwise “November 1918” makes for interesting history.

For the full Amazon URL see: https://www.amazon.com/review/R1W9DUGA4109F4/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv