Wednesday, January 27, 2021

My Amazon Review of Stephen Wertheim's "Tomorrow the World: The Birth of U.S. Global Supremacy"

 

The Fall of France Shock

 

Columbia University historian and co-founder of the noninterventionist Quincy Institute offers up a conspiracy theory of how a small group of intellectuals centered around the Council on Foreign Relations in the early 1940’s became the vanguard of American hegemony in the years to come. The elite view was highlighted by Henry Luce’s famous “American Century” article in Life Magazine in February 1941. To me there is some truth in what Wertheim writes, but history is far more complicated than the theory he lays out.

 

He argues that it was not Pearl Harbor that turned the tide against isolationism, but rather the fall of France in May 1940. Although France’s fall did not move public opinion all that much, it certainly moved elite opinion. But why did it move elite opinion? My answer is that it was an enormous geopolitical shock that would have worked its way through policy in any event, elite opinion or not. Why?

 

Simply put, the correlation forces drove policy far more than a few intellectuals. The fall of France meant that the balance of power in Europe was broken and Germany ruled supreme. England was up against the wall and the wily Stalin understood the geopolitical underpinnings of his pact with Hitler were rendered moot. Stalin’s hope of Western Europe bleeding white in a manner similar to World War I was shattered and instead of the Soviets being able to pick up the pieces of a shattered Europe, his country would soon become Hitler’s prey.

 

In America the isolationists/noninterventionists believed that the European balance of power would be preserved obviating the need to intervene. The collapse of France shattered that illusion. Thus, the noninterventionist idea of hemispheric defense looked kind of lame in the face of a Nazi dominated Europe. Simply put by not acting the United States would be on the strategic defensive, a hardly desirable outcome.

 

After the war, the United States stood astride the world like no other power ever before. But contrary to what Wertheim argues, instead of pressing its military advantage, the U.S. demobilizes and remains that way until the Korean War. It was Soviet expansionism in Europe and China that forces the United States into becoming a global hegemon, albeit an enlightened one.

 

I wish Wertheim would have cited Walter Russell Meade’s “American Providence” which discusses the four strands of American foreign policy. In that book Meade outlined the conflict between the Wilsonian internationalists and the Jeffersonian isolationists on the eve of World War II. That argument was settled initially by the Jacksonians revenge against the Pearl Harbor attack and later the Hamiltonian internationalists seized the economic prizes that were available in the postwar world.

 

In a word, Wertheim overstates his case, and the book could have used a better editor. It is a slog at too many points.


For the full Amazon URL see: The Fall of France Shock (amazon.com)



Thursday, January 21, 2021

My Amazon Review of Amor Towles' "A Gentleman in Moscow"

 

Soviet Life in the Eyes of a Count and a Grand Hotel

 

As I write this there are nearly 26,000 reviews of this book so I obviously do not have much to add. Nevertheless, here is my brief take. Count Alexander Ilyich Rostov, a man of impeccable tastes, is placed under house arrest in 1922 at the very grand Hotel Metropol. We follow his life over the next three decades through the eyes of an off-screen narrator. Amor Towles tells his story with grace, sympathy, and humor as he witnesses the emergence of the Soviet state, albeit from the vantage point of a luxury hotel, not the famine fields of Ukraine, the great purge of 1937-38 and the devastation of World War II. Near the end of the book the whole Politburo, including Khrushchev, play a role.

The count works as a waiter at the Boyarsky restaurant and there he befriends the chef, maĆ®tre di and other waiters. Beyond the friendships the novel is about romance and the love of a father for a daughter. Early on he befriends Nina, a precocious six-year-old who know all the inner passages of the hotel and possesses a pass key.  Later, that key will be of great importance.

The count has a long running affair with a Lauren Bacall-type willowy actress. Her description is no accident in that Humphrey Bogart and the movie “Casablanca” plays more than a casual role in the novel. The count watches 1930’s and 1940’s movies with an OGPU (later KGB) colonel who is seeking greater understanding of America through its movies. Their conversations are a joy to listen in on.

In sum, Towles has written a truly enjoyable novel and I highly recommend it.

For the full Amazon URL see: Soviet Life in the Eyes of a Count and a Grand Hotel (amazon.com)



Tuesday, January 19, 2021

Picks and Pans for the Biden Cabinet

 In November I offered my out of the box ideas for a Biden unity cabinet. (Shulmaven: Some Out of the Box Ideas for a Biden Unity Cabinet). His cabinet has turned out far too conventional, but he did latch on to my idea of having D.C. Circuit Court of Appeals Judge Merrick Garland to be Attorney General. Below you will find my views on several of the Biden nominees who, by and large, will make for a pretty good cabinet.


Picks 

Merrick Garland, Attorney General - He is clearly a class act who will clean up the stench in the Justice Department.

Tony Blinken, Secretary of State - He is an experienced foreign policy hand who has the complete trust of Biden. When he speaks our allies and adversaries will know that he speaks for the president.

Janet Yellen, Secretary of the Treasury- She knows policy and knows Washington and will work well with Fed Chair Powell.

Gina Raimondo, Secretary of Commerce - Currently governor of Rhode Island and former founder of a private equity firm. She has worked well with the Rhode Island business community and a close friend of mind believes that she is one of the smartest people he has ever met.

Gary Gensler, Securities and Exchange Commission Chair - He is an ex-Goldman Sachs partner and headed the Commodity Futures Trading Commission, He will be a tough yet fair cop for Wall Street.

Victoria Nuland, Under Secretary of State for Political Affairs- She is an experienced diplomat known for her very tough views on Putin.


Pans

Deb Haaland, Secretary of the Interior - She is a very ideological  one term congresswoman and a member of the Navajo Nation. She lacks the temperament and the administrative experience to run a 70,000 employee department.

Xavier Becerra, Secretary of Health and Human Services - Another ideologue who lacks administrative experience. If Biden wants unity, his litigation record in California will make it hard for him to break bread with people who legitimate concerns about immigration and abortion. Thankfully Biden's very experienced COVID task force will be walled off from him.

Wendy Sherman, Deputy Secretary of State- She gave away the store with the Iran nuclear deal. Blinkin will have to maintain a very tight reign on her activities.


Sunday, January 10, 2021

"Is the Pandemic Hiding Future Inflation," UCLA Economic Letter, January 2021

How Asset Price Inflation Will Lead to Consumer Price Inflation


Highlights

The cover story of the December 12-18th edition of The Economist was headlined, “Will Inflation Return?” The article discussed the recent history of why consumer price inflation, running at a low year-over-year rate of 1.2% as of November, has been so quiescent. However, there is another type of inflation that has been soaring. I am speaking of asset price inflation which is showing up practically everywhere.

Distinguished from ordinary goods and services, asset price inflation affects financial instruments such as bonds, shares, and their derivatives, as well as real estate and other capital goods. For example, after swooning in March, stock prices have soared with the S&P 500 up 16.4% in 2020 and the tech-heavy NASDAQ Composite up a startling 43.6%% (Figure 1). Further, home prices rose at the highest rate in six years with the Case-Shiller National Home Price Index up 8.4% year-over-year in October (Figure 2). And to top it off, Bitcoin, the crypto currency, ended the year up an astounding 306%.

The rocket fuel for the burst in asset prices is the Federal Reserve. Money growth as measured by M2 (including cash, checking deposits, savings accounts, time deposits, money market mutual funds etc.), has been running at 25% year-over-year rate, a record high. For now, money has been flowing into asset prices. At some point via the wealth effect, it could very well flow into consumer prices as consumers increase consumption by reducing their current savings and increasing their borrowing. 

Supporting this view is the fact that, as in the late 1990s, the public is once again actively participating in the stock market. Indeed, there is some evidence that the financial markets suspect an inflationary process is now underway.  The 10-year inflation breakeven yield – a measure of inflationary expectations embedded in the 10-year Treasury bond – has risen from 0.75% in March to 1.99% at year-end (Figure 3).

 I am cautioned that all of those who forecast an increase in inflation over the past decade – and I was one of them for a time – turned out to be wrong. Nevertheless, all of the ingredients are now in place for an acceleration in consumer price inflation. And remember: Unlike the 2010-15 period when banks were unwilling to lend because of regulatory constraints, those constraints are no longer there. Thus, inflation noticeably over 2% a year is far more likely than inflation below 2%.

The full article is available at: https://bit.ly/2LwYl6v

Friday, January 8, 2021

The Republican Party Implodes

The Republican Party founded in 1854 by anti-slavery Whigs is in the process of imploding. In just two days the party lost two Senate seats in Georgia, witnessed the sacking of the Capitol by insurrectionist vandals incited by President Trump and then two-thirds of Republican House members including their leader Kevin McCarthy and eight senators voted to overturn the lawful election of Joe Biden. Particularly repugnant was the behavior of the faux populist Senators and former Supreme Court clerks Ted Cruz (Princeton, Harvard) and Josh Hawley (Stanford, Yale).  These two made their beds with Trump and they will now have to lie sleepless in those beds of thorns.

It is beyond me how Senators Romney, Thune, Toomey and Saase and Congressmembers Liz Cheney and Kinzinger can remain in a party where the Trump-Cruz-Hawley retain the backing of a majority of the membership, even after the attack on the Capitol. Thus my guess is that the Republican Party is about to split along the lines of my November 2018 blogpost (See: Shulmaven: The Coming Political Realignment: Part II ) where the establishment Republicans, the right-Hamiltonians join up with the Democratic Party, the left-Hamiltonians. They have more in common with the Democrats than what remains of the Republican Party which will become a modern version of the 1840's Know Nothing Party. 

The split will be exacerbated by what I expect to be a Trump Pardonpalooza late next week (See: Shulmaven: Trump's Pardonpalooza Coming Christmas Eve ) when he pardons himself, his family and all of his co-conspirators. And if that won't be enough the Trumpistas will be wallowing their "They stole it slogan" a version of Weimar Germany's "stab in the back" and "November criminals" memes of the fascists of that era. (See: Shulmaven: Trump's Big Lie and the Legacy of 1918 Germany)

Make no mistake the Democratic Party with its cancel culture left, defund the police mobs, high tax mentality and its elite haughtiness is no bed of roses, but at least for the most part, it respects our constitutional processes. Moreover if enough Republicans join, the Democrats just might be moved ever so gently to the Right. As that happens with or without this movement the Democratic Party will likely split with the Left forming a social democratic party, a la Eugene Debs in the early 1900's.

Monday, January 4, 2021

My Amazon Review of Bruce Greenwald's et.al. "Value Investing: From Graham to Buffett and Beyond" 2nd. Ed.

 

In Search of Value

 

As a value investor, I have the highest respect for Bruce Greenwald and his colleagues. Unfortunately, in recent years value investing has failed to live up to its billing. Indeed, over the past two decades Warren Buffett’s Berkshire Hathaway has performed roughly inline with the S&P 500. (I am a shareholder.) My history with value investing goes back to reading Graham & Dodd in 1964 while attending Baruch College. Further I own the classic 1940 edition of that book and Greenwald’s first edition of this book. Nevertheless, I did find my way to owning Microsoft, Apple, and Alphabet.

 

Nevertheless, Greenwald’s new book is worth a careful read. He is very wise in dismissing modern portfolio theory’s Beta as a measure of risk. Why? The beta measure of risk is independent of stock price. He is also very cautious about using discounted cash flow over long periods of time because the results are extremely sensitive to small changes in the discount and growth rates.

 

Greenwald plows over old ground in his discussion using net reproducible assets and earning power as a method for determining value. He then goes one step further by introducing franchise value into his valuation paradigm. Simply put franchise value is created by the ability of a firm to earn significantly higher returns over its cost of capital over a sustained period. Those returns arise from the existence of a protective “moat” around its businesses. Greenwald also recognizes that over time a firm’s franchise value can decline, and he thus introduces a decay factor to account for this factor.

 

The question arises is why hasn’t value investing been successful in recent years. There are at least two explanations. First is that the economy has shifted from tangible asset based to intangible asset based. That means GAAP accounting does not put on the balance sheet such intangibles as trademarks, patents organizational efficiency and research and development platforms. Greenwald adjusts for these factors, but there is higher error term surrounding the valuation of intangibles than tangibles. Second the Fed’s zero interest rate policy coupled with quantitative easing has likely distorted many of the historical metrics defining value.

 

The book was written before Berkshire Hathaway made its $735 million investment in Snowflake, a cloud computing software company. At Berkshire’s price, the company was valued at $34 billion and had trailing twelve months revenue of just under $500 million. Whatever one can say it is hard to make a valuation case for this company. Nevertheless, the stock more than doubled after Berkshire’s IPO purchase.

 

Greenwald has a very long discussion about Intel, the semiconductor giant, which at times in its history represented true value. He blames Intel’s recent problems on value destroying acquisitions. That is true in part, but Intel’s real problems run deeper. Its franchise value has deteriorated as it vaunted R&D operation failed to keep up with advances made by Applied Micro Devices, Nvidia and Apple. Moreover, its edge in manufacturing disappeared as Samsung and Taiwan Semiconductor surpassed it in the production of the latest generation of chips. In other words, Intel’s “moat” was paved over by competition despite its spending 19% and 22% of revenue on R&D and capital spending in 2019, respectively.

 

An added attraction of the book is that it includes vignettes from star value investors as Warren Buffett, Mario Gabelli, and Seth Klarman, among others. I read the book in the Kindle version; given the number of tables, it would have been an easier read in the hardback version.

 

Lastly, I recently started a position in a stock that currently trades at 10 times earnings and is trading at or below in my estimate, the reproduction costs of its assets. So, hope springs eternal and I will close with the opening quote that Graham & Dodd used in their classic text “Security Analysis: Principles and Technique,” from Horace’s Ars Poetica, “Many shall be restored that now are fallen and many Shall fall that now are in honor.”


For the full Amazon URL see: In Search of Value (amazon.com)