Roaring 20's or That 70's Show

 With the 50 basis point backup in 10-Year U.S. Treasury yields over the first two months of the year the stock market has reached a critical juncture. As readers of this blog know, I have been bullish on stock prices for over a year ago ( See: Shulmaven: The Fed Green Lights the Stock Market ) largely based on the fact that interest rates will stay lower for longer. That assumption is now under challenge as I believe the markets now rightly believe that inflation will not be as quiescent as it has been over the past decade. To be sure I wrote about asset price inflation leading to consumer price inflation in January (See: Shulmaven: "Is the Pandemic Hiding Future Inflation," UCLA Economic Letter, January 2021), but we are now witnessing dramatic price increases in copper, oil and lumber and across a spectrum of producer prices. 

Meanwhile the Biden Administration continues to push for its extravagant $1.9 trillion relief/stimulus program and the Fed continues to support 25% year-over-year M2 growth, more than twice the peak rate of the great financial crisis. This is a formula for higher inflation and yes, higher interest rates that could work to engender a low level 1970's style stagflation.

To be sure that is a risk, but my sense is that what the stock market has been telling us all year that it isn't only interest rates that have been driving stock prices. In my opinion, assuming the Biden Administration is successful with a major infrastructure program that will complement the coming corporate capital spending boom I envision, profits will soar. Indeed corporate spending will concentrate on the electrification of the economy, hardening the grid, insourcing of critical supplies to make the economy more resilient, and hardening the IT infrastructure. All of this will be going on concurrently with a suburban housing boom. Net net, it is my belief that the 20's will roar, at least in the early part.

As a result the demand for capital will be high, interest rates will rise faster than what the market now expects and concomitantly price-earnings multiples will contract. So instead of the 22-25 times earning multiples hypothesized, future multiples will be on the order of 18-21 times earnings. Not so bad, but the risk remains that later in the decade we will see the reemergence of a less than benign interest rate and inflation outlook. 

My Amazon Review of Michael Shnayerson's : Bugsy: The Dark Side of the American Dream"

 

The Rise and Fall of Bugsy Siegel

 

Michael Shnayerson tells the story of how a Jewish eastside kid under the tutelage of legendary mobster Arnold Rothstein rose to be among the top bootleggers in the 1920’s. By 1930 Bugsy Siegel along with Lucky Luciano and his boyhood friend Meyer Lansky became the triumvirate of organized crime. Siegel was instrumental in the formation of Murder Inc. and along the way he paid for his brother’s medical school training. Siegel was hands on in murder, rapes and robberies, a true gangster.

 

He moved from New York City to Los Angeles and with the aid former gangster and now actor George Raft, Siegel become the toast of Hollywood. His Hollywood good looks certainly didn’t hurt. Just as Hollywood found fascination with the radical left in the 1960’s, in the 1930’s Hollywood was enamored with the gangster in their midst. Remember that Warren Beatty played him in the movie, “Bugsy.” Meantime his wife and two daughters were living in the toney Scarsdale suburb of New York City.

 

Shnayerson offers up his belief as to why the Jewish gangsters were far more sensitive to the rise of Nazism in Germany than the Jewish community as a whole. His explanation is that the gangsters knew how violent people can be.

 

Although Siegel get all of the credit for the creation of postwar Las Vegas, much of the credit goes to his partner Billy Wilkerson, publisher of the Hollywood Reporter and nightclub impresario. Siegel took over Wilkerson’s Flamingo project, which was to become the first modern Las Vegas hotel/casino. However, the problem was that Siegel was a horrible construction boss and the project suffered from huge cost over runs that were funded by the Mob. When the Mob suspects Siegel and his girlfriend Virginia Hill from skimming their money, at a Havana meeting in 1946 Luciano and Lansky order up a hit on their one-time buddy.

 

The hit was accomplished in June 1947, a crime that was never solved. Shnayerson offers up his theory as to who actually did it.  This is a fast-paced book well worth the read. I only wish he spent more time on Mickey Cohen, Siegel’s longtime Los Angeles accomplice.

For the full Amazon URL see: The Rise and Fall of Bugsy Siegel (amazon.com)

My Amazon Review of William Walker's "A Spy in Vienna....."

 

Vienna on the Road to Anschluss.

 

This is the third William Walker novel I reviewed. I previously reviewed his first and third Paul Muller novel ( Shulmaven: My Amazon Review of William Walker's "Danzig:A Novel of Political Intrigue"  and  Shulmaven: My Amazon Review of William Walker's "Target Switzerland: A Paul Muller Novel of Political Intrigue" ) about inter-war Europe. Paul Muller, his protagonist is a diplomat/spy in the service of Switzerland. Here as League of Nations Commissioner for Austria his mission is to prevent Hitler from acquiring Austria’s gold reserves in the event of a German takeover of the country. Muller goes so far as to meet with British foreign minister Anthony Eden in a failed attempt to get his cooperation in transferring Austria’s gold reserves which are held in the vaults of the Bank of England.

You can literally smell, taste, and witness the street fights of 1938 Vienna in this novel as tensions rise from early January to mid-March when the German troops move in. We see Muller meeting with the Austrian finance minister and the head of its central bank as they try to determine what policy Chancellor Kurt von Schushnigg is going to follow as he attempts to face down Hitler.

Along the way Muller meets with the leading journalists of the day who are covering Austria, among them the now very famous William Shirer. We also see Muller ending up in bed with the wife of Germany’s ambassador and former German chancellor Franz von Papen.

There is brief diversion to Hollywood where Muller was visiting relatives. There he meets the actor, Charles Boyer who had just completed “Algiers.” By shear coincidence I watched the movie last week. So at least for me, it added a nice touch to the book.

Of Walker’s three books I would rate this one better than the other two: not quite five stars but very enjoyable.

For the Complete Amazon URL see: Vienna on the Road to Anshluss (amazon.com)

My Amazon Review of Thomas Ricks' "First Principles:............"

 

The Noblest Romans of America

 

Military affairs writer Thomas Ricks discusses how Greco-Roman classical thought underpinned the political philosophy of our first four presidents.  College educated Adams, Jefferson and Madison understood Latin and Greek and to them the voices of Cato, Cicero and Cincinnatus were not ancient history, but current in their thoughts. Though not college educated, Washington absorbed the culture by osmosis and perhaps he was the noblest Roman of them all. For it was he, just like Cincinnatus who fought the war and then returned to his farm.

 

For all of them the models for a republic came from Greece and Rome. To be sure both were republics of the elite and both rested on the work of slaves, which is pretty much how we ended up in 1789. Nevertheless, the watchword for both was “virtue,” meaning civic virtue by placing the public good over private interest. This is a far cry from Donald Trump’s Washington, and it was, in fact, Trump’s election that prompted Ricks to write this book.

 

The ideas of the ancient world were tempered by the writings of Montesquieu (“Spirit of Laws” 1748) and the Scottish enlightenment writings of David Hume and Adam Smith. It was Madison’s genius to harness private interests in the service of classical virtue in writing the constitution.

 

Ricks has suggestions as to our world of today can utilize the thoughts of the classics. He notes that the Founders would be shocked as to the role money plays in our politics thereby creating an all-powerful oligarchy. That is true, but I would I argue that the Founders would also be shocked by the size and scope of the federal government. With the stakes so high, it is only natural that money has flooded into our politics.

 

Ricks has given us another view into the thoughts of our founder. Although a bit long-winded in spots his book is well worth the read.

For the full Amazon URL see: The Noblest Romans of America (amazon.com)

The Party of Moral Eunuchs

 Yet again the Republican Party proved itself to be the party of moral eunuchs. This is my fifth blog calling out Republicans as moral eunuchs. (See:  Shulmaven: The Republican Moral Eunuchs and the Magnificent 13,  Shulmaven: The Coming Political Realignment: Part II, Shulmaven: A Funeral in Washington, Shulmaven: An Open Letter to Paul Ryan and Mitch McConnell) Save for 10 members of the House and 7 members of the Senate, congressional Republicans refused to acknowledge guilt in the impeachment of Donald Trump for inciting a riot that sacked the Capitol building, caused death and injury to the Capitol Police and the near assassinations of Speaker Nancy Pelosi and Vice President Pence. 

Senate Minority Leader Mitch McConnell has a portrait of his hero Henry Clay in his office. If he acted like Clay, who worked to save the Union from 1820-1850, he would have voted to convict Trump. My guess is that if he now looks closely at that portrait he would see tears in the eyes of Clay.

All I can say to the Republican eunuchs is to quote Oliver Cromwell, "You have sat too long for any good you have been doing lately... Depart, I say; and let us have done with you. In the name of God, go!  It will be up to the voters to render the ultimate verdict.

The Democrats are Fighting the Last Fiscal War

 Just as generals tend to fight the last war, so too do politicians. The Democrats are remembering the lesson of 2009 where the fiscal package approved by President Obama and the Congress was woefully lacking amidst the Great Financial Crisis. At the time both housing and stocks were in the toilet and the banking system plumbing was clogged up with bad loans. 

Although the situation is far different today the President Joe Biden and his Democrats are moving forward with a $1.9 trillion relief/stimulus package on top of the $900 billion approved in December. This at a time when the Congressional Budget Office estimates the output gap at $420 billion. Estimating the output gap is tricky so let's assume it is about $1 trillion half the current proposal.  Further too much of the money is going to people who don't really need it and state and local governments are far more flush than what was estimated only a few months ago. As former treasury secretary Larry Summers recently argued, the money would be far better spent on long term projects that will improve the productivity and the health of the economy and the citizenry.

Remember today's economy, despite the pandemic, is in far better shape than in 2009. Both the housing and stock markets are booming and most Americans are flush with cash. To be sure the bottom 20% of the economy and the businesses associated with it are in a world of hurt and that is where the aid ought to be focused. 

My guess is that by the summer, the economy will be much stronger with higher inflation than what most economists now expect and as a consequence the willingness of the electorate to spend  on long term investments will wane. Therefore it would be far better to take out $900 billion from the Administration's package and reserve it for long term investments. Further tying a minimum wage increase to the package will only make it worse for the hard hit restaurant industry thereby delaying its recovery. 

My Amazon Review of William Walker's "Target Switzerland: A Paul Muller Novel of Political Intrigue"

 

Economic Warfare

 

This is William Walker’s third novel featuring Paul Muller his diplomat/spy protagonist. I reviewed his first novel “Danzig” a few years ago and have yet to read his second. Our characters come on the scene in late 1938 where neutral Switzerland is caught in a vice between England/France on one side and Nazi Germany on the other. England is threatening to engage in economic warfare against Germany, a war in which the Swiss economy would be collateral damage.

 

The Brits seek out Muller to get information on the German economy. Muller is set up as a lure to find out what the Brits are up to. With the aid of Hilde Magendanz, an economist buried in the bowels of the Swiss National Bank he hits paydirt. Hilde initially comes off as a “mousey woman” in dingy office actually is not only brilliant but rather glamourous in high diplomatic settings. It is no brainer to figure out that there would soon be a romantic attachment between her and Muller.

 

Hilde discovers that the German economy is teetering under the weight of armament expenditures that is rapidly draining Germany’s foreign exchange reserves. Hjalmar Schact the Reichsbank president urges Hitler to cut back his armament buildup which Hitler accedes to in part, but in the end, Schacht is fired. Simply put Hitler had no choice but to go to war sooner rather than later.

 

We find out that the Swiss are fearful that Germany was planning an end run around the Maginot Line through Switzerland. Though neutral Switzerland entered in a secret defense pact with France who would come to its aid should Germany invade, something I did not know.

 

There is much more in the book and it makes for a good read. Walker makes at least one mistake when he attributes the phrase “arsenal of democracy” in 1939, when in fact Roosevelt doesn’t utter it until December 1940.

For the full Amazon URL see: Economic Warfare (amazon.com)