The Unravelling

 

The world as we have known it for the past 30 years is over. The era of low inflation, ever-falling interest rates, ever-rising stock prices, globalization, and geopolitical stability among the major powers is unravelling. Russia’s invasion of Ukraine has signaled that a new Cold War is upon us and making things worse was the Xi-Putin communique at the Beijing Olympics which marked the beginning of a renewed authoritarian alliance against the West. What this means is defense spending is going to ramp up bigtime with inflationary consequences.

 

The COVID pandemic has taught us that globalization and just-in-time inventory processes have made supply chains far more fragile than we had thought. As a result, higher buffer stocks and the moving of production closer to final demand will increase economy wide costs.  The inflationary process is being exacerbated by the rush to decarbonize the economy with its attendant underinvestment in oil and gas.  As they say, short term pain for long term gain. We are also relearning that reckless fiscal and monetary policies can bring about the high inflation we are now experiencing. It seems that Milton Friedman and his ideas about money are being resurrected from the dead.

 

Domestically there are too many eerie parallels to 1940 America where the Charles Lindberg America First group linked up with the Communist Party to oppose U.S. intervention in support of beleaguered England. Just the other day showboating lefties Alexandra Ocasio Cortez and Cori Bush linked up arm and arm with the right-wingers Paul Gosar and Matt Gaetz seeking Congressional preauthorization before sending troops in support to Ukraine, a move that President Biden said is off the table. And, of course, we have Tucker “Tokyo Rose” Carslon singing Putin’s praise every night on Fox.

 

This witch’s brew means inflation will remain higher for longer, a secular bear market for bonds, a very volatile stock market and as ugly as our politics are today, it will get worse.

 

My Amazon Review of Adi Schwartz's and Einat Wilf's "The War of Return: How Western Indulgence of the Palestinian Dream Has Obstructed the Path to Peace"

 

The Palestinian Right of Return: Get Over It

 

Journalist Adi Schwartz and former MK Einat Wilf, both members of the Israeli Left, have written an important book making the case that the biggest obstacle to Israeli-Palestinian peace is the mistaken belief and Western indulgence of the belief that Palestinians have a right to return to Israel proper. In essence the right to return is a rejection of the Israeli state whose Jewish population would be demographically overwhelmed. This is a demand that no Israeli government can accept. The notion of a right of return is especially galling because how can there be refugees from a war that ended over 70 years ago?

 

Traditionally the role of the U.N. High Commission for Refugees (UNHCR) has been to rehabilitate and resettle refugees. That precisely was the process after World War II and the India/Pakistan split of 1947. Going back in history there was a mass separation of Turks and Greeks after the Turko-Greek War of 1919-20. The Turks in Greece moved to Turkey while the Greeks in Turkey moved to Greece. Further, if you can believe this, any descendant of someone living in 1948 Israel now living in the United States can be classified as a refugee by the United Nations Relief and Works Agency for Palestinian Refugees (UNRWA). Something like this has never happened before.

 

Indeed UNRWA, despite its name is not really a UN organization. The UN funds a small management fee, but the bulk of its funds come directly from Western contributions. The organization is not really on the UN budget. The U.S. was the leading contributor until 2018 when President Trump ceased making contributions in 2018. In 2021 the Biden Administration restored U.S. contributions.

 

Meanwhile UNRWA has effectively become a Palestinian front organization where it is the second largest employer on the West Bank, and it actively promotes the culture of Palestinian victimhood. The Palestinian are being victimized by their own culture of victimhood. As the authors note the original sin of introducing the right of return was not a Palestinian, but rather the UN diplomat Count Folke Bernadotte. In part the right of return notion was put in place to placate the Arabs and thereby keep the Soviets out of the Middle East. Were it not for Cold War politics the whole notion would never have seen the light of day.

 

As a result, UNRWA’s operation of the Palestinian camps, which are really cities in their own right, became hothouses for Palestinian nationalism, something that really did not exist until the 1960s. It was in the camps that the return ideology got so cemented that no Palestinian politician can back away from.

 

Schartz and Wilf correctly argue that peace talks between the Palestinians and the Israelis broke down in 2000 and 2008 over the right of return issues. It was not about borders or the final status of Jerusalem. Thus, instead of being a side issue, the right of return is the central focus of the Palestinians. It means that the peace process faces a long winding road ahead of it. As Wilf and Schwartz argue the phasing out of UNRWA is a precondition for getting the Palestinians to accept reality.

For the full Amazon URL see: The Palestinian Right of Return: Get Over It (amazon.com)

My Amazon Review of Jay Newman's "Undermoney: A Novel"

 

Rogue Traders

 

Retired hedge fund impresario Jay Newman has written his first novel about a rogue military-backed operation to elect a U.S. Senator as president. Newman is famous for his being the point person for the giant Elliot Management hedge fund’s successful effort to reap billions of dollars profits on Argentina’s defaulted debt. His background in hedge fund operations and international finance allows him to tell a story of corruption in the highest places of finance and politics domestically and internationally.

 

His story evolves a group of special forces operatives in Afghanistan who make a pact to save America from its incompetent leadership. One of their members has become a sitting senator and he becomes their vehicle to become president. Of course, that needs money, and we find them stealing two billion dollars in currency that was air dropped into the Syrian desert to support America’s allies in the region.

 

However, that money had to be laundered and the vehicles they chose was a hedge fund in New York that they plotted to seize control of and a corrupt central banker in Latvia who also happens to launder Russian money as well. The hedge fund is run by the sociopathic Elias Vicker who makes his money by investing in low probability – high impact events based on inside information.

 

Newman’s plot takes us to the Russian-backed Parsifal Group whose business is to create events that would have a huge market impact. As a result, the hedge fund has advanced knowledge of an explosion here, an air disaster there, and a 9/11 styled event. Parsifal profits from its investment in the hedge fund.

 

Along the way we meet the New York hedge fund glitterati, nymphomaniac Russian ballerinas with many of the leading characters found in compromising positions. As an aside Newman mentions how Saudi Arabia’s MBS obtained compromising pictures of Amazon’s Jeff Bezos and how Russian intelligence operatives have infiltrated the highest reaches of American politics, journalism, and finance. How much of this it true along with the Latvian Central Bank acting as a laundromat for the Russian oligarchy, I do not know.

 

At times I found Newman’s plot choppy, but this book represents a very strong first effort.

Fpr the full Amazon URL see: Rogue Traders (amazon.com)

Time for a Fed Intermeeting Move

With the year-over-year consumer price index now running at a 7.5% and with Core CPI at 6%, it is so obvious that the Fed's zero interest rate policy is way behind the curve. In ancient times the Paul Volcker of 1979 and the 1980's and the Alan Greenspan of the late 1980's and early 1990's would have acted with alacrity, meaning there would be an intermeeting rate hike to highlight the seriousness of their concerns about inflation. 

The 20 year era of Fed gradualism on the upside is over as the low inflation environment of the past two decades is now behind us. Moveover both the housing and healthcare components of the CPI are lagging realtime pricing making it likely that inflation will remain higher for longer. Indeed wages are up 5.7% year over year and are likely to move higher as the fully employed economy will continue to be strong.

Remember as Milton Friedman, another member of the ancien regime, noted that monetary policy acts with long and variable lags. Thus it is time to act and furthermore an intermeeting move will restore the Fed's and Chair Jerome Powell's waning credibilty as an inflation fighter.

I would note that this is not a prediction, but rather what I think the Fed should do. We'll see.

My Amazon Review of Sarah Broom's "The Yellow House: A Memoir"

 

A House and a Family in New Orleans

 

Sarah Broom has written a loving memoir of her family, her life, and the yellow house where much of it happened. Broom is the 12^th of twelve children born to Ivory Mae in 1979 and her father would die shortly after. Seventeen years earlier her mom, at age 19, purchased a yellow house in the down and out neighborhood of New Orleans East for $3,200 cash with the money coming from the life insurance proceeds from her first husband. She re-marries and her second husband brings some stability to her family as he has a steady job as a maintenance worker in the nearby NASA facility in Michaud, Louisiana.

 

A small house with twelve children would normally be chaotic, but the chaos is added to because it is an on-going do-it-yourself construction project that was to say the least, done poorly. The plumbing is erratic, electrical wires are exposed and the flooring comes apart. Yet the family held together and many of its members ultimately thrived even in the face rampant racial discrimination in the form of poor schools and the lack of basic governmental services. Indeed, the demise of the immediate neighborhood of the yellow house was accelerated by the placement of public housing within its midst. In part, Broom’s book is a social history of New Orleans from 1960 to the present. It is not pretty and New Orleans East, just seven miles from the famed French Quarter, is a world apart.

 

The house has its demise with Hurricane Katrina in 2005. The entire neighborhood is swept away in the water and with that the yellow house’s minimal foundation. It was demolished. Many of the family including the author had already moved out of New Orleans, but the coming of the water made the exodus permanent.

 

The rest of the book is a partial autobiography of Broom. We see her as bright kid in a failing public school who then goes to a Christian high school. She does well enough there to go on to college at North Texas University and then to U.C. Berkeley for a master’s degree in journalism. It is unfortunate that she spends very little time on her time in college and nothing on her decision to go to Berkely and her time there. She also doesn’t mention how she got her job at Oprah’s O Magazine.

 

She does however go into great deal her experience as journalist in Burundi which was in the midst of a civil war. She goes there as a result of meeting Samantha Power at a dinner in New York City. It was quite the harrowing experience. On her return she ends up being a press flack for New Orleans Mayor Ray Nagin. While there she witnessed the underbelly of New Orleans corruption.

 

Broom is a fine writer, and her story is inspirational in the sense that few would have predicted when she was growing up in New Orleans, she would rise to become a noted journalist and author. It is a tribute to her mother who raised her by herself and to her.

For the full Amazon URL see: A House and a Family in New Orleans (amazon.com)

A Quick Note on the De-Risking of Forward Earnings Guidance

 Something strange is going on this earnings season. Companies are reporting strong fourth quarter results, while at the same time issuing very conservative earnings guidance for 2022. What gives? My sense is that given the uncertainties surrounding COVID and the tenuous supply chain, corporate managements have decided to take the stock price hit from the weak earnings guidance early on and thereby allow for positive surprises as the year evolves. In short, their earnings outlook has be de-risked.

Compay managements following this policy include, for example, Abbott Labs, L3Harris and Honeywell this morning.  Simply put, barring a real downturn in the economy earning guidance will gradually increase from quarter to quarter. As a result, the de-risking should put a floor underneath the broad trading range for stock prices that I envision for this year.