My Amazon Review of Marie Yovanovitch's "Lessons from the Edge: A Memoir"

 

In Service to America

 

After reading Marie Yovanovitch’s memoir my respect for America’s foreign service officers has only grown. Most of the officers do not serve in glamourous capitals like London and Paris, but in out-of-the-way places where many are both corrupt and dangerous. Yovanovitch was no exception where aside from serving in London where she attended a ball at Buckingham Palace, she served in Somalia and as ambassador to Kyrgyzstan, Armenia and, of course, Ukraine. I also learned that most officers are not engaged in high policy, but rather are engaged in making sure the American embassy works on a day-to-day basis. In Mogadishu, for example, Yovanovitch made sure there was sufficient gasoline for the embassy’s vehicles, no easy task.

 

Yovanovitch is most famous for being fired by Donald Trump as our ambassador to Ukraine in April 2019 where she was a pawn in Rudy Giuliani’s intrigues to get dirt on Joe Biden’s son, Hunter. Giuliani was working hand-in-glove with the corrupt Ukrainian prosecutor Yuri Lutsenko. Several of the Ukrainian oligarchs wanted to get rid of Yovanovitch because she was supporting the anti-corruption forces in Ukraine. One of her duties as ambassador was to support anti-corruption and pro-democracy efforts in Ukraine. As a result, corrupt politician in America and Ukraine had a common interest in removing her.

 

Her removal made her a star witness in Trump’s first impeachment trial. It was here where America got to know her. Needless to say, her testimony was a showstopper. What the public did not know at the time was that her 90-year-old mother died, and she cracked a tooth leading to root canal surgery.

 

From her memoir we learn about her family who fled both Nazi and Communist tyranny and ended up in rural Connecticut via Canada where her father taught at a boarding school. We also learned that her then 88-year-old mother was with her in Ukraine while she was ambassador. She never married and the only hint of a romantic attachment she gives out was when she dated a marine guard in Mogadishu.

 

She did very well for a self-proclaimed introvert who had to attend numerous public functions and deal with various heads of state and foreign ministers. She also had to balance American interests with American values. In her view short-term interests many times prevailed over our values. Simply put it is very difficult to trust corrupt dictators who would betray us to the next higher bidder.

 

Mari Yovanovitch has written an important book describing her life as a foreign service officer and an ambassador and the lessons she learned from being on the edge and part of history. We need more people like her.

For the full Amazon URL see: In Service to America (amazon.com)

 

The Bond Market Wakes up to Yield Curve Control

For about a week the bond market was in a tizzy about the inversion in the 2-10 Treasury curve where the two year note yielded a bit more than the 10-year note. Market particpants were screaming "Rececession, Recession." Then, of a sudden a few Fed speakers came out like screaming hawks and from an inversion of about 9 basis points the yield curve normalized at a higher level with the 10-year yielding about 20 basis points more than the two year.

What was brought home to market particpants is that the Fed has the ability to control the yield curve. At the height of quantitative easing there was much discussion about yield curve control where the Fed would fix the 10 year yield at an unusually low level, a throwback to its 1940's policy. Now, however, with a $9 trillion balance sheet the Fed with quantitative tightening can all but fix the 10 year yield wherever it wants it. Thus it has the ability to keep the yield on the 10-year note above the 2-year note thereby preventing an inversion.

My sense is that recession fears for 2023 are overdone, but 2024 could be another story. To be sure the very significant backup in interest rates will slow the economy. Nevertheless, if inflation declines to the 4-5% range by yearend a 2-3% Fed Funds rate would still be signalling negative real yields. Thus monetary policy remains far from contractionary and it will likely take a positive real Fed Funds rate to break the economy.

My Amazon Review of Mary Childs' "The Bond King:......"

The Tragedy of Bill Gross

 

NPR’s Planet Money host Mary Childs has written a biography of Bill Gross and PIMCO, the investment firm he founded. Fresh out of the UCLA Anderson School with a newly minted M.B.A., Bill Gross was hired to work as an investment analyst in the sleepy bond department of Pacific Mutual Life Insurance Co. It was there where Gross comes up with the then novel idea of trading bonds for total return, rather than holding them till maturity.

 

As the concept takes hold in the inflationary 1970’s, Gross begins to outperform other bond managers and he attracts a swath of institutional investors as PIMCO is spun out of the life company. By 2000 Gross is a star money manager and 70% of the company is acquired by Allianz, a German insurance giant.

 

Gross makes his bones by using futures, options, and all sorts of derivative instruments. He generated super returns in 1983 by arbitraging the difference between the futures price of GNMA securities and the underlying cash market where he cornered the market on the cheapest to deliver security. Yes, I know this is arcane bond market stuff. In 2002 Fortune Magazine names him the Bond King.

 

Later in that decade Gross was way ahead of the curve in predicting the mortgage melt down that was to come. He sent his people out to pose as home buyers to get a better understanding of the deteriorating underwriting standards for mortgages which led to a stellar year in 2007.

 

Gross then brings back Mohamed El-Erian from Harvard Management as his co-chief investment officer. Never mind that El-Erian’s international bond fund suffers from horrid performance. Of a sudden Gross became paranoid as El-Erian appears to be a rival. He became erratic and his performance suffered. So much so, that in 2014 his very own executive committee stages a palace coup and ousts him. He goes down hill from there and in 2016 his wife of 40 years divorces him.

 

Childs is very good at explaining PIMCO’s culture. Unlike the boisterous trading floor at sell-side firms and many buy-side firms, PIMCO’s trading floor is silent. There is no chatter among the traders; they communicate by email. As a product of the sell-side culture, the quiet trading floor seems outright weird.

 

My criticism of Childs’ book is that she leaves out quite a bit and makes a few big mistakes. In order for trading strategy to be successful you need counter parties willing to trade. At the same time Gross was starting out a revolution was taking place on Wall Street. Mortgage securities were being invented by Salomon Brothers’ Lew Ranieri and First Boston’s Larry Fink. Over at Drexel, Mike Milken was bringing into being the high yield bond market that enabled leveraged buyouts which had the effect of converting investment grade corporate bonds into junk overnight. Thus, the days of buy and hold were over and active trading became the norm in the fixed income market. Simply put Childs leaves out the milieu Gross was trading in.

 

Childs cites the reason for Pacific Mutual’s move to Orange County from downtown Los Angeles to Newport Beach in Orange County as lower rents. That is wrong. The real reason is that the WASP power structure in Los Angeles was losing relevance in the post-Watts riot era. The ascendant Black-Jewish-Latino coalition was taking over leaving less room for the power barons especially Asa Call, its CEO, at Pacific Mutual. She also characterizes Orange County as “barren strip mall desert,” which is so far from the truth. Only a snobbish east-coaster would make such a comment.

 

Nevertheless, aside from my comments above and aside from my view that her book takes on the feel of a very long magazine article, Childs offers up an interesting history of a finance titan in his time and place.

For the full Amazon URL see: The Tragedy of Bill Gross (amazon.com)