My Amazon Review of Andrew Lo's and Stephen Foerster's "In Pursuit of the Perfect Portfolio:........."

 

Thinking About Retirement Portfolios

 

Finance professors Andrew Lo and Stephen Foerster have given us a tour or modern finance theory through the lives and ideas of its leading academics and practitioners with the goal of coming with a “perfect” retirement portfolio. He starts his intellectual history with the mean-variance work of Harry Markowitz and then goes on to discuss the “betas” of Bill Sharpe, the efficient market hypothesis of Eugene Fama and the options pricing world Black-Scholes/Merton. We also have Jeremy Siegel who’s “Stocks for the Long Run” became the bible of the 1990’s bull market, yet Siegel did call the top in the NASDAQ in early 2000.

 

His practitioners are index fund founder John Bogle, pension consultant Charles Ellis and bond guru Martin Leibowitz. We also have the behavioral economist Bob Shiller of irrational exuberance fame. In the interests of full disclosure Marty Leibowitz was my boss for a time at Salomon Brothers and I worked with Myron Scholes there as well. I also first met with Bob Shiller at the infamous Fed meeting on the stock market in 1996 where I was a participant.

 

What all of them had in common is that they were math “nerds” as kids. Further something must have been in the water at the University of Chicago and M.I.T. in the late 1960s. It was at those two places along with Sharpe’s UCLA that modern portfolio theory exploded on to the scene. For my perspective I received an MBA from UCLA in January 1966 in finance where modern finance was barely discussed and four years later when I returned for a Ph.D. in finance it was all that was discussed.

 

So, what is an investor contemplating retirement to do? The general consensus is that there is no generic retirement portfolio. It depends on the individual investor’s tolerance for risk and consumption patterns. Within that framework nearly all of them would recommend low-cost index funds and TIPs. There is some support for the traditional 60/40 stock bond portfolio, but Siegel and Ellis are skeptical of bonds when interest rates are extraordinarily low as they have been for the past several years. However, this presents a quandary, if bonds can be over-priced why can’t stocks be and vice versa. This is where Shiller’s cyclically adjusted price earnings ratio might be a tool to be used qualitatively.

 

Several of them recommend adding international stocks through a low-cost index fund, small cap stocks and value stocks to the mix. Although this was certainly theoretically sound around the turn of the century, over the past two decades those substitutions within an equity portfolio would have severely detracted from investing the S&P 500 alone.

 

My criticism of the book is that it gives to great a weight to the concept of efficient markets. While the markets are efficient most of the time, that is always not the case. Witness the recent collapse of high value-money losing companies as an example. The authors mention the term “black swan,” in passing, but they do not mention Nicholas Nassim Taleb who popularized the term a decade ago. This omission is unfortunate because Taleb is one of the keenest critics of modern finance theory. Simply put the tails of return distributions are much fatter than in a normal distribution and the probability distributions are not stable over time. Moreover, we know our lives are path dependent, why shouldn’t markets be path dependent, at least, in some cases and especially when the economic regime changes.

 

Although cited, the 1900 dissertation by Louis Bachelier in Paris, should have been given more emphasis. As mentioned, Bachelier anticipated Einstein by five years on the idea of Brownian Motion, he also had a well-developed idea on the pricing of stock options that pre-dated Black-Scholes by 70 years. Specifically, he defined the notion of put-call parity which is essential for modern options theory to work.

 

Nevertheless, Lo and Foerster have written a very helpful book for investors seeking sensible guidelines for retirement planning and who also would benefit from modern finance theory.

For the full amazon URL see: Thinking About Retirement Portfolios (amazon.com)

A High Noon Moment for Liz Cheney in Wyoming

 Congresswoman Liz Cheney, the hero of the January 6th Committee, is fighting for her political life in her Republican primary election in Wyoming set for August 16th. Cheney is down 22 points in the latest poll against her Trump-backed opponent Harriet Hageman. Moreover it is no secret that Wyoming is Trump country and Cheney is further handicapped because she faces very credible death threats making it hard for her to campaign in the normal way.

So, what is she supposed to do? To me it is time for a High Noon moment. In that 1952 movie marshall Will Kane, played by Gary Cooper, stood alone against the notorious Miller gang as the town stood idly by. What Cheney should do, and I am aware that this will not be a movie, is that she should face off the death threats and campaign openly in the Wyoming towns and cities of Cheyene, Cody, Pinedale, and Rock Springs. This would stand in sharp contrast to Senator Josh Hawley's cowardly actions on January 6th.

Admittedly this is a high risk strategy, but it will gain the respect of all but the diehard Trumpies and it would amplify the role of stong women standing up to Trump today and a smilar strong woman tradition in Wyoming. I would note that the then Wyoming Teritory granted women the right to vote in 1869, fifty years ahead the 19th Amendment which granted women the right to vote nationally.

My Amazon Review of Walter Russell Mead's "The Arc of a Covenant: The United States, Israel and the Fate of the Jewish People"

 

America’s Changing Views on Israel

 

Bard College professor and Wall Street Journal foreign policy columnist Walter Russell Mead has written three books in one. The first is a history of the U.S- Israel relationship, the second a history of American foreign policy and the third is a recent history of domestic politics in the United States. In Mead’s view all three are inter-related. This book is above all on the how’s and why’s of the American view on Israel. I write this just as President Biden has left the middle east after visiting Israel and Saudi Arabia signaling a reconfiguration of the region’s chessboard.

 

At the outset Mead completely debunks the view that U.S.-Israel policy is controlled by the so called “Jewish Lobby.” To be sure there is a pro-Israel lobby, but it is far from controlling and it suffers from as many failures as successes. Further American presidents, Nixon, Reagan, W. Bush, and Trump who did much to cement the relationship between the United States and Israel were decidedly unpopular among the largely liberal Jewish community.

 

Mead starts his history in the late 19^th century where a group of Philo-semitic Protestants articulated the support for a return of the Jews to their ancient homeland. Steeped in the bible and the classics these Christians thought it was only natural for the Jews to have a state of their own especially after Greek independence earlier that century and the creation of new Rome in the form of Italy. These views predated Herzl’s Zionism.

 

Mead goes into great detail the policy arguments that took place in the Truman Administration concerning the formation of the State of Israel. His Secretaries of State and Defense were firmly against it, but Truman finally came down on the side of independence. Much was made at the time of the importance of the Jewish vote in the upcoming 1948 presidential election. However, Truman needed the support of the liberal internationalists under the leadership of Eleanor Roosevelt who viewed the success of the U.N resolution on Israel to be critical to that organization’s future. Truman needed to keep Roosevelt from supporting the far-left candidacy of Henry Wallace.

 

Of interest in 1948, Stalin, motivated by his need to make trouble for Britain and the United States in the middle east, gave the greenlight to Czechoslovakia to sell arms to Israel. Those arms made the crucial difference in Israel’s war for independence. It also supplied hard currency to the Czech’s who desperately needed it after turning down Marshall Plan aid.

 

As difficult as it seems today, the American Left was the home to most of Israel’s support in the 1950’s and 60’s. Israel, for all practical purposes, was a struggling socialist country supporting the dispossessed Jews of Europe and the Arab world. However, today the Left sees Israel as militaristic, capitalistic settler-colonialist state. It seems that the American Left just loves to penalize Israel’s success in building a modern state in an otherwise impoverished middle east. Those are the very attributes praised by the “Jacksonian evangelical Zionists” of the American Right.

 

Nevertheless, Mead leaves much out of his history. Not much is said about the 1956 Suez War where Eisenhower backs Egypt against Israel, France, and Britain; the 1982 Lebanon War which turned American public opinion against Israel, and the taking out of the Iraq nuclear program. Mead resumes his discussion U.S.-Israel relations in the 2000’s and highlights the failures of the magical thinking of George W. Bush’s neocons with the Iraq War and Obama’s with respect to the Arab Spring, Iran, and Israel. Ironically Obama’s missteps in region led the Abraham Accords and burgeoning alliance between Israel and the Sunni Arabs.

 

Although Mead supports the need for a Palestinian state, he like most others doesn’t present a roadmap to getting there. Regardless, Mead has offered up a work of history at its best.

For the full Amazon URL see: America's Changing Views on Israel (amazon.com)

 

My Amazon Review of Colson Whitehead's "Harlem Shuffle"

 

Harlem Days, Harlem Nights in the Early 1960’s

 

Colson Whitehead paints a portrait of Harlem from 1959-1964 through the eyes of furniture store owner and family man Ray Carney. Through it all we learn all about the furniture styles and brands of the early 1960’s, a travelogue if you will. Aside from his day job running his furniture store Carney supplements his income as a part-time fence for stolen goods. His cousin Freddie continuously gets him into and at the outset Freddie is part of a safety deposit box heist at the famed Hotel Theresa. Simply put, to steal from the Hotel Theresa is a crime against the community, but no matter it happens, and Carney is there to fence some of the stolen goods.

 

Along the way we meet the Harlem equivalent of Damon Runyan gangsters with names like “Miami Joe.” We also witness what I would call scenes from the class struggle in Harlem where Carney tries to join an exclusive club of local business leaders.

 

The book ends against the backdrop of the July 1964 riots where Carney and his employees had to stand guard to protect their store along with Freddie getting Carney in real big trouble with the family of a major and very entitled real estate developer.

 

This book is far lighter than Whitehead’s “The Nickel Boys” (See:Shulmaven: My Amazon Review of Colson Whitehead's "The Nickel Boys" ) and in my opinion, it is not a good, but well worth the read. You get a real sense of Harlem in the early 1960’s and it makes you wonder about how much or how little change there has been.

For the full amazon URL see: Harlem Days, Harlem Nights in the Early 1960's (amazon.com)