Shulmaven Back on X (Twitter)

Last August I was erroneously banned from X(Twitter). (See: Shulmaven: Shulmaven Banned from Twitter (X)) A week ago X recognized the error of its ways and restored my account. I have been and will continue to post under @shulmaven.

My Amazon Review of George Tavlas' "The Monetarists: The Making of the Chicago.........."

 A Book Only Economics Nerds Would Like

 

Economist George Tavlas has written a very long, deeply researched intellectual history of the Chicago monetary tradition. In the late 1920’s and early 1930’s a group of economists at the University of Chicago outlined a series of policy measures that would become the basis of modern-day monetarism. At its core would be the Fisherian equation of MV=PT, or money times velocity equals price times transactions along with the importance of real interest rates as opposed to nominal rates. The group fully supported a rules-based system over discretionary monetary authorities with the view that discretion can only lead to uncertainty.

 

The thought leader were Frank Knight, Aaron Director, Lloyd Mintes, Harry Simons, Jacob Viner, and Paul Douglas, the first of risk and uncertainty fame and the last the coinventor of the Cobb-Douglas production function and later a distinguished Senator from Illinois. They believed that economic instability was caused by the fractional reserve-based banking system and hence they called for 100% reserves, or in today’s parlance narrow banking. They opposed the gold standard, supported flexible exchange rates, and money financed deficits to jump start the economy out of the depression. They later walked away from 100% reserves because of the end of the gold standard, deposit insurance and allowing the Fed to discount government securities. However, we do note that an over-leveraged banking system loaded with bad paper almost triggered Great Depression 2.0 in 2008.

 

They stood athwart the new Keynesian consensus that money didn’t matter, and only fiscal policy could stabilize the economy. As such they remained in the economic wilderness for over two decades.

 

To me the most interesting member of the group was Paul Douglas. He was a political activist and supported labor unions. At the age of 50 he enlisted in the Marine Corps and saw combat in the Pacific where he was awarded two purple hearts. As a senator, from his perch on the Joint Economic Committee, he led the charge in support of the Treasury-Fed Accord of 1951 and was a firm believer in the role of money in the economy. Indeed, as a New York Times editorial noted at the time, Douglas was the most influential senator on banking policy since the passing of Carter Glass in 1946. As an aside, much of the group in the 1940’s supported progressive income taxation to equalize the distribution of income and strong enforcement of the antitrust laws. Those beliefs would soon go by the wayside.

 

Milton Friedman would come on the scene in 1946 and become the intellectual leader of the new monetarism. His 1956 “Quantity Theory of Money: A Restatement” would establish his as a force in economics where he called for the money supply to grow at a consistent rate to accommodate the growth in real output.  He spread the gospel with his Workshops on Money and Banking bringing in scholars from all over the country. MV would equal PY instead of PT, with Y standing for real output. That along with other research with Anna Schwartz would lead up to his classic “A Monetary History of the United States, 1867-1960” which placed the blame of the Great Depression squarely on the Federal Reserve’s failure to keep the money supply from collapsing. However, I did learn from the book, that a little-known FDIC economist Clark Warburton had much of this figured out in the late 1940’s and early 1950’s.

 

I came into contact with monetarism as an undergraduate at Baruch College in the early 1960’s.  There I had professors Alvin Marty, Eugene Lerner and Robert Weintraub who were all Friedman acolytes. In fact, we used “A Monetary History” as a text. I then went on to graduate school at UCLA in the then business school which was very close to the economics department. At the time the UCLA economics department was known as Chicago west, with professors Robert Clower, Karl Brunner, and Benjamin Klein. In the business school I had Professors Neil Jacoby and But Zwick, both of the Chicago tradition.

 

As a result, when I got involved with the UCLA Anderson Forecast in the 1970’s, monetarism was second nature to me, and it enabled me to better understand that tumultuous era of high inflation. Of course, by the early 80’s the hard fast money growth rule would succumb to monetary innovations that made money hard to define. Soon the Taylor Rule would substitute for the money growth rule.

 

Tavlas has written an important intellectual history, but as I said at the outset, it is not for the lay reader and for economics nerd the book could have used a better editor.

For the full Amazon URL see: A Book Only Economics Nerds would Like (amazon.com)

2024: Volatile Politics, Volatile Markets and the Fed Joins CREEP

Shulmaven did not cover itself in glory in 2023. (See: Shulmaven: 2023: Another Year of Living Dangerously ) We got much of it wrong:

* The economy did not enter a recession.

*Stocks did not trade in a broad range of 4200-3300 and instead approached its all-time high of 4800.

*Bitcoin didn't collapse to below $10,000 and and instead more than doubled to over $40,000.

*Trump was not a spent force and he now seems cruising towards nomination.

* The market has yet to recognize we have entered a new 13-year cycle.

We got a few things right:

*The Fed remained on the warpath for much of the year and wage gains remained solid.

*10-Year Treasury yields stayed above 4% for much of the year. Coincidentally  the yield ended where it stated at 3.9%

* Ukraine struck deep into Russia with missiles and sabotage as global tensions remained high.

Now, in the spirit of being often wrong and never in doubt here are my views for 2024:

* With the S&P 500 trading just below its all-time high and the VIX index at 12, I believe 2024 will be year of high volatility coming from volatile international and domestic politics. Think 1968.

* The stock market appears to be ignoring the warning of former Secretary of Defense and CIA Director Robert Gates where he noted in the November/December issue of Foreign Affairs "The United States now confronts graver threats to its security than it has in decades, perhaps ever."

* In retaliation for attacks on Ukraine's power plants, Ukraine will set ablaze several of Russia's prize West Siberian oilfields.

* Israel will defeat Hamas sufficiently to declare a victory and by yearend Saudi Arabia will be on track to join the Abraham Accords. (See: Shulmaven: Hamas Aggression Must be Punished)

*Domestically all of the signs point to a Trump victory for the Republican nomination and his victory in November, hardly a confidence building eventuality. Nevertheless, I am not yet predicting a Trump victory; I think it is a 50/50 call as of today.

* The Fed will do whatever it takes to avoid a recession in 2024. Their recent pivot is a step in that direction.  Objectively the Fed will join the Committee to Re-Elect the President. (CREEP, the name of Nixon's campaign in 1972.) As a pillar of the establishment and fearful of its independence, the Fed will effectively be all-in for Biden. Thus the Fed will plant the seeds for a very problematic 2025.

* Core CPI will likely run at a 2-2.5% rate in the first half, but accelerate to a 3% run rate by yearend. As a result the yield on the 10-Year Treasury will once again be north of 4%. In keeping with my view that we are in a new 13-year economic cycle, wage growth will remain solid.

* In this environment the S&P 500 should trade in a broad range of 5000-4200, approaching both ends more than once during the year, with the VIX exceeding 30 at least once during the year. Consistent with the past month, the S&P 493 will outperform the Magnificent Seven.

Crunch Time for Ukraine, Israel and the Border

 As I write this an ad hoc Senate committee is attempting to forge a broad border security bill that would attract 60 votes in the Senate thereby paving the way for passing much needed aid to Ukraine and Israel. It is frightening that the national security interests of the United States is being compromised by the Republican wrecker caucus. 

Perhaps more dangerous is the fact that the Republican Party is now home to a Putinista caucus as well that likely will vote against Ukraine aid no matter what the Senate Democrats and Biden offer up on immigration. Indeed the best that can happen to the Democrats is to make a deal on immigration, because if they don't put this issue behind them they could very well be a gonner in the next election.

Not to be out done the Hamas caucus within the Democratic Party will likely vote against any aid to Israel. Thus if any bill comes out of the Senate it will likely be a coalition of the centrists of both parties and I would like to point out that once again my favorite Senator, Kyrsten Sinema (I-AZ) is leading the charge to forge a workable bill. 

However the question remains whether or not the House, which is not in session, would actually pass any Senate compromise. In that body the Putinista caucus would rather have an issue than passing substantive legislation. 

Last week marked the 82nd anniversary of the attack on Pearl Harbor. It would be tragic if Congress' failure to act on Ukraine aid will be remembered as a week of infamy.

My Review* of David Grann's "The Wager: A Tale of Shipwreck, Mutiny and Murder"

 Shipwreck and Survival Around Cape Horn

 

Author David Grann knows how to spin a yarn. He tells the story of the Wager, a British warship on a mission to seize Spanish treasure during the War of Jenkins Ear in 1740. The convoy is led by George Anson who succeeds in circumnavigating the world and seizing Spanish treasure off the coast of the Philippines. The Wager is not so lucky.

 

After barely making it through the Straits of Magellan the Wager runs aground on an island off the Chilean coast. It is there that we see a struggle for survival that is aided by some temporary help from Indigenous people from the mainland. It is a long struggle involving near starvation on the island and the crew ultimately gets off by fashioning an ark out of a small landing craft from the mother ship. That tiny ark makes it through the perilous straits and ends up in Brazil, quite an achievement in seamanship.

 

The story is told through the eyes of three main characters. The Captain, David Cheap; John Bulkeley the gunner, and the 16-year-old John Byron, who would become the grandfather of Lord Byron, the poet. It is Bulkeley who is the one who ultimately takes charge of the situation, and it is he who chronicles the events upon their return to England.

 

What I found most interesting was the daily life and daily hardships aboard ship in the days of sail. It was a hard life and the sailors had to deal with the harsh elements, limited navigation equipment, epidemics, and the ongoing threat of scurvy. Absent Vitamin C, the body deteriorates, skin turns black, and teeth fall out and this is what happened to much of the crew. I also learned the origin of such present-day terms as “toeing the line,” “under the weather,” and “learning the ropes” had its origins in the British Navy.

 

Grann tells a true story that he writes like a novel. The book held my interest throughout, and it is an enjoyable read.

*- Amazon is, yet again, late in posting. Amazon posted on 12/16 with the following URL: Shipwreck and Survival Around Cape Horn (amazon.com)

 

 

My UCLA Talk on the Long Term Outlook for Financial Markets

 On December 6th I presented my long term outlook for the financial markets at the UCLA Anderson Forecast conference. The talk was based on the 13-year cycle theory I outlined in May 2022. ( See: Shulmaven: The U.S. Economy is Entering a New Thirteen Year Cycle ) The link to my talk can be found below. It lasts about 15 minutes and I would note that before it began there was a fire alarm that evacuated the building.

The link is here: https://www.youtube.com/watch?v=KFbLvDzXRJk&t=191s

My Amazon Review of Martin Baron's "Collision of Power: Trump, Bezos and The Washington Post"

 Democracy Dies in Darkness

 

I met Marty Baron in the early 1980’s when I was working as an economist at the UCLA Business Forecasting Project, and he was a reporter/editor at the Los Angeles Times. Who knew he would go on to lead the Miami Herald, the Boston Globe and then become the executive editor of the storied Washington Post. Although he was just starting out, he was a great journalist then and he became greater as the years passed.

 

In this book Baron puts us inside the Washington Post newsroom as it was hemorrhaging cash when he started there in 2013 and was then rescued by Amazon’s Jeff Bezos who infused the cash needed to restore the paper back to its greatness. Just to note I have always been a fan of the Washington Post and much preferred it to the hoity toity New York Times. Through Baron’s eyes we se how the Post put together the stories involving the Snowden documents, the Steele Dossier, and its ongoing struggles with the Trump administration. Baron was clear from the start when he stated “We are not at war with the administration. We are at work.”

 

This is important because Baron had to face off with coteries of self-centered young journalists who thought that they were the story and that their opinions should be spayed across the news pages. To me if anything, Baron made a mistake in hiring most of them and the Post as well as other news organizations should look for viewpoint diversity as opposed to racial, gender and sexual orientation diversity. My advice would be to stay away from the Ivy’s; Baron is a case and point; he went to Lehigh.

 

Bezos comes across as a real mensch. Aside from putting up the big bucks needed to grow the newsroom, Bezos became personally involved in the freeing of journalist Jason Rezaian and his wife Yeganeh from Iranian prisons. So much so that when Rezaian arrived in Switzerland Bezos was there with his private plane to ferry them back to the United States. Similarly, Bezos was at the Saudi Arabian consulate in Istanbul to protest the murdering of Post journalist Jamal Khashoggi. Throughout it all, Bezos, for the most part, backed Baron and stayed away from making editorial judgements.

 

As someone who in his misspent youth was involved in editing and publishing an underground newspaper, I found Baron’s book fascinating. The reader gets the smell of the Washington Post’s newsroom, a place I visited many years ago before the move to its new digs.

For the full amazon URL see: Democracy Dies in Darkness (amazon.com)

My Review* of Greg Lukianoff's and Rikki Schlott's "The Cancelling of the American Mind:..."

The New Totalitarians

 

Greg Lukianoff’s and Rikki Schlott’s new book on the totalitarian nature of America’s cancel culture couldn’t be timelier. I would like to state at the outset that freedom of speech is very important to me because in my misspent youth I put myself at great risk for my beliefs.

 

As I write this, we are witnessing a rampage of totalitarian racial Marxists assaulting Jews on our most elite college campuses. It is not an accident that both Columbia and the University of Pennsylvania, schools that witnessed among the worst antisemitic rampages in recent days, scored the lowest on the Foundation for Individual Rights and Expression (FIRE) scores on campus freedom of speech.  Just to note, Lukianoff is the president of FIRE and Schlott is a research fellow there.

 

This book can be considered a continuation of Jonathan Haidt’s and Greg Lukianoff’s 2018 “The Coddling of the American Mind.” Here Lukianoff and Schlott go into example after example of how people are canceled because of their heterodox beliefs. Most of the examples take place on college campuses, but there are telling examples in the publishing and the corporate world. Most of the examples involve the Left on attack with their rhetorical fortress built around the racial Marxist belief that oppressors can do no right and the oppressed can do no wrong. Thus, under their canon Israel defending itself from a wanton terrorist attack is guilty, while the Hamas terrorist dictatorship is innocent. Although Lukianoff considers himself a man of the Left, it fits neatly into Christopher Rufo’s right wing world view as expressed in his “America’s Cultural Revolution.” ( Shulmaven: My Amazon Review of Christopher Rufo's "America's Cultural Revolution: How the Radical Left Conquered Everything")

 

This book is not only a screed attacking the Left. The Right doesn’t get off easy as well. The authors recount how anti-Trump conservatives were cancelled, books were banned and “anti-woke” laws were put in place in several states forcing professors to walk on eggshells in what they can say on and off campus.

 

Lukianoff’s and Schlott’s solution calls for the creation of a free speech culture on college campuses, easier said than done, eliminating DEI loyalty oaths in the hiring and promotion of faculty, opening up more jobs to non-college graduates, and calling for employers to widen their horizons with respect to schools they recruit at. (i.e., more state schools over the Ivy’s) Indeed Lukianoff himself had to do away with the college degree requirement to hire Schlott.

 

I would go much further. In my view donors that feel the way I do should cut off their contributions to their alma maters, the entire DEI bureaucracy which enforces the cancel culture should be torn up root and branch and government should withhold funding for those institutions who fail to do that.

 

P.S. I received this book as a gift.

*-Amazon has yet to post the review. 11/16.   Amazon rejected this review because of  a "violation of community standards." I slightly edited the review and it appeared on 12/4 at the following URL:  The New Totalitarians (amazon.com)

Reliving the 1930's - Part 5

We started this series in March 2014 ( Shulmaven: Reliving the 1930s)  with Putin taking Crimea and using his proxies in eastern Ukraine and the last one was in April 2017 with  Trump’s and Obama’s vacillation in Syria in 2013 and 2017. ( Shulmaven: Reliving the 1930s - Part 4) With this blog I go further in that I now believe that we are no longer in the Post-Cold War Era, but rather we are now in what future historians will call a pre-war era.

 

Instead of facing the Berlin-Rome-Tokyo Axis we now face the Russia-China-Iran North Korea Axis We see this new axis playing out in Ukraine, Gaza, and the Taiwan Straits. All the signs were there in the 1930’s with Japan invading Manchuria in 1931 and the heart of China in 1937; Italy invading Abyssinia in 1935, and Germany reoccupying the Rhineland in 1936. However, it was not until 1938 that they were taken seriously.

 

In terms of economic policy protectionism was the order of the day in the 1930’s and we now witness the Biden Administration continuing and amplifying Trump’s protectionist trade policies. Although Biden’s trade policies conflict, he remains a committed internationalist. However, the Republican Party is reverting to its 1930’s form with its America First withdrawal from the world.

 

At home America’s college campuses look like prewar Germany where in many cases it is no longer safe for Jews to walk freely to class. Although anti-Zionism has always been a cover for antisemitism, recent events have ripped off all of its pretentions of being anti-Israel while still liking Jews. Nevertheless, unlike the 1930’s, Jews in America have more to fear from the Left than from the Right when the Father Coughlin’s of the world ruled the airwaves.

 

Further unlike the 1930’s when America had real leadership under Franklin Roosevelt, today’s divided government is challenged by a Putinista faction in the Republican Party that is implicitly allied with the new axis of evil. Be warned the clock is ticking.

  

My Amazon Review of James Ellroy's "The Enchanters"

West LA Noir

As is his style James Ellroy goes deeply into the underbelly of Hollywood. Most of the activity takes place in Brentwood, Pacific Palisades, and Malibu. His vehicle is a novelized version Freddy Otash, a private investigator and police officer who was a well-known Hollywood fixer. The time is Spring/Summer 1962 when Otash was hired by Jimmy Hoffa to find dirt on the Kennedy’s, especially with their involvement with Marilyn Monroe. Monroe comes off as a drug addicted psychotic who was just fired from what would have been her last movie, “Something’s Gotta Give.” She dies of an overdose with suspicions something more was involved.

Along the way we meet Peter Lawford who is married to Kennedy sister Pat. Lawford’s role is to find young women for the Kennedy brothers. Meantime his wife Pat rekindles her affair with Otash.

Ellroy take us into the drug dens and sex pads of Hollywood. Most of the debauchery is known to LA police chief William Parker and LA sheriff Peter Pitchess. We also have a younger Daryl Gates who would later become LA’s chief of police.

Mixed into all of this is Darryl Zanuck’s 20^th Century Fox which is hemorrhaging cash coming from huge overruns on “Cleopatra” an epic starring Elizabeth Taylor and Richard Burton. As a side note Fox would later sell half its movie lot in what was to become Century City.

Otash is a pill-popping alcoholic who kills a couple of people as the somewhat convoluted plot moves along. I arrived in LA two years later with little knowledge of the depravity the book depicts, probably exaggerated. My warning for the reader is that this is a long book, 448 pages in the print edition. 

For the full Amazon URL see: West LA Noir (amazon.com)

Easing the Humanitarian Crisis in Gaza: It is up to Hamas

 There is a humanitarian crisis in Gaza, but it is up to Hamas, not Israel to ease it. Hamas can do the following:

1. Cease all rocket attacks on Israel.

2. Free the 240 Israeli and other nationality hostages.

3. Allow a corridor for Palestinians to move south to get out of the way from the fighting and allow a corridor for food and medical supplies, but not fuel.

Further it is important to recognize that the speedier the Israeli victory the speedier the Palestinians will be freed from the Hamas dictatorship which will allow for a peaceful rebuilding of Gaza.

My Zoom Interview with Professor Meron Medzini on "Golda's War Diaries"

 On Sunday October 29th I interviewed Professor Meron Medzini on the new Israeli documentary "Golda's War Diaries." ( https://go2films.com/films/goldas-diaries/)  This was part of a program sponsored by the Santa Fe Jewish Film Festival and the Temple Beth Shalom's Israel Committee. We discussed the current Israel/Hamas War, the 1973 War, the recent Helen Mirren film, and Golda Meir's career. Prof. Medzini was Golda's spokesperson before, during and after the 1973 War. 

The link to the interview is below:

Prof. Meron Medzini Interview Final Cut - YouTube

Stock Market Correction or Bear Market?

 I certainly haven't covered myself with glory this year. My recession call in May, just ahead of a 5% GDP quarter is damning. (Shulmaven: Has the Recession Arrived?) Nevertheless with the S&P 500 now down a touch over 10% from its July 31st high, a correction has been signaled. Perhaps more troubling, notwithstanding the fact that the index is still up 7% on the year, the equal weighted index is down 6%, meaning more stocks are down than up. Just as in the early 1970's nifty fifty market, the leadership has been extraordinarily narrow. Indeed with the onset of a middle-east war we have yet again another parallel to the 1970's. (Shulmaven: Roaring 20's or That 70's Show)

To me my biggest concern is that the S&P 500 is still down 14% from its 4797 all-time high set on January 3, 2022. It can be argued, that just like in the 1970's, we are now in a structural bear market that began almost two years ago. If that is the case, the rally this year could be characterized as one of the biggest head fakes of all time. It remains to early to make that call, and a big tell will be whether or not the broader stock market rallies next month with the abatement of mutual fund tax selling.

My Amazon Review of Michael Lewis' "Going Infinite: The Rise and Fall of a New Tycoon"

Crypto Kid

 

Sam Bankman-Fried (SBF) viewed himself as the J.P. Morgan of crypto currency, instead he was far more like P.T. Barnum; a huckster of the first order. He is now on trial for multiple counts of fraud. I didn’t like crypto currency before I read this book; I now like it even less. Author Michael Lewis really let me down in his trying to make a hero out of SBF. Nothing could be further from the truth as SBF comes off as the pampered child of the Stanford bubble he grew up in with his too indulgent law professor parents. Even at age 31 he held on to his childhood stuffed animal.

 

Lewis chronicles his career from MIT to Jane Street Capital where he earns his trader chops and then on to trading crypto currency in Hong Kong. He then formed his Alameda Research and his market maker FTX. Because there were no financial controls it was very easy to intermix customer deposits at FTX with his hedge fund which was nominally run by his on and off paramour Caroline Ellison, another piece of work.

 , 

Some of that money was invested in Bahamas real estate for his firm and for a fancy house for his parents. The money also found its way to Washington D.C. where SBF became a leading contributor to the Democratic Party and anti-Trump Republicans and boy did that buy him access.

 

SBF had an unusually high degree of tolerance for risk. All he cared about was a positive expected value, no matter how high the probability of losing was. Thus, he totally ignored the Kelly Criterion for the proper sizing of investments. His goal was to get as rich as possible so that he could give away his fortune to save the world. He operated under the principal of “effective altruism” in order to maximize the greatest good for the maximum number of people. He professes to love humanity, by he really doesn’t like people as individuals. Further he virtue signals by his vegan diet, unruly hair, and dressing in shorts.

 

To me his effective altruism is nothing but a marketing hype to justify the huge fortune he was creating which peaked at around $40 billion before the collapse. Somehow, he managed to lose $8 billion of client funds and therein lies the core of his fraud.

 

Too conclude Michael Lewis was snowed by Sam Bankman Fried. A more critical look would really have improved this book.

For the full Amazon Review see:  Crypto Kid (amazon.com)

Hamas' Useful Idiots

"Useful idiots" is a term attributed to Lenin to describe western intellectuals who naively supported the Soviet dictatorship. Unfortunately, today we have two nominally Jewish groups, IFNotNow and Jewish Voices for Peace, who are explicitly supporting the Hamas dictatorship in Gaza. These two groups look the other way when 1400 Jews were murdered by Hamas terrorists in the Simchat Torah massacre on October 7th. As a result, just like the Communist fellow travelers in the 1930's they are giving cover to Hamas' brutality.

For whatever reason these guilt-ridden Jews have turned their backs on their Jewish brethren in Israel who account for half the Jewish population in the world. Instead, they are supporting a dictatorship whose sole goal is the destruction of the Jewish population in Israel. In other words IfNotNow and Jewish Voices for Peace are implicitly calling for a second holocaust. My advice to the Jewish community is to shun them and for the press to call them out for what they are.

My Amazon Review of Walter Isaacson's "Elon Musk"

 

                                             Rocket Man

 

Every aerospace executive and board member should read Walter Isaacson’s biography of Elon Musk. Starting from scratch Musk has built America’s leading rocket and space communications company by ignoring the hidebound bureaucratic rules of the major aerospace companies delivering rockets at one tenth the cost of his bloated competitors. Musk’s rules are:

1.      Doubt every requirement.

2.     Question every cost?

3.     Act with a sense of urgency.

4.     Learn by failing.

5.     Improvise.

 

The other secret that Musk applied to Tesla as well as SpaceX is that he integrated design, engineering, and manufacturing so that each of those entities can learn from the others. Thus, engineers and designers are able to make improvements in manufacturing as issues arise. Steve Jobs at Apple integrated design and engineering, but outsourced manufacturing to China.

 

Rising from an unhappy childhood in South Africa, Musk became a Silicon Valley entrepreneur to become part of the famed “PayPal Mafia.” He used his PayPal success to fund Tesla and SpaceX and the rest is history.

 

Musk’s genius has the ability to inspire loyalty, at least for a time, of a host brilliant people who built his empire. However, empathy is not his middle name, and, in many ways, he seems to be a very cruel person. He is one of those people who professes to love humanity, but really doesn’t like people as individuals.

 

Isaacson discusses Musk’s chaotic personal life. Three marriages, 11 children two of whom by sperm donation. Isaacson doesn’t explain why so many of Musk’s children were conceived by in vitro fertilization.

 

Then, of course there is Twitter, now called X after his favorite letter. His adventure at Twitter seems to be one giant ego trip where he promised to free that social media site from it “wokeness.” To say the staff of Twitter was woke, would be an understatement. He wanted to encourage free expression, yet under his rule Twitter has become a cesspool of hate.

I had my own run in with twitter. Despite all of Musk’s talk of a new openness I was banned for using the term “circular firing squad” to characterize Hunter Biden bringing his father into his legal thicket. Something is really wrong with X and from press accounts is seems to be getting worse by the day.

 

Despite being hagiographic at times, Isaacson brings to life one of our leading entrepreneurs who is bringing us into new electric and space ages.

For the full Amazon URL see: Rocket Man (amazon.com)

Bank of America Corp: A Beached Whale

Bank of America (BAC) reported earnings today that modestly exceeded analyst consensus estimates. However, as we noted in April (Shulmaven: Winter Comes to the Bank Stocks), BAC was suffering from huge embedded mark-to-market losses on its held to maturity securities holdings which amounted to $108 billion at yearend 2022. Today BAC reported those losses, as of the end of the third quarter, increased to $132 billion on a cost basis of $603 billion, not chump change.

The bank also reported that its tangible book value per share was $23.79. The $132 billion in embedded losses amounts to $16.35/share. Thus the true tangible book value would be a meagre $7.44/share. With BAC stock trading this morning at $27.15, it is being valued at a very pricey 3.6X "true" tangible book value. To me this means, that unless interest rates fall dramatically, BAC's share price will be weighed down for years.

Hamas Aggression Must be Punished

Hamas' aggression against Israel has to be punished; quickly and severely. To use the words of the 1950's Cold War, Israel has to massively retaliate to avenge the deaths and kidnapping of its civilians. Put bluntly, Israel has to destroy Hamas root and branch. By acting this way the country will gain the respect of the region and instead of putting the proposed U.S./Saudi/Israel deal on hold, it would accelerate it. 

Remember, an Israel that looks weak will garner no respect in the broader Middle-East. Indeed to reinforce the idea that Israel means business Netanyahu ought to form a new unity government by bringing in the center-left and kicking out the rabid right ministers, who by the way have no military experience. Just to note, prior to the 6-Day War in 1967, Israel formed a unity government.

Now is not the time for recriminations, but once the objectives in Gaza are achieved a full blown inquiry will be needed to examine the gross military and intelligence failures of the government that enabled the aggression in the first instance.

My Amazon Review of Victor Haghani's and James White's "The Missing Billionaires: A Guide to Better Financial Decisions"

Utility vs. Wealth Maximization

 

Victor Haghani and James White of ElmWealth have written an important, but too academic book, about investing for retirement. Trust me, this not Burton Malkiel’s “A Random Walk Down Wall Street.” In the interest of full disclosure, I worked with Haghani at Salomon Brothers in the late 1980’s and early 1990’s, before he went on to Long Term Capital Management (LTCM). After initial success in 1995, the firm failed spectacularly in 1998. From that Haghani personally learned the importance of sizing of investments. Simply put, he was over-invested in his firm.

 

This is a book more about how much to invest rather than what to invest in. Sizing is critical and the author’s missing billionaires were way over invested in a single asset, and they maintained unsustainable lifestyles. They utilize the concept of the “Merton Share” where the size of an investment is positively related to expected return and negatively related to risk aversion and the square of expected volatility.

 

The goal is to maximize utility, not wealth. Here I will give an example of my own. An investor has an opportunity to invest $9,000 in an investment that has a 1% chance of a return of $1,000,000 and a 99% chance of a total loss. The expected return is a positive $1,000. A pure wealth maximizer might just take the bet, while a utility maximizer would abstain.

 

In order to make their math work Haghani and White assume that individuals operate under “constant relative risk aversion.” For the lay reader this is a nonstarter, and the book is loaded with references to the finance literature. Further, at least in my case, I don’t think it is valid. When I retired, I was determined to have a fortress balance sheet, which saved me more than a little bit of anxiety during the 2008 financial crisis. Once passed, as my wealth increased, I began increasing my risk levels, but retaining a core fortress balance sheet.

 

The authors take the Jane Austin view that a critical measure of wealth is the income derived from it. Hence, they conceptually like annuities, if only they could be structured in a transparent and low fee way. In today’s financial marketplace that is a tall order. My problem with annuities is that they cause confusion between the return on capital with the return of capital.

 

If you follow Haghani’s and White’s advice you would today be cautious about the prospect for long-term returns from today’s stock market. At this writing the earnings yield of the Case-Shiller price-earnings ratio is 3.39% while the five-year TIPS yield is 2.35%. A real equity risk premium of a meagre 1.04% has historically led to very poor future returns.

 

There is much more in this book, but my guess is that the lay reader would find it a difficult go. On the other hand, a reader with financial training will gain much insight.

For the full amazon URL see: Utility vs. Wealth Maximization (amazon.com)

House Crushes MAGA Wrecker Caucus

The House of Representatives by an overwhelming 335-91 margin voted to keep our government open for another 45 days, thereby signaling a major defeat for the wrecker caucus within the House. Among the wreckers are Matt Gaetz, Andy Biggs, Paul Gosar, Lauren Boebert and Margorie Taylor Greene. All of whom were being cheered on from the peanut gallery by Liddle Donnie Trump. It was good to see Democrats and Republicans working together for the common good and it remains to be seen whether Kevin McCarthy will remain speaker. The main drawback in the deal is the absence of funding for Ukraine. Hopefully that will be remedied next week.

I previously wrote about the wreckers in three prior blog posts. (See: https://shulmaven.blogspot.com/2013/09/on-strike-shut-it-down.html, https://shulmaven.blogspot.com/2013/10/after-action-report-on-government-shut.html, and https://shulmaven.blogspot.com/2015/10/the-republican-wrecker-caucus-strikes.html)

Although the characters are different from 10 years ago, the goal remain the same and that is to stop the normal functioning of government to serve their own petty ends. Unfortunately the House Republicans continue to circle the drain, meaning this will not be the last time we have to put with the MAGA wreckers.

My Review* of Neil Howe's "The Fourth Turning is Here: What the Seasons of History......"

 America in an Era of Crisis

I received this book as a gift. 

America is in crisis. Nothing seems to be working with dysfunction everywhere from Congress to the post office, to the airlines, to the housing market, to medical care, to the lack of civility and to extreme weather events. All of this is a symptom of what author Neil Howe calls the onset of the fourth turning. Howe builds on his earlier book written with William Strauss entitled “The Fourth Turning” which appeared in 1997. In that book the authors coined the term “millennial generation.”

 

According to Howe Anglo-American history going back to the War of the Roses follows a predicable 80–100-year Saeculum which is broken up into 20–30-year blocks. For example, the 80-year blocks of 1780-1860-1940-2020 would constitute three turnings. Each crisis era was forewarned by a war. The Revolutionary War crisis was preceded by the French and Indian War, the Civil War crisis by the Mexican War, the Great Depression/World War II crisis by World War I and the current crisis by 9/11 and its aftermath.

 

Thus, according to Howe, we will soon be entering the fourth turning which he estimates to start around 2033. Unfortunately, the fourth turning is usually accompanied by a major war or a civil war. As a result, the recent ugliness is only a precursor of worse things to come. However, once the crisis has passed a new dawn awaits us, as in the end of World War II.

 

Within each 80-year block there are four eras defined by the change in generations. The recent history looks like this in Howe’s terms:

Boom 1943-1960, High.

Gen X 1961-1981, Awakening.

Millennial 1982-06, Unraveling.

Homeland 2007-2033? Crisis

 

Each generation gives rise to a protype character. By Howe’s reckoning there are heroes, artists, nomads, and prophets. It is the heroes that resolve the crisis era that become the leaders of the next high cycle. Think Eisenhower, for example.

 

In Howe’s view the next Saeculum will be characterized by the rise of community over the Individual. The unmet tasks of the prior era will be handled by a far more egalitarian society. Taxes will be higher on the wealthy, but entitlement spending will be under control and government finally figures out to deliver services more efficiently with high investment in climate mitigation and drastic reforms in zoning that would once again make housing affordable. In other words, a very efficient social democracy.

 

I noticed a few errors in the book. The Four Freedoms were a product of World War II not World War I and the Treaty of Detroit was made in 1950, not 1946. Nevertheless, Howe gives us a new interpretation of our history and his insights are extraordinary.

*-Yet again Amazon is late in posting my review. Amazon just posted it at America in an Era of Crisis (amazon.com) Sep 28

My Conversation with Ori Nir on the Situation in Israel: Part 2

 On September 10th I had a wide ranging conversation with Ori Nir, Vice President for Public Affairs of Americans for Peace Now on the proposed judicial reforms in Israel, relationship with the Palestinians and the proposed Israel-U.S.-Saudi Arabia- Palestine mega deal. The YouTube link is below. This is a follow up of on our March 19th conversation. (Shulmaven: My Conversation with Ori Nir on the Situation in Israel)

An Update on What’s Happening in Israel: The View from Americans for Peace Now - YouTube

A Quick Note on General Motors and the UAW Strike

 I am not expert enough to weigh in completely on the current UAW strike against the Big 3. However I would note that the automobile companies are arguing that they need the high profits they are now earning to fund their development of electric vehicles. On the surface this makes sense, but given that General Motors' current $5 billion share buyback program does not make sense. That money should be going into electric vehicle development.

In another era, way back in 1954, General Motors sold $350 million dollars in new stock to fund the development and the production of new vehicles. Thus, if GM were really serious about electric vehicles it would be selling stock, not buying back their stock from existing shareholders.

My Review* of Daniel Kraus' "Whalefall"

Jay and the Whale

 

Chapter Two of the Book of Jonah opens with “The Lord provided a huge fish to swallow Jonah; and Jonah remained in the fish’s belly three days and three nights.” Here we have 17-year-old diver Jay Gardiner being swallowed by a 60-foot sperm whale and he has far less than three days to get out. Author Daniel Kraus weaves a terrifying story of Jay’s attempts to free himself from the belly of the whale. Along the way we learn much about the anatomy of a sperm whale and learn about all of the flotsam that is nestled there, including a Brillo box that will become important later in the story.

 

The book is far more than a Jonah story because through the use of flashbacks we learn much about Jay’s troubled relationship with his father Mitt, also a diver, and his family. The reason for Jay’s dive that morning into Monterey Bay, an area I know well, is to find the bones of his dead father who committed suicide after a bout with cancer. And while in the whale, Jay reconciles with his late father.

 

I started reading this book on a long flight in a dark cabin over the Atlantic. It reached a point where the story was so terrifying that, in the darkness, I had to put it down. I didn’t finish until I returned home. All told, Knaus tells an adventure story with a strong human touch. Because there are 550 reviews already posted on Amazon, I have kept my review to a minimum. 

*- Amazon has yet again failed to post my review in a timely manner. Posted by amazon a week late on 9/16. See: Jay and the Whale (amazon.com)

J.M. Smucker's Dumb Deal to Buy Hostess Brands

I am a 50-year shareholder of J.M. Smucker (SJM) and I have seen them make some great deals (Folgers Coffee $3.3 billion in 2008) and some horrible deals (Big Heart Pet Brands $5.3 billion in 2015), but their planned $5.6 billion acquisition of Twinkie maker Hostess Brands (TWNK) takes the cake. This deal is dumb on strategic and valuation grounds and family scion Paul H. Smucker is probably turning over in his grave.

It staggers the mind too think that when the sweetened snack industry is being riled by the prospect of a new class of weight loss drugs that will drive a dagger into the industry's business model, SJM decides to pay a huge premium (54% price unaffected) for TWNK, perhaps the most vulnerable company in that sector.

Compounding the strategic mistake SJM is paying a huge 17X EBITDA on 2023 numbers and an estimate 13X on SJM's estimate (aggressive in my opinion) of 2024 results allowing for synergies. To me it makes no sense for SJM which was trading at 11X EBITDA to buy a far worse business at 17X EBITDA. Further SJM compounds the problem by levering up to the gills with planned financing approximating $5 billion. That borrowing with raise its Debt/EBITDA ratio from a modest 2.2X to a junk level 4.5X. Simply put, expect SJM's P/E ratio to contract. It is no accident that SJM is trading down 7% intraday.

My Amazon Review of Christopher Rufo's "America's Cultural Revolution: How the Radical Left Conquered Everything"

Racial Marxism

Christopher Rufo, a leading agent provocateur of the Right, has written a deeply researched intellectual history of how the political culture of the 1960’s Left became dominant in 21^st century America. Rufo traces today’s diversity, equity, inclusion (DEI) and antiracism training back to the ideas of Herbert Marcuse, Angela Davis, Paulo Freire, and Derrick Bell. Thus, there is a straight line from the cultural revolution of 1968 to the “wokism” of 2015 and beyond.

 

To me Rufo’s ideas ring true because as a young leftist of that era I first heard the terms “the long march through the institutions” and “white skin privilege” in the early 1970’s. According to Rufo the Left’s long march first succeeded in establishing university ethnic studies programs, then on to the education schools and soon enough the entire liberal arts were largely controlled by far-left ideologues. After the universities, came the newsrooms, the media and corporate HR departments.

 

Frankfurt school philosopher Herbert Marcuse is the founding father of racial Marxism. Marcuse gave up on the working class as the motive force for revolution and substituted militant minorities.  If you want to know why the Democratic Party lost the working class, you can do no worse than reading Marcuse. Instead having the white revolutionaries of the 1960’s we now have the limousine liberals and middle-class feminists linking us with urban minorities to form the guts of the Democratic coalition.

 

Rufo then goes on to Marcuse student Angela Davis who became the paragon of Black liberation. Her support of the Black Panthers was legendary and according to Rufo there is a straight line from the Panthers to Black Lives Matter. Her “kill the pigs” would become “defund the police” fifty years later.

 

Indeed, in the early 1970’s the white left was so enthralled with the Panthers that is took political direction from them. Further Davis was a stone-cold communist who followed the Soviet party line to the bitter end. Part of Davis’s politics was to destroy such icons of American history as Washington, Jefferson, and Lincoln to make white’s feel ashamed of their country.

 

I never heard of Paulo Friere before reading this book. His contribution was to emphasize education as a way to revolution. His “Pedagogy of the Oppressed” is one of most widely cited books in academia. We see his ideas in school curricula designed to make white children uncomfortable about their heritage. This is not about teaching real history, but rather bending it to a leftist ideology.

 

His last ideologist of the Left is Harvard Law professor Derrick Bell who started to develop critical race theory in the early 1970’s. Bell is a racial pessimist because white people are inherently oppressors because of their “privilege.” Although not stated, it seems that under critical race theory the entire white population has to go through Maoist-style re-education camps. Don’t laugh, there are all kinds of institutional programs that are doing modified versions of this.

 

Rufo ends his book on an upbeat note. He is, after all, a counter revolutionary. As a trustee at Florida’s New College, he is working do away with a host of sham departments that cover for leftist organizing and doing away with its DEI programs. Eliminating DEI is essential to Rufo. His program can be summarized as “equality over equity, dignity over inclusion, and order over chaos.” As a personal note I stopped giving money to UCLA because, like many universities, the school required a personal statement in support of DEI in order to be hired or promoted. Simply put, a 21^st century loyalty oath.

 

Although polemical, Rufo has written a serious book that should be read by policy makers and the public alike. In order to make the needed changes we have to know how we got here.

 For the full Amazon URL see: Racial Marxism (amazon.com) 

Shulmaven Banned from Twitter (X)

Shulmaven was banned from Twitter (X) this morning for posting the comment "Circular firing squad" on Betsy Woodruff Swan's article on the Hunter Biden litigation. (See: In talks with prosecutors, Hunter Biden’s lawyers vowed to put the president on the stand - POLITICO ) Twitter said I violated their rules against "violent speech."  Give me a break. To call me out for this means, that given all of the hate speech and porn now on Twitter, something is really rotten in that organization.

Elon, get a life and fix this before it is too late! Meantime, dear readers,  boycott X.

My Amazon Review of Alan Philps' "The Red Hotel: Moscow 1941, The Metropol Hotel......."

A Failure of Journalism 

We last ran into the Metropol Hotel in Amor Towles’ “A Gentleman in Moscow.” (See:        My Amazon Review of Amor Towles' "A Gentleman in Moscow")  Here we revisit the hotel as the home of foreign journalists covering the Eastern Front during World War II. We meet such stalwarts Quentin Reynolds, Margaret Bourke-White, Walter Kerr, Cyrus Sulzberger, and Edgar Snow among others. They are all there to cover the war under the very strict hands of Soviet censorship. Hence, for the most part, they have become organs of Soviet Propaganda.

 

The journalists are aided by a corps of female interpreters who in addition to there nominal duties are there to spy, influence and sometimes perform sexual services for mostly male reporters. One of those interpreters was Nadya Ulanovskaya who with her husband Alex are the true protagonists of the book. Both Nadya and Alex as teenagers were revolutionaries in 1917 and, in fact, they met Stalin. After the revolution both move up in nomenklatura and by 1926 they are working as GRU agents in China under the legendary master spy, Richard Sorge. (See: Shulmaven: My Amazon Review of Owen Matthews' "An Impeccable Spy: Richard Sorge, Stalin's Master Agent )

 

By 1932 Alex had moved over to the NKVD and worked as its rezident in New York. In that capacity he recruited Whitaker Chambers who years later would blow the whistle on the Soviet spy ring in the United States. (See: Shulmaven: My Amazon Review of Calder Walten's "Spies: The Epic Intelligence War Between East and West" )

However, by the late 1930’s both are disillusioned with communism and are initially saved from the purges by an old friend from the NKVD. Nadya worked for Australian journalist Godfrey Blunden. She travels with the journalistic crew to see what the Soviets want them to see at the front. The journalists live high on the hog while all of Russia is starving. Author Alan Philps gives us a great sense of the fear in Moscow as Hitler’s armies approached as the journalist were evacuated further east.

 

Nadya’s luck runs out in 1948 when she is arrested. It seems the KGB figured out that she was the protagonist in a novel Blunden wrote. She spends time in Lubyanka, Lefortovo and the Gulag and serves eight years. She is released early under Khrushchev's general amnesty. I didn’t realize what a big deal that was. Also released were her husband and daughter.

 

She immediately acts as a rebel by being a leader in “samizdat” movement which published previously forbidden tracts. Ultimately, she and her daughter move to Israel.

 

What we learn from Philp’s book is that journalists working under dictatorships cannot really do an honest job. In this case the journalists in Russia lived on their expense accounts, paid no taxes and eagerly awaited writing books that would bring them a royalty stream. To write out of line would mean having their visas revoked. Thus, in no way could they be considered independent. This is a lesson for a reader of reports emanating from Russia, Iran, China, and Palestine. Take all of them with more than a few grains of salt. Witness what happened to Evan Gershkovich now imprisoned in Russia.

 

Alan Philps has done a great service to the memory of Nadya Ulanovskaya and has written a work of history that today’s journalists should not forget.

For the full Amazon URL see: A Failure of Journalism (amazon.com)

 

My Amazon Review of Calder Walten's "Spies: The Epic Intelligence War Between East and West"

 Intelligence Wars

I normally frown on long books, but Calder Walten’s book weighing in at 688 pages is an exception. In this deeply sourced book Walten covers the 100-year East vs. West spy war starting with the formation of the Cheka in 1918 and its nontrivial influence on history. Like it or not the West has been at war with the Russians from the beginning and if you want a later date for the start of the Cold War you can use 1943 with the emergence of the Cambridge Five occupying high posts in the British security services and the atomic spy ring at Los Alamos.

The initial Soviet target was the British, but with the U.S. recognition of the USSR in 1933 the way was open for the NKVD and the GRU to establish outposts in the U.S. via their embassy and consulates and with the formation of AMTORG, the Soviet trading corporation. From this modest beginning came high placed spies including Alger Hiss, Lawrence Duggan Laughlin Currie and Harry Dexter White. And working with the U.S Communist Party, an error in tradecraft, the Soviets recruited the Rosenberg spy ring. Indeed, had Henry Wallace become President his choices for Secretaries of State and Treasury were Duggan and White, respectively making for a true horror show.

For the most part both the U.S. and Britain were oblivious to the Soviet threat through World War II. A case in point is that the atomic spy, physicist, and German communist Klaus Fuchs was cleared by British intelligence. In fact, the British were prohibited from spying on the Soviets and the U.S. OSS was riddled with Soviet Agents. On the U.S. side the one hero in the piece was FBI chief J. Edgar Hoover who was alert to the spying threat. (See: Shulmaven: My Amazon Review of Howard Blum's "In the Enemy's House: The Secret Saga of the FBI Agent and the Code Breaker who Caught the Russian Spies")  Based on the information coming from his spies, atomic spies, Stalin authorized the start of the Soviet nuclear program while the Battle of Stalingrad was going on. Stalin was thinking ahead to the postwar rivalry.

 

As good as Soviet spying was on Britain and the U.S. it objectively failed with respect to Germany because Stalin refused to believe the warnings coming from his intelligence apparatus. He even ignored the clear warnings from his super spy in Japan, Richard Sorge. (See: Shulmaven: My Amazon Review of Owen Matthews' "An Impeccable Spy: Richard Sorge, Stalin's Master Agent )

 

So successful was the Russian spying, especially through to the efforts of Cambridge Five member Kim Philby as MI6 liaison to the CIA, was that Stalin knew about America’s intelligence efforts before President Harry Truman. Indeed, Kim Philby was best buddies with James Angleton, the head of the CIA’s counterintelligence division.

 

This is not to say that the U.S. and Britain were asleep. The U.S. developed Oleg Penkovsky as an asset in Moscow. He was extraordinarily helpful during the Cuban missile crisis by informing Kennedy about the limited number of missiles that were operational in the Soviet Union. The British had Oleg Gordievsky, a high KGB official, who while in London briefed both Gorbachev and Thatcher on the eve of their first meeting in 1985. ( Shulmaven: My Amazon Review of Ben Macintyre's "The Spy and the Traitor: The Greatest Espionage Story of the Cold )  It was also Gordievsky who alerted the West that Russia truly feared that the U.S. was about to launch a preventive war during the Able Archer exercises in late 1983. Reagan took note of that and cooled his hot rhetoric that came from his “Evil Empire” speech earlier that year.

 

Walten also tells of the CIA’s paranoia in fearing nationalist uprisings as the vanguard of a communist revolution in the global south. Big mistakes were made in Asia, Latin America, and Africa. However, he does not that it was the weak Chilean economy and the army and not the CIA who overthrew Allende in 1973. Both the CIA and the KGB were playing cat and mouse with each other in that country.

 

Walten covers far more than spies. Aside from HUMINT, he discusses signal intelligence (SIGINT), electronic intelligence (ELINT) and image intelligence (IMint). I learned that Dr. Edwin Land, the founder of Polaroid, came up with the idea of using high resolution photography that became the basis of first the U-2 spy plane and later satellite imagery. The U-2 that was shot down over Russia in 1959 was accomplished through the use of a proximity fuse that was obtained from the Rosenberg spy ring.

 

I also learned that the dissolution of the Soviet Union did not turn off Russian spying. The KGB reformed as the FSB and the SVR and used such highly placed agents as Aldrich Ames in the CIA and John Walker in FBI counterintelligence. The damage these two caused was incalculable including the fingering of Gordievsky who escaped Russia by the skin of his teeth.  It seems that Clinton did not care about intelligence, but the new Russia plowed ahead. Walten discusses how the War on Terror diverted resources away from Russia and China to the West’s detriment.  Of course, it goes without saying that the Russian security services played a nontrivial role in the 2016 and 2020 elections. However, he does note the U.S. success in calling attention to Russia’s planned invasion of Ukraine in February 2022 which prevented a Russian false flag operation.

 

Walten ends his book with a discussion on China whose Ministry of State Security represents a far greater threat than the KGB/GRU ever represented. China’s espionage is across the board that involves stealing corporate secrets, cyber warfare, SIGINT, and the use HUMINT, in particular involving Chinese nationals in the U.S.  Remember the Russians were never an economic threat; China is thereby defending against its commercial spying critical.

 

Calder Walten’s well-written book is true public service. He highlights the fact that we live in a dangerous world where, as they say, eternal vigilance is the price of liberty.

For the full Amazon URL see: Intelligence Wars (amazon.com)

My Review* of Seth Klarman's Ed. of "Graham and Dodd's Security Analysis 7th Ed."

Learning from the Masters

 

Star value investor Seth Klarman has edited an updated version of Graham & Dodd’s investing classic with help from such luminaries as James Grant, Howard Marks, and Todd Combs. Klarman uses the 1940 edition as the basis for his and the other editorial commentaries on the text’s very detailed discussion on security analysis. For most readers the original Graham & Dodd discussion will seem like ancient history to today’s investing world, but for a history buff like me, I found much of the discussion fascinating. (Also see my prior review of Graham Shulmaven: My Amazon Review of Benjamin Graham's and Jason Zweig's (Ed) "The Intelligent Investor (Rev. Ed.)" )

 

The core lesson of Graham & Dodd is that when one invests in a common stock, he or she owns a proportionate share in a business and the value of that business is dependent upon its net assets (shareholders’ equity) and its underlying earning power. The idea is to be able to buy a stock sufficiently below its value to create what Graham & Dodd call a margin of safety. Also timeless is Graham & Dodd’s holding suspect the use of appraised values in real estate debt securities that were so prominent in the 1920’s and again today.

 

For Graham & Dodd earnings power is measured by the average of earnings over the last five or ten years. The future does not really enter into the discussion except if there is a strong upward trend which might allow an investor to pay modestly higher earnings multiple. The authors were especially critical of the 1928-29 new-era philosophy of valuing equities solely on the basis of future prospects largely because the future is unpredictable. Thus, they are critical of John Burr Williams’ 1938 view that the value of a stock equals the present value of future dividends, because, again, the future is unknowable. Nevertheless, in today’s world investing is all about capitalizing future earnings.

 

You have to remember that Graham & Dodd were writing against the backdrop of the Great Depression of the 1930’s. The new-era philosophy of 1928-29 crashed and burned and what investors had to deal with was the here and now of net asset values and historical earning power. However, they did note the price-earnings ratios in 1936-38 were much higher than they were in 1923-25, which they attributed to much lower interest rates. They also wisely noted that the low interest rates of the 1930’s were sending a negative message about the future growth in the economy. In retrospect the high multiples could be attributed to the fact that corporations were under-earning due to the depression.

 

They also seemed to be puzzled about the return to growth stock investing in the late 1930’s. They listed seventeen stocks that were characterized as growth issues at that time. Several of the names would puzzle today’s investor, but I would point out that there were five chemical stocks on the list. The advances in chemistry and chemical engineering in the 1930’s made them the technology stocks of that day.

 

I enjoyed the essays introducing the chapters of the book. However, my criticism of the essays is that they do not include detailed examples of how a Graham & Dodd investor, like me, would utilize the wisdom presented in the book today. For that I would recommend Bruce Greenwald’s “Value Investing: From Graham to Buffett and Beyond 2^nd Ed.” (See: Shulmaven: My Amazon Review of Bruce Greenwald's et.al. "Value Investing: From Graham to Buffett and Beyond" 2nd. Ed.)

*-Amazon has yet again failed to post this review. Amazon just posted my review on 8/17, see Learning from the Masters (amazon.com)

Moody's Lowers the Boom on the Bank Stocks

 Moody's finally acknowledged what most of us new last April that the banks were in a world of hurt. ( See: Shulmaven: Winter Comes to the Bank Stocks ) Last night Moody's downgraded 10 banks including Commerce Bancshares and M&T Bank, put 6 under review including BNY-Mellon, Cullen Frost, Truist Financial and U.S. Bancorp  and placed 11 banks with a negative outlook including PNC and Fifth Third. The rationale for the downgrades was based upon high funding costs, asset risk in commercial real estate, underwater securities holdings and potentially  higher capital requirements. The ratings agency neglected to mention higher FDIC premiums. Moody's also neglected to note that the day will soon come when the Federal Reserve introduces a high inflation scenario in its annual stress test. 

The bottom line here is that the banking crisis engendered by the failure of Silicon Valley Bank and First Republic Bank is far from over with that credit standards will continue to tighten. What will ultimately be needed is a re-equitization of the banking system with its concomitant dilution. The one saving grace is that just like the defense industry's "last supper" hosted by Secretary of Defense William Perry in 1993 which signaled a consolidation of that industry, we now have Secretary of the Treasury Janet Yellen urging the regional and community banks to merge. The anti-merger FTC Chair Lina Khan will stay out of the way.