Sunday, January 29, 2023

Random Thoughts on the Economy and the Stock Market

 *Last week the Commerce Department reported that real GDP increased at a 2.9% annual rate in the fourth quarter. Normally that would represent solid growth, but if we back out trade and inventories, domestic final demand increased at a meager 0.8%. Despite continued sub 200k unemployment claims, we are setting ourselves up for a modestly negative first quarter.

* The White House was really pissed about Chevron's $75 billion share buyback. They explicitly stated "“For a company that claimed not too long ago that it was ‘working hard’ to increase oil production, handing out $75 billion to executives and wealthy shareholders sure is an odd way to show it,” White House spokesman Abdullah Hasan said in an emailed statement. “We continue to call on oil companies to use their record profits to increase supply and reduce costs for the American people.” (Source: Bloomberg) For a White House that believes that fossil fuel generated climate change represents an existential threat to humanity its statement represents the height of hypocrisy. 

* The January rally in the stock market continued last week the the NASDAQ Composite and the S&P 500 now up 11%  and 6%, respectively with January not yet over. My guess is that the bulk, if not all, of the gains are in for the year. 

* The Fed's open market committee meets this week. With stocks rising and housing apparently bottoming out, there is no need for them to even be thinking about a pivot to lower rates. The Fed Funds rate will likely go over 5% and stay there for the balance of the year.

Tuesday, January 24, 2023

My Amazon Review of Robert Kagan's "The Ghost at the Feast: America and the Collapse................."

 America Comes of Age in Fits and Starts

 

Robert Kagan, a senior fellow at the Brookings Institution, has written a sequel to his “Dangerous Nation” Japan to cover American foreign policy from 1900-1941. In 1900 fresh after defeating Spain in 1898 the U.S. had the largest economy in the world and was viewed as a non-entity as far as the great powers of Europe were concerned. Domestically there was a strong anti-imperialist lobby against the American occupation of the Philippines, but Kagan reminds us that the freeing Cuba from Spanish colonialism was highly popular across the political spectrum. Using terms of today, it was viewed as a “humanitarian intervention.” Further the takeover of the Philippines was accidental in that Admiral George Dewey was following a decade old plan to steam to Manila to engage the Spanish fleet where he won a resounding victory. Kagan argues that absent the U.S. intervention, sooner or later the Philippines would have been taken over by either Germany or Japan.

 

Kagan covers the Platt Amendment to the Monroe Doctrine which unilaterally granted the U.S. the right to intervene in Latin America which it does many times. Initially to keep the Europeans out and to maintain the peace, but later with less than benign motives. He spends less than time than he should have around the politics of building the Panama Canal and President Roosevelt’s arbitration of the Russo-Japanese War. By 1914 the U.S. has no army to speak of and has modern, but small Navy.

 

When the war in Europe broke out the U.S. position was to stay out of it, despite strong support from banking interests to weigh in on the side of the allies. There was great support for the Central Powers coming from Irish, German and Jewish Americans for their own unique reasons. Despite the sinking of the Lusitania, President Woodrow Wilson, though indirectly supporting the allies, struggles to keep the U.S. out of the war. The pressure for U.S. entry  is led by former president Theodore Roosevelt. Ultimately as Germany resorts to unrestricted submarine warfare the U.S. enters the war as an associated power with an inflated sense of morality coming from “peace without victory” and his Fourteen Points.

 

Wilson enters the Versailles negotiations as a giant. American power is supreme, yet he gets sucked into the vortex of European power politics doing whatever he can to bring forth the League of Nations. However, while in Paris, the once internationalist Republican Party, does a 180-degree shift. The party once lead by Elihu Root, Henry Stimson and Charles Evans Hughes is now lead by the anti-league Theodore Roosevelt and Senate foreign relations chair Henry Cabot Lodge. They are backed up by “the irreconcilables” led by Senator’s William Borah and Hiram Johnson. When Wilson fails to seek a compromise, the League fails and the U.S. returns to its pre-war isolation. In a footnote three young idealist, William Bullitt, John Maynard Keynes, and Walter Lippmann become disillusioned on the shoals of European reality.

 

It is here where Kagan argues that the U.S. should have stayed in the game. Without U.S. backing both France and Britain became paranoid about future German power and therefore were less willing to compromise on reparations, something that would plague the continent for a decade. In the terms of the British diplomat Harold Nicholson, the U.S. became “the ghost at the feast.” To be sure the U.S. was present financially with both the Dawes and Young Plans, it was not really in the game.

 

With the onset of the Great Depression the world order begins to collapse, first economically and the politically. Japan invades Manchuria making a mockery of the League. Further, its naval build-up threatens the American presence in the Pacific and we have the rise of Hitler.

 

What is the newly elected President Roosevelt’s response to the deteriorating international situation? More isolation. Kagan, in my opinion underplays Roosevelt’s blowing up the July 1933 World Economic Conference where it is understood in no uncertain terms the U.S. will focus on domestic recovery. This did not go unnoticed by Mussolini and Hitler. To me one failing of the book is that is lacks an economic context, particularly on the role of the gold standard and the collapse in world trade.

 

Later in the decade Roosevelt has to fight off the isolationists to deal with the growing challenges coming from Japan and Germany. He highlights the trigger for the change as the September 1938 Munich Conference and the November 1938 Kristallnacht explosion in Germany. Kagan reasons, correctly in my opinion, that the reason France and Germany caved into Hitler is that they rightfully believed that the U.S. did not have their backs. Thus had the U.S. been more involved with Europe in the 1930’s the horrors to come might just have been avoided. And if the war in Europe did not start, Japan might not have embarked on its aggression in Southeast Asia.

 

Kagan’s conclusion is that there is a straight line from America’s holiday from international affairs in the 1920’s and 1930’s to the agony of the 1940’s. It is a lesson that should be remembered by those today who see few reasons for America’s involvement on the world stage.

For the full Amazon URL see: America Comes of Age in Fits and Starts (amazon.com)


Saturday, January 14, 2023

Goldman Sachs Just Might Have it Wrong on Defense Stocks

Barron's recently highlighted a Goldman Sachs research report by analyst Noah Poponak downgrading three large defense stocks stocks, namely Lockheed-Martin, Northrup-Grumman and Raytheon (See: Goldman Sachs Is Cautious on Defense Stocks, Cuts Lockheed, Northrop, Raytheon | Barron's (barrons.com)(Paywall) A key reason for the downgrade was that Poponak believes deficit and debt worries will spill over into defense appropriations putting at risk the record $800 billion scheduled for this year and future spending, as well. 

To be sure such an outcome would not be out of the question, but Poponak while recognizing the geopolitical threats the United States and its allies are facing, he ignores the fundamental fact that defense spending as a share of GDP is now running at a postwar low. According to FRED data (BEA series A824RE) defense spending as of the third quarter of 2022 accounted for 3.6% of GDP, its lowest share since 1940 when it accounted for 2.7% of GDP. 

Presented below is the history for selected dates:

Date           Defense Share      Comments

Q3:52              16.0%              Korean War peak

Q3:67              11.2                  Vietnam peak

Q3:86                7.9                 Reagan Buildup peak

Q4:00                3.8                 Peace Dividend

Q3:09-Q4:10     5.5                 Afghan/Iraq peak

Q3:22                3.6                 Current

Thus it would be just as easy to argue that given the growing threat coming out of China, a Russia off the rails in Ukraine, North Korean nukes and the potential for Iranian nukes; that from over-spending on defense the U.S., despite current budgetary issues, is grossly under-spending. The world is far more dangerous now than when the U.S. was the global super-power in 2000.

Note: In the interest of full disclosure I am long several defense stocks including two of those mentioned.

Thursday, January 12, 2023

My Review* of Jonathan Sacks' "Morality: Restoring the Common Good in Divided Times"

I vs. We

 

Rabbi Lord Jonathan Sacks, of blessed memory, has written an important book to help us understand and improve upon our very divided society. He cries out for the need for society to establish a common set of moral values that were once established by religion because without a shared morality there is no society.  It is no accident that encomiums from Jonathan Haidt and Robert Putnam appear on the book jacket as Rabbi Sacks cites their path breaking works at length.

 

The crux of his argument is that society has moved from a “we” centered one to an “I” centered one. This is a result of the outsourcing of basic needs to the market and the state with little room left for civil society. The market is all about economic advantage and the state is all about political power. Individual interactions with the state and the market are short-term transactional. In contrast interactions with civil society are long-term relational.

 

Rabbi Sacks notes the works of Spinoza, Kant, Nietzsche, Smith, and Marx among others. Importantly he notes that Adam Smith wrote “The Theory of Moral Sentiments” before he wrote “The Wealth of Nations.” To Smith in order for capitalism to work it has to be underpinned by a strong sense of morality a factor that is all too forgotten by those who worship at the altar of the market.

 

Along with his commenting on the works of the great philosophers of the past, Sacks laces his book with an extraordinary amount of pop culture references. It here where he goes astray. He blames the individualistic counterculture of the 1960s for much of the troubles society now faces. To him that is when the “I” dominance began its great ascent. Afterall one of the mottos of that era was “do your own thing.”

 

I think he is wrong here; it really began in the 1970s. Tom Wolfe wrote one of his most famous essays entitled “The Me Decade” in the April 23, 1976, edition of New York Magazine. To Wolfe the 1960s were “communitarian” when the civil rights, women’s and anti-Vietnam War movements were built. There was quite a bit of “we” there. In contrast Wolfe noted the 1970s were all about “atomized individualism,” Sack’s “I” if you will. Simply put the 1970s were all about the self.

 

Rabbi Sacks is especially critical of social media which reinforces social isolation and makes it easy to say outrageous things that you would never say face-to-face. I am certainly guilty of that with the full knowledge that such interactions taken in the aggregate coarsen society as a whole. He is not a believer in multiculturalism. The role of identity politics is to build walls around people furthering the division of society by fostering the concept of rights over responsibilities. Rabbi Sacks views multiculturalism as a hotel where people live in separate rooms when it would be far better for disparate groups to live in home where their lives are shared.

 

Thus, in order to build a shared morality society civil institution where relationships can be fostered have to nurtured and created anew. Religious institutions used to serve that role in the past, but with the decline of religion other institutions have to rise to take its place. We need a return to “we.”


*- Amazon has yet to post this review. Amazon just posted the review 1/15: I vs. We (amazon.com)

Tuesday, January 3, 2023

My Amazon Review of Kim Stanley Robinson's "The Ministry for the Future"

A Disservice to the Politics of Climate Change

 

Sci-fi writer Kim Stanley Robinson has done a disservice to those of us who care about the peril of climate change. It isn’t clear from his book that he cares more about dismantling capitalism than solving the problem of climate change. His book will convince the diehard climate activists who are already convinced, but it rouses the suspicions of those of us who view the politics of climate change as a ruse to upend capitalism.

 

His Ministry for the Future, a U.N. body, is headed up by Mary Murphy a former Irish foreign minister. Operating out of Zurich in 2025 and beyond she is charged with solving the climate crisis. However, what could have been a very interesting personality, Murphy is a one-dimensional character as are all of the other characters in the book.

 

The book opens with a catastrophic heat wave in India and features the flooding of the Los Angeles plain along with other climate horrors. As the crises deepens Murphy convinces the central banks of the world to engage in quantitative easing by issuing a carbon currency. Although this sounds novel, it really is a modified cap and trade system, and it ignores the inflationary consequences of the currency issuance. Robinson is partial modern monetary theory (MMT), but the book was written before the inflation of 2021 and 2022 which discredited MMT and huge fiscal deficits.

 

Most troubling is Robinson’s tacit approval of eco-terrorism where swarms of drones take down aircraft and container ships triggering a global depression. Somehow the populace of the industrial west remains strangely compliant. Obviously, Robinson didn’t witness the panic of $5 gas in 2022 and how such enviro-friendly politicians as Bernie Sanders and Elizabeth Warren attacked the oil companies for high gas prices. Both of those politicians were cynically ignorant of the fact that high gas prices promote alternative energy.

 

Although Robinson to his credit seems to favor geo-engineering and carbon capture to reduce emissions, he does not mention nuclear power as a potential carbon free source of energy and further there is nary a mention of expediting permits for alternative energy projects. I guess he can only go so far for fear of losing his environmental constituency.

The book has a “happy” ending with climate emissions declining in the 2040’s, but Robinson’s path in getting there strains credulity. For example, has the northern plains depopulated and returning to grasslands and many corporations turning into industrial coops.


For the full Amazon URL see: A Disservice to the Politics of Climate Change (amazon.com)