The Night of the Long Knives Comes to Russia

 On the night of June 30, 1934, Hitler launched what was to be called the night of the long knives against Ernst Rohm the leader of the paramilitary SA brownshirts and other opponents of his regime.  In what appears to be happening in reverse in Russia is that Yevgeny Prigozhin the leader of the private army Wagner Group is launching a coup against Vladimir Putin.

 

Although the situation remains fluid, Prigozhin has seized Russian Army headquarters in Rostov on the Don and a convoy is barreling north to Moscow facing little or no opposition. The Wagner Group is the most battle-hardened military force in Russia, and it remains to be seen whether or not they will be opposed by regular troops in the Russian Army. However, the force will likely face opposition from the air and the troops under the control of the FSB security service.

 

In the meantime, Ukrainian forces will likely take advantage of Russia’s lack of command and control and the absence of Wagner Group soldiers to step up their offensive to retake their lost territories.  It is very possible that the Russian Army in Ukraine will soon collapse.

 

Outside of the Ukraine theatre Wagner is very active in Syria, Mali, and Venezuela.  What happens to Russian influence in those places is now an open question. As Lenin once remarked “there are decades where nothing happens, and there are weeks where decades happen.”

My Amazon Review of Peter Zeihan's "The End of the World is Just Beginning......."

 

The Coming Global Disorder

 

Peter Zeihan “end of the world” thesis is based on the demography of collapsing birthrates and the globalization we have been living with since the 1944 Bretton Woods agreement is in terminal free fall. To him, the era of “order” is over and will soon be remembered as an aberration. I agree with him with respect to global demographics, but, although weakening, globalization will still be with us. Of course, if Zeihan’s view of the end of globalization is correct, the world as we know it will be in a world of hurt.

 

Simply put, much of the world has benefitted from the international division of labor brought about by the monetary stability of Bretton Woods and the presence of the U.S. Navy protecting freedom of the seas for all of the participants in the global economy. Instead of pirates trawling the seas, we have giant container ships bringing a harvest of goods to global producers and consumers.

 

Zeihan adopts a neo-Trumpian view of global trade where the U.S. worker has subsidized the rest of the world and as a result the U.S. will withdraw from the global economy no longer interested in enforcing international norms. Thus, with the unity of the Cold War struggle with the Soviet Union over, the support of Western Europe and East Asia less important. Less important, maybe; irrelevant not quite.

 

Where Zeihan is on much sounder footing is his discussion of demographics. Both Russia and China along with most of Europe and northeast Asia are rapidly depopulating. Simply put, the world is getting older at a very rapid pace and will soon be without workers. Watching Russia and China grow old might not be so benign for the world, because I fear that their leaders understand this and are in the process of expanding their reach before it is too late. Hence Russia’s invasion of Ukraine and China’s increasing aggressiveness over Taiwan. Further Zeihan under-rates the capabilities of the Chinese navy.

 

Zeihan goes into great detail in discussing global transportation, finance, energy industrial materials, manufacturing, and agriculture. In the case of the last the end of globalization will bring with it the prospect of mass starvation. During World War I the Central Powers were cut off from global agricultural trade bringing with it mass starvation.

 

According to Zeihan the United States, because of better demographics, its resource base and proximity to both Canada and Mexico is in far better shape than the rest of the world. To be sure the U.S. would end up poorer, but compared to the rest we would be looking pretty. Of course, a war with Russia or China would radically alter this picture.

 

Zeihan has a breezy writing style making the book easy to read. My guess is that he is directionally right, but he over-states his case.

For the full Amazon URL see: The Coming World Disorder (amazon.com)

My Amazon Review of William Walker's "War Ups the Ante"

Europe Goes to War

 

To paraphrase Leon Trotsky, the western democracies were not interested in war, but war was interested in them. This is the fifth in a series of Paul Muller books written by William Walker. (See: Shulmaven: My Amazon Review of William Walker's "If War Should Come:....."  )  Yet again, Walker does not disappoint. Muller is a banker/diplomat/spy working for the Swiss government immediately preceding and at the start of World War II. As usual Muller is up to his eyeballs in the diplomatic intrigue of that era.

 

The book opens with Muller in Finland where his acclaimed for helping to fight off the Russian invasion. This notoriety does not sit well with neutral Switzerland, so he is farmed off to the League of Nations where he is instrumental in getting the Soviet Union kicked out because of its invasion of Finland. There he meets his Hungarian “spy” girlfriend.

 

Muller soon gets involved in a British plot to block iron ore shipments from neutral Sweden through a planned attack on the Norwegian port city of Narvik. As Alan Furst noted in his “Blood of Victory” novel the British and French plotted to block Danube oil traffic from the Ploesti oil fields in Romania and seriously planned to bomb the Russian oil fields in Baku which were feeding Hitler’s war machine. Walker notes that the “phony war” between October 1939 and April 1940 wasn’t so phony after all. So afraid were Britain and France in confronting Germany on the western front, they planned these peripheral actions. Needless to say, they did not succeed, and they would soon meet the full weight of the German blitzkrieg in May 1940.

 

As in his prior novels Walker gives us a window into the diplomacy of the era. He is especially acute in discussing the role of William Bullitt, the U.S. ambassador to France. It makes for an enjoyable read.

For the full Amazon URL see: Europe goes to War (amazon.com)

The Video Link to the UCLA Anderson Forecast on Commercial Real Estate

Presented below is the video link to the UCLA Anderson Forecast for Commercial Real Estate. The initial part shows the UCLA forecast for the economy. My short discussion on commercial real estate appears at 1:41 and the panel discussion starts at 1:55. The panel consists of Stuart Gabriel, Moderator and Head of the Ziman Center for Real Estate, Carl Muhlstein, Executive MD at JLL, Jackie Levy, CFO of the Caruso Group, and Paige Serden, Sr. Dir. at Gantry, and yours truly. You might find some of this worth your while.

 UCLA Forecast: June 2023 Economic Outlook - YouTube

My Amazon Review of Benjamin Graham's and Jason Zweig's (Ed) "The Intelligent Investor (Rev. Ed.)"

 Margin of Safety

 I just finished rereading “The Intelligent Investor,” a book a I read many years ago and much of its investment insights are still very valid for today. I would note that I was weaned on Benjamin Graham’s “Security Analysis, Principles and Techniques” as an undergraduate at Baruch College. I guess you can say that Graham’s ideas are in my blood. Indeed, just as Graham probed the Standard and Poor’s stock guide, so too did I for many years. Today we have computerized databases.

 The most critical ideas that are useful today include:

·       * A stock certificate is more than a piece of paper; it represents an

      ownership interest in a business.

·      *  Investments should only be undertaken with a quantifiable margin of safety.

·     *   “Mr. Market” who on occasion is manic-depressive allows you to express a view on a stock or a bond every day.

·     *   Despite all of your efforts at security analysis the stock market is loosely efficient making it very difficult to outperform a broad index. Investment success flows from a few very special situations.

·      *  Investors can be characterized as defensive or enterprising, but even for the enterprising investor Graham’s rules are designed to minimize losses through diversification and heeding to margin of safety requirements.

 

As the classic value investor, much of Graham’s work is focused on tangible book value. That metric worked well though the middle of the 20^th Century, but that kept Graham and his acolytes away from growth companies who were powered by intangible capital. Thus, it was hard for Graham to get comfortable with owning many of the growth stocks of his era, but his discipline kept him away from the craziness of the bubbles that occurred in 1961 and in the late 1960’s.  Jason Zweig, the editor of this version discusses at the length the extremes of the late 1990’s dot.com bubble.

 

Graham was fond of public utility shares in the early 1970’s because they traded a low price/earnings and price/book ratios. Unfortunately, he did not foresee the debacle that cost over-runs in nuclear power brought on to this sector. Zweig points this out. Also, Graham really didn’t associate the rise in interest rates in the late 1960’s with the rise in inflation. He characterized common stocks as inflation hedges, which in the long run they are, but that is not necessarily true in the short run as rising inflation propels interest rates higher and price/earnings ratios lower.

 

Then there is a short discussion on Graham’s investment in Government Employees Insurance Co. (GEICO). There his partnership broke his diversification rule by investing 25% of its capital in it for 50% of the company. However, its valuation in terms of earnings and tangible equity was very low. It was his best investment and Warren Buffett, his best-known student, followed him into GEICO and as a result Berkshire Hathaway now owns the entire company.

 

Although the book’s examples are dated, the investing rules outlined here are timeless.

For the full Amazon URL see: Margin of Safety (amazon.com)

Random Thoughts on the Economy and the Stock Market - No. 5

 *-Contrary to what we have been thinking the stock markets as measured by the S&P 500 surged to  its highest level of the year and is just a touch off its August high. The stock market responded to strong employment growth in May and the signals coming out of the Federal Reserve that there will be the first pause in their rate hiking policy that began over a year ago. Further the White House and the Congress agreed to deal over the debt ceiling that postpones that issue well past the 2024 election. For that proviso alone Biden won the debt ceiling stand-off.

*- Obviously the May employment data indicates that my call for the recession starting that month was way off the mark. (See: Shulmaven: Has the Recession Arrived?) Nevertheless, with household employment down by 310,000, compared to a 339,000 increase in nonfarm payrolls, and the the unemployment rate rising to 3.7% all is far from perfect in the labor market.

*-  Little noticed last week was updated guidance from Equity Residential, the owner of 80,000 upscale apartment units,  which indicated that same store rents were up 6% from a year ago. This is hardly the news that the Fed has been looking for. Rents increasing anywhere near that level will make it impossible for the Fed to achieve its 2% inflation target.

*- Treasury bill and bond issuance is about to surge as the government reverses its special measures to avoid breaching the debt ceiling. This action will drain reserves from the system and put upward pressure on interest rates.

*- Net, Net. I would be a seller of the rally.

My Amazon Review of Hal Brands' Ed. "The New Makers of Modern Strategy...."

Thinking Strategically

 

Johns Hopkins professor Hal Brands has updated Peter Paret’s 1986 “Makers of Modern Strategy,” which in turn updated Edward Mead Earle’s 1943 version. It is a very long book consisting of 45 separate essays by different authors that runs 1168 pages. In my opinion this is way too long for the average educated lay reader. Nevertheless, there is much to be learned and I will highlight below a few of the essays that caught my attention.

 

Walter Russell Mead’s discussion of Thucydides is on the mark because it deals with the timeless question that the fear of a rising power (Athens) engenders in an established power (Sparta). I wish he spent more time on Graham Allison’s parallel thoughts on the U.S. vis-à-vis China. (Shulmaven: My Amazon Review of Graham Allison's "Destined for War: Can America and China Escape Thucydides's Trap" ) Matthew Kroenig’s essay on Machiavelli’s realism is spot on. Further he understands that despite Machiavelli’s bad rap, he was a republican at heart seeking to unify Italy. (Shulmaven: My Amazon Review of Philip Bobbitt's "The Garments of Court and Palace: Machiavelli and the World that he Made")

 

I was disappointed in Hew Strachan’s essay on Clausewitz. To be sure he emphasizes that war is the extension of politics by other means, but he is all to brief on friction, the fog of war and the center of gravity of the enemy. He does, however, mentions Col. Harry Summers’ Clausewitzian critique of U.S. military policy in Vietnam.

 

The essay by Charles Edel on John Quincy Adams’ realism hits the mark. Understanding the U.S. was not ready for the global stage, Adams utilizes the implicit support of the British navy to establish the Monroe Doctrine and further avoids direct U.S. involvement in the Latin American and Greek revolutions. At the time the U.S. could rightly only offer moral support.

 

I didn’t realize how influential Alfred Taylor Mahan’s treatise in sea power until I read John Maurer’s essay. Mahan’s influence extended well beyond the United States to Germany and Japan with global consequences. Robert Kagan’s essay on Woodrow Wilson casts him, not Theodore Roosevelt, as the architect of American global strategy for the 20^th Century. Wilson comes off far more realistic than I expected as he protected U.S. interests at Versailles.

 

Nobel Laureate Thomas Schelling’s theories of nuclear deterrence and flexible response are examined by Eric Edelman. Schelling’s theories were in contradiction to the Eisenhower Administration’s massive retaliation response to potential Soviet aggression. One of the problems, as Edelman notes, is that sometimes the message you want to send is misinterpreted by the enemy, which is what occurred during the Cuban missile crisis. The Russians thought the embargo was a far bigger deal than how the Kennedy Administration viewed it.

 

Mark Moyar’s essay on U.S. strategy in Vietnam accuses the Johnson Administration of refusing to listen to its military advisors who wanted to go all-in at the start of the war. Simply put, gradual escalation failed. However, it is not clear that Johnson would have had the political support for what his advisors advocated. Nevertheless, this debate echoes to this day with the Biden policy with respect to Ukraine. Biden has been a gradualist, but ultimately, he is doing far more than what he thought practical at the start of the war.

 

I am glad that Dmitry Adamsky has given credit to Andrew Marshall, the long-time Pentagon guru of the net assessment project. If any one person has been the architect of U.S. military strategy in a networked age, it is Marshall. (Shulmaven: My Amazon Review of Andrew Krepinevich's and Barry Watts' "The Last Warrior: Andrew Marshall and the Shaping of Modern American Defense Strategy")

 

The book ends with a summation essay by Yale’s John Lewis Gaddis. It is a well thought out summary, but where he errs is that he gives too much credit to Franklin Roosevelt’s recognition of the Soviet Union as a strategic decision that would play out in World War II. To me, it is an ex-post rationalization where Roosevelt’s motivation had more to do with the hope of near-term trade deals.

 

I know I have only scratched the surface of Brands’ book, but if the reader puts in the effort there is much to be learned here.

For the full Amazon URL see: Thinking Strategically (amazon.com)