ET
I have been writing about Ukraine since 2014 (See: https://shulmaven.blogspot.com/2014/03/the-ukraine-what-is-to-be-done.html ) and as recently as last March. (See: https://shulmaven.blogspot.com/2025/03/shame.html ) Yesterday’s White House summit meeting with European leaders and Ukraine President Volodymyr Zelensky reversed the very negative vibes set off by Friday’s Trump-Putin Alaska summit where it was feared that Trump was about to sell out Ukraine. The conversations were both serious and friendly and it seems that there was a real reproachment between Trump and Zelensky.
However, the hard
part is now ahead of us. It remains to be seen whether or not Putin will
actually meet with Zelensky. Today Switzerland offered up its good offices as a
meeting site. Should that happen, it would open the way for a trilateral summit
with Trump, Putin, and Zelensky.
What has to be ironed
out is the precise border between Ukraine and the Russian held provinces. That
border would have to be defensible, which means that the current Ukrainian
position in the Donetsk region would have to be maintained, something that
Russia is opposed to. Another question is what
the European security guarantee would cover. For example, would it include troops on ground,
air support and rebuilding assistance? Perhaps more important what would be the
modalities of the United States’ role as security coordinator. Would it include
intelligence sharing, military hardware, and air support? Although Trump has
ruled out combat troops, would it allow for support troops involved in training.
And don’t forget Putin has a vote in all of this.
Nevertheless, for the
first time since the war started over three years ago there is a pathway to a
settlement. It certainly won’t be perfect because Putin’s aggression would be
rewarded, but it will enable Ukraine to be a viable and prosperous state. Remember,
diplomacy is the art of the possible.
The Balance of Power
King’s College naval
historian Andrew Lambert has written an over-detailed evaluation of British
geopolitical strategy from 1793-1914. After fighting France for 22 years
Britain settled on a strategy of offshore balancing and maintaining order in
Europe enforced by the Royal Navy and a small expeditionary force. The initial
goal was to prevent a revanchist France from regaining control of Europe. The architects
were Prime Minister Lord Liverpool, Foreign Secretary Castlereagh, and the Duke
of Wellington. The latter initially as the hero of Waterloo and later as prime minister.
Their policies were enhanced by Lord Palmerston as both foreign secretary and
prime minister.
Britain’s greatest
fear was that a continental power could launch an invasion from the low countries.
Hence it was crucial to keep France out of the Scheldt Estuary and the Port of
Antwerp. When Belgium split off from Holland the 1839 Neutrality Treaty
orchestrated by Palmerston kept France out. The result of that treaty and Britain’s
troop presence in Belgium in 1870, kept both France and Germany out of Belgium
during their war. This would not be so in 1914.
The linchpin of the
strategy was the power of the Royal Navy whose goal was to be at least twice as
strong as any two powers. Aside from a quantitative advantage the Royal Navy had
the most technologically advanced fleet by taking advantage of steam power,
screw propellers, gunnery, and hydrology. The Royal Navy truly ruled the waves and it enabled
Britain to become a global power through its colonies, but for that power to be
maintained there had to be an offshore balance in Europe.
For most of the 19th
century the policy succeeded largely because France was in a long-term relative
decline while Britain was moving to its heights. However, after 1870 Britain
entered into a relative decline in relationship to a newly reunified Germany.
As a result, it required an alliance with France which severely limited Britain’s
freedom of action. Britain learned the hard way in the trenches of France.
Given all of Britain’s interest in Belgium, it is a wonder why Germany was
unsure about Britain’s entry in World War I after it invaded Belgium.
Although Lambert
discusses the 1815 Vienna settlement, he makes little note of Count Metternich
of Austria whose interest in a stable Europe was greater than Britain’s. He
also does not cite Henry Kissinger’s “A World Restored” on the Congress of
Vienna. He also left out a discussion on the 1878 Congress of Berlin where
British Prime Minister Disraeli played a leading role in settling, at least for
a time, the Balkan question. There is way too much information in this book,
and I would only recommend it to history nerds.
Today's Wall Street Journal brought with it an important article by economics columnist Greg Ip entitled "U.S. Marches Towards State Capitalism...." (See: https://www.wsj.com/economy/the-u-s-marches-toward-state-capitalism-with-american-characteristics-f75cafa8?mod=hp_lead_pos5 , paywall) In the article Ip outlines how the U.S. is moving towards state capitalism with Trump's demands for a share of NVIDIA's chip exports to China, the golden share in the U.S. Steel takeover and Biden's industrial policy. In my words, socialism with American characteristics.
Aside from the over-night news about chip exports, Shulmaven made the same case on July 27th where we added tariffs and Biden's DEI policies. ( https://shulmaven.blogspot.com/2025/07/on-road-to-serfdom.html )Whether we call it state capitalism, socialism or fascism, the result is the same. We are entering a world of state controlled economic activity which in the words of Hayek will put us on "the road to serfdom."
Much has be written about the explosive growth in capital spending on AI by Google, Meta, Microsoft, and Amazon. (See: https://www.wsj.com/economy/the-ai-booms-hidden-risk-to-the-economy-731b00d6?mod=author_content_page_1_pos_1 , paywall) Those four companies are on tap to spend about $360 billion this year on building out data centers and related investments. Given the high prices of their stocks, market participants are assuming that AI investment will have a huge payoff in the future and are willing to overlook short term declines in free cash flow.
My sense is that investors are underappreciating three risks. The first is that the return on tangible capital will likely be lower than the hitherto high returns on intangible capital earned by the four companies. Second, the bidding war for talent where $100 million payouts have taken place will squeeze margins. Third, and perhaps most important, is that AI will not, at least initially, be a winner take all market. It is likely that AI will be nowhere near as profitable as winner take all Microsoft's operating systems, Google's search, and Meta's social media.
Why? At the present time there are six highly capitalized entrants in the AI market and many smaller ventures competing for market share. The six are ChatGPT, Gemini, Anthropic, Perplexity, Meta AI, and Grok. Although ChatGPT has the current lead, this is a highly fluid market environment with deep pockets competing for market share. Thus, my guess is that investors will soon be disappointed with the returns coming from AI. The likely beneficiaries of this competition will be consumers and the highly talented employees.
One hundred and eleven years ago the guns of August opened fire signaling the start of World War I. Although far from being deadly, the July employment report reeked carnage on the stock market with the S&P 500 declining by 1.6% on Friday while the bond market sustained a massive rally with the 2-year note yields declining by 27 basis points and 10-year yields declining by 14 basis points. The markets are clearly sniffing out a recession.
Nonfarm payrolls
increased by a meagre 73,000 jobs, but what really spooked the markets was a
gigantic downward revision of 258,000 jobs for May and June. Further, all of
the gain can be accounted for by healthcare and social services, hardly growth drivers.
The three-month average for employment gains of 35,000 jobs is indicative of a stalled
labor market. The far more volatile household survey was much worse with the
average monthly decline from May to July of 287,000 jobs. My guess is that the administration’s
immigration raids are now taking their toll on the job market. The labor market is experiencing simultaneous demand and supply
shocks.
In March I called for
the recession of 2025 to begin in the second quarter. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html
) That obviously didn’t pan out, but with real final domestic demand growing at
only 1.2% in the second quarter and the job market stalling out, it was pretty
close to a recession.
The day before the
employment data came out, President Trump announced a panoply of tariffs on a
host of countries that have failed to make a deal with him. Those tariffs and
the earlier ones announced for the E.U. and Japan means that the U.S average
tariff rate is now about 19%, eight times above where we started the year. Simply
put, Trump called the market’s bluff on the TACO trade an eventuality we noted
in June. (See: https://shulmaven.blogspot.com/2025/06/stocks-too-complacent-about-taco-trade.html
)
As a result, with
Trump’s tariffs now baked into the cake and with a stalled job market, the U.S.
economy is on course for stagflation. The tariffs will keep inflation as measured
by the core price indices above 3% and that will put the Fed between a rock and
a hard place, especially because the unemployment rate will remain well
contained, at least for now.
Adding insult to
injury President Trump fired BLS Commissioner Erika McEntarfer because he didn’t
like the revisions to the employment data. His big, beautiful economy is not as
beautiful as he thought. This banana republic move will lower the market’s
confidence in future data coming out for the government’s data mills, not a
good thing.
Lastly, I have been
skeptical of the stock market’s big rally off the April lows. (See: https://shulmaven.blogspot.com/2025/06/my-ucla-anderson-forecast-presentation.html
) My sense is that this skepticism will soon be justified.
*- With apologies to Barbara Tuchman
The Recovery that Failed
Libertarian economist
George Selgin has written an intriguing history of the New Deal and role
Keynesian thought played in it. The book is largely a critique of Eric Rauchway’s
“The Moneymakers.” (See: https://shulmaven.blogspot.com/2015/12/my-amazon-review-of-eric-rauchways.html
) In the main I agree with Selgin. Simply put, many policies attributed to
Roosevelt weren’t really his and by and large Roosevelt was wary of deficits as
a macroeconomic policy tool. In Selgin’s framework the New Deal consisted of
three R’s: recovery, relief, and reform. Selgin focuses on the recovery aspects
and notes that Roosevelt’s deficits came from funding relief.
To begin with the
ideas behind the Emergency Banking Act of 1933 which closed and then reopened
the banks came from Hoover’s treasury department, namely Secretary Ogden Reed
and Under-Secretary Arthur Ballentine. Further Roosevelt opposed the deposit insurance
provisions of the Glass-Steagall Act because of the moral hazards associated
with it. That issue would come to the fore in the 1980’s. A criticism of Selgin
is that he does not give credit for how successful deposit insurance was during
the 1937-38 downturn. The bank runs of the early depression were over.
As to deficit
financing, the biggest deficit took place in 1936 when the World War I veterans’
bonus was paid out. Roosevelt opposed it and his veto was over-ridden. The
payout provided a short-term boost to the economy and played a significant role
in his re-election. However,
in 1937 the lack of such stimulus played a role in that year’s downturn.
In the Spring of 1938
Roosevelt and his advisors finally took Keynes’ advice and embarked on the
first true Keynesian stimulus of his administration. However, in the light of
the World War II spending that was to come, it was far too little.
Selgin credits the
massive gold inflows of the 1930’s for the modest recovery that took place. The
gold came from Stalin’s stepping up gold production in the Soviet Union and
European flight capital fearing Hitler. It was the gold inflow that enabled the
Fed to embark on a policy of monetary easing, a policy that was halted in late
1936 as the treasury sterilized the gold inflows out of fear of inflation.
Roosevelt did take
the U.S. off the gold standard in 1933 and raised the price of gold, a stratagem
that Keynes advised. To Keynes it would be path to monetary ease. However,
according to Selgin the increase in price of gold came from the ideas of George
Warren who thought that a rise in the price of gold would automatically
increase commodity prices. It did not.
Along the way Selgin
notes how Roosevelt’s reforms stalled the economy, and the anti-business nature
of his policies greatly weakened private investment. That would not turn until
World War II ended and the feared depression did not take hold. Selgin
observed a rise in business optimism in the aftermath of the war; however, this
sentiment was not reflected in stock prices, as Wall Street experienced a
three-year bear market from 1946 to 1949. Stock
market investors at the time were clearly worried. As a result, it would have
helped to have some discussion of stock prices during his 1933-1947 history.
Although few people realize it, the Trump/Biden years will be remembered when the United States took a giant step on the road to serfdom by socializing the economy. The Republicans of yore held up the virtues of the free market; under Trump that is no longer the case. For generations the Democrats have never been comfortable with the workings of the market, but they conceded its ability to generate wealth and to create a mass prosperity. However, today there are growing voices in the Democratic Party to socialize much of the economy.
Under Biden the country embarked on an industrial policy whose goals were to penalize the production of fossil fuels and subsidize clean energy (solar and wind), subsidize computer chip making, and further increase the government's involvement in healthcare, just to name a few. Biden also left the initial Trump tariffs in place. You can't look to the Democrats to support free trade. Further, Biden attempted to micromanage the economy by putting DEI into every nook and cranny of employment law.
Compared to Trump's second term, Biden's industrial policies were chump change. Trump is in the process of jacking up tariffs from 3% to close to 20%, extorted $550 billion from Japan to fund a sovereign wealth fund, made an investment in rare earth producer MP Materials (See: https://shulmaven.blogspot.com/2025/07/the-pentagon-makes-play-for-rare-earths.html), and with a "golden share" gave the president control of U.S. Steel. To me the sovereign wealth fund brings up memories of the corrupt Reconstruction Finance Corporation of 1932-1953, a path to corruption if there ever was one. Although American universities are need of significant reform, Trump's attempt to micromanage them goes far beyond what is necessary.
My sense is that under Trump we are on the road to something that will look a lot like Mussolini fascism where the private sector carries out the will of the state. For those comfortable with Trump, I would warn them what goes around comes around. When the Democrats return to power the economy could soon be turned into a 21st century version of British Labor Party socialism of the late 1940's with the added kicker of having DEI on steroids. Either way, it is not a pretty picture.
*-With apologies to Friedrich von Hayek
Slow Motion Train Wreck
Washington journalists Josh Dawsey, Tyler Pager, and
Isaac Arnsdorf have written a personality-driven account of the 2024
presidential election. Starting in 2022 they take us behind the scenes of the
Trump, Biden, and later Harris campaigns for the presidency. There is an inevitability
to it all, but after all the book is an after the fact accounting of the
election.
What the book lacks is a review of the structural
backdrop to the election. There should have been tables of polling data on the
relative popularity of the candidates along with the electorate’s view on whether
the country was on the “right track” or the “wrong track.”
Much of the ground here was discussed in “Original Sin,”
but that book ended with Biden dropping out of the race. (See: https://shulmaven.blogspot.com/2025/06/my-review-of-jake-tappers-and-alex.html)
Both books are consistent in the view that Hunter Biden’s legal problems weighed
greatly on Biden. The authors are sympathetic to Harris, but they do note her
many unforced errors, specifically her failure to fully rebut her 2020
positions on hot button social issues, her failure to separate herself from
Biden and picking the lackluster Tim Walz as her VP selection.
I learned much about the Trump campaign and how Suzie
Wiles brought a modicum of discipline. She was instrumental in neutering Ron
DeSantis, her former boss and the real rival to Trump. I also didn’t realize
how important Steve Witkoff and Laura Loomer were to Trump. Witkoff was his
consistent consigliere and is now a special ambassador to the Russia/Ukraine
and the middle east. Loomer, despite being somewhat of an unguided missile, rallied
support for Trump before and during the campaign.
The book also reinforced my view of Ron Klain, Biden’s
chief of staff and campaign honcho. Klain instinct was always to seek support on
the Left. This was true post-debate and well before, when he was in charge of
policy. In my opinion it is was his predilections that kept Biden tacking Left
while in office which, in my view, doomed his presidency.
This authors give us a real fly on the wall perspective
to both campaigns, but I said at the outset, a full review of the structural
parameters of the race would have been helpful.
The Evolution of Walter Lippmann from Socialist to Conservative-Liberal
I previously reviewed
Craufurd Goodwin’s book on Walter Lippman as an economist. (See: https://shulmaven.blogspot.com/2014/11/my-amazon-review-of-craufurd-goodwins.html
) Here we have Tom Arnold-Forster’s work as a complete intellectual biography
of Lippmann’s thought. Lippmann, born in 1889 from a wealthy Jewish family,
would over the next seven decades would become one of America’s great pundits.
He would ignore his Jewish heritage throughout his life.
Lippmann advised
presidents, worked on Wilson’s 14 Points, was present at the Versailles Conference
and with his 1922 “Public Opinion” became a leading political scientist. To
Lippmann social psychology was the driving force behind the formation of public
opinion.
After graduating from
Harvard Lippmann hung out in the socialist milieu of the Greenwich Village and
the New Republic crowd of the 1910’s. He became good buddies with the soon to
be communist, John Reed. However, he never lived there and retreated to his
upper-eastside family home.
From his perch as a syndicated
columnist, first with the New York World and then with the Herald Tribune, through his "Today and Tomorrow" column he became
widely known and very influential. He fully supported the urban liberalism of
Al Smith. He was extraordinarily prescient in 1931 about the enormity of the
crisis caused by the Great Depression and again in 1938 he fully understood
Hitler’s motives to conquer Europe.
However, once the immediate
emergency of the depression was over, Lippmann moved to the Right. So much so
that a group of European conservative economists, including Hayek, sponsored a
1938 colloquium in his honor. Simply put Lippmann’s opposition to state
planning put him in good stead with that group and it was there he coined the term
“neo-liberal.”
He went all out to
support the U.S. military build-up from 1939-41 and after the war he became an advocate
of military-Keynesianism. Early on he understood the danger coming from the
Soviet Union and he popularized the term, “Cold War.” His Eurocentricity made
him a critic of the Vietnam war.
Lippmann was a great
believer in the role of newspapers in forming public opinion. Afterall, he
wrote “Public Opinion” just prior to the advent of radio. I wonder what he
would think now of the collapse of newspapers and panoply of information
sources that the public now has available?
My concern about the
book is that Arnold-Forster largely presents criticisms of Lippmann from the
Left about his economics and his belief in a strong America. Criticism from the
Right comes very late in the book and is minimal. My guess is that the author
unfortunately sides with the Left.
In taking a page out of Winston Churchill's playbook, where Britain acquired a 51% controlling interest in the Anglo-Persian Oil Company (now BP) on the eve of World War I, the Pentagon today made a $400 million dollar investment in rare earth miner/refiner MP Materials. The Pentagon on full exercise of its convertible preferred and warrants will own 14% of the company and become its largest shareholder. Paired with the investment is a long-term supply contract at fixed minimum prices thereby ensuring profitability.
Rare earths are used to make highly sophisticated magnets that are used in advanced aircraft (think F-35) and guided missiles. At the present time the bulk of the rare earths used by the Pentagon and U.S. industry are imported from China, not the best of circumstances.
The Pentagon's logic behind the deal is identical to Churchill's over 100 years ago. As First Lord of the Admiralty Churchill was seeking a secure supply of oil for the Royal Navy. In addition to its investment, Britain secured a 20-year supply contract for Anglo-Persian's oil.
As an aside, the preferred stock is convertible at $30.03 a share. MP Materials stock shot up to $44, so thus far the Pentagon is well ahead of the game.
A Menage of Convenience
Historian Tim Bouverie
has written a follow-on to his “Appeasement…” (See: https://shulmaven.blogspot.com/2019/07/my-amazon-review-of-tim-boveries.html
) with an exhaustive history of the Roosevelt-Churchill-Stalin alliance of
World War II. After Stalin’s dalliance with Hitler fell apart in June 1941 he
joined up with Churchill. Although Roosevelt supplied Britain with lend-lease
aid, he didn’t become a full partner until the Japanese attack on Pearl Harbor.
Bouverie recounts in great detail the diplomacy involved in keeping the
alliance together where, to say the least, the war aims of the three parties
differed.
I will not recount
here what has already been written about the big wartime conferences in
Casablanca, Tehran, and Yalta. What I found most interesting was how Churchill’s
dealings with Vichy France, Spain, and Iraq in 1940 and 1941 was of great
strategic import. To back up a bit in 1936 British Foreign Secretary Samuel
Hoare teamed up with French Prime Minister Pierre Laval in a failed scheme to
appease Mussolini in Ethiopia. Moving ahead to 1940 we found Hoare working
brilliantly as ambassador to Spain to keep Spain out of Axis hands while Laval
worked for the Nazi’s has a high official in Vichy France.
In response to Vichy,
Churchill acted boldly in sinking a good portion of the French fleet off the
coast of Algeria to keep it out of the hands of Germany. The U.S. policy
towards Vichy was far more muddled. (See: https://shulmaven.blogspot.com/2021/12/my-amazon-review-of-michael-neibergs.html
)
Simultaneously
Churchill had big troubles in the middle east where a pro-axis coup in Iraq threatened
its oil supplies. Churchill deployed his over-stretched army in Egypt and Palestine
to over-turn the coup and remove Vichy authorities from Syria. (See: https://shulmaven.blogspot.com/2019/06/my-amazon-review-of-john-broichs-blood.html
) All the while London was being blitzed and Britain’s position in Egypt was
under threat.
As the war was
winding down the early fissures of the Cold War came to the fore. Although
Bouverie does not think the Cold War was inevitable, I would tend to disagree.
He doesn’t give much weight to the removal of the more pro-Western Maxim
Litvinov from his ambassadorial post in Washington and similarly the removal of
Ivan Maisky from London in 1943 with more hardline officials. To me that was a major
tell. Once Stalin achieved the initiative on ground in 1942 his war aim was to seize
eastern Europe to establish a buffer from Germany. Bouverie is correct in
stating that Churchill and Roosevelt at Yalta could do little to alter the
facts on ground. The combination of the
Soviet army along with the success of its spy services made the Soviet Union a
clear winner at enormous cost of World War II. ( See: https://shulmaven.blogspot.com/2021/06/my-amazon-review-of-sean-mckeekins.html
) That in turn set the stage for the
Cold War.
Tim Bouverie has
written an important book about diplomatic history. There is much here to study,
and he demonstrated that although the parties had different war aims they
succeeded in destroying the Hitlerite regime.
In a victory for the “abundance agenda” (See: https://shulmaven.blogspot.com/2025/04/my-review-of-ezra-kleins-and-derek.html ) over the “enviro-liberals” (See: https://shulmaven.blogspot.com/2016/04/donald-trump-and-enviro-liberals.html ) and their labor union* allies the California Legislature just amended the California Environmental Quality Act (CEQA) to exempt multifamily housing projects in urban areas from the strictures of the law. No longer can narrow special interest groups hold up much need housing by threatening and engaging in litigation.
California is the
midst of the worst housing crisis in the Nation. The median price of a single-family
home is $900,000 and where so-called affordable housing projects come in in
excess of $1,000,000/unit. California used to build housing and from 1960 -2010
the state authorized about 200,000 units/year. In 2024 only 100,000 units were authorized,
and the state is now short about 2,000,000 units.
Although the housing
shortfall has many causes, much of the blame can be placed at the feet of CEQA.
A coterie of neighborhood groups, enviro-liberals, labor unions and law firms
seem to work in unison to stop much needed housing. Until about 1970 house prices
in California were roughly in line with the national average. However, with the
Friends of Mammoth Decision that made CEQA applicable to private projects and
the passage of the California Coastal Act in 1972, house prices took off. As a
result, house prices in the Golden State are nearly two and half times the
national median. It is no wonder that there is an exodus from the state.
The Democratic
Legislature and Governor Gavin Newsom deserve credit for enacting this legislation.
It is way late, but better late than never.
*Labor
unions used CEQA to extort project labor agreement from developers. Indeed
high-rise construction under the Bill requires union labor.
Zorhan Mamdani, the TikTok Jacobin, upset former governor Andrew Cuomo in New York City’s Democratic Primary making him the odds-on favorite to be the next mayor. Running as a Democratic Socialist, Mamdani’s slick TikTok campaign came across as young and energetic sharply contrasting himself to a Cuomo who appeared ancient. On substance, under the banner of making New York City affordable, he called for the tired old socialist nostrums of rent freezes, increasing business and personal income taxes in the already highest tax city in the country, city-owned grocery stores, free bus service, a $30/hour minimum wage, and for effectively increasing property taxes for white homeowners. His program represents a sure-fire path for New York City to join the failed cities of Chicago and Los Angeles.
Contrary from
socialist dogma, Mamdani’s base was not lodged in the working class and the
African American communities, but rather it came from the young children of privilege
who are over-credentialed, underemployed, and housing stressed. Most of them
resided in what is called New York’s “commie belt” which runs from western
Queens to western Brooklyn. For the most part these hipsters believe that society
owes them a good life in New York City. Unfortunately for them, they can’t
really afford it, and many live off the largess of their parents. Indeed, with
two-bedroom apartments renting for more than $5,000/month, New York City is
objectively unaffordable. This is not true of Mamdani whose college professor
Dad and movie making Mom are more than comfortable.
The underbelly of the
Mamdani campaign is its extreme anti-capitalist, anti-colonialist, defund the
police, and above all its anti-Zionism themes. As late as this morning Mamdani
refused to condemn the term “globalize the intifada,” which means kill the Jews
in the diaspora. If that isn't antisemitism, I don't know what is! It is not a surprise that Jeremy Corbyn, the notorious British
antisemite, congratulated Mamdani on his election win. Indeed, many of the people
who marched in New York’s anti-Zionist parades worked as Mamdani’s shock troops
during his campaign.
How did this happen?
The answer is that both the Democratic and Jewish establishments in New York
City are sclerotic. They are pale shadows of their former selves, and it will
be difficult for them to rally to oppose Mamdani in the general election, where
his most likely opponent would be Eric Adams, the current scandal plagued mayor.
However, because the turnout in the primary was low, it is possible that Mamdani’s
youth turnout hit a ceiling and that older voters will go to the polls in
November in substantial numbers to swamp the TikTok generation. If not, New
York City will soon become Havana on the Hudson as its tax base abandons the
city.
To the Barricades
Stanford Professor
Dan Edelstein has written a very academic intellectual history of the idea of political
revolutions. To the ancients up to the time of the French Revolution the whole
idea of revolution was disturbing. It meant a useless cycle of destruction as
society moved from tyrannical to mob rule with nothing being accomplished.
From Professor
Edelstein I learned of Polybius a Greek historian writing in the time of the
Roman Republic. Polybius endorsed the idea of a “balanced constitution” that distributed
executive, legislative and judicial power, sounds familiar. His writings
greatly influenced the founders of the American republic. Edelstein views the
American Revolution as “radical conservatism” designed to “preserve the state.”
This produced the American constitution which to the frustration of the extreme
right and the extreme left forces policies into the center.
All of this changed
with the French Revolution where the idea of progress took hold. The belief in
progress meant that a revolution could bring about a glorious future and
instead of having a balanced constitution it excused dictatorship in the hope
that it would bring about a better world to come. To Edelstein, dictatorship
was not an exception, but rather a feature of modern revolutions. Starting with
Napoleon in 1799, to the Latin American caudillos of the early 1800’s, to
Lenin, Mao, and Khomeini.
This is a hard book
for the lay reader, but for those interested in the idea of revolution it is
well worth slogging through.
In 49 BCE Julius Caesar crossed the Rubicon in northern Italy thereby declaring war on the Roman Senate. The phrase has since come to mean “passing the point of no return.” President Trump with his B-2 bomber strike on three Iranian nuclear facilities has gone where no president has gone before, including Bush II, Obama, Trump I, and Biden. As a result of this action the middle east has been irrevocably changed, hopefully for the better.
It remains to be seen
how successful the bombing mission was and to what degree Iran will retaliate. It will take time to do a bomb damage
assessment, but the early indications are that the damage was substantial. The
key question will be how hard the underground Fordow site was hit. (See: https://shulmaven.blogspot.com/2025/06/israel-and-iran-fog-of-war.html
)
The bombing raid was
coordinated with Israeli strikes earlier in the week that took out Iranian air
defenses in southern Iran. With the Iranian nuclear threat presumably removed,
Israel prime minister Netanyahu will now have a freer hand to make peace in
Gaza. He now may be strong enough to deal with the hard right members of his
cabinet.
When Julius Caesar crossed
the Rubicon, he reportedly said “the die is cast.” The dice are now rolling in the middle east
which means the middle east will look quite a bit different than the way it
looked two days ago.
One last point, Wall Street’s “TACO trade” (Trump always chickens out on tariffs”) may no longer be valid. (See:
With Iran rushing headlong towards nuclear weapons, last Friday Israel engaged in a pre-emptive strike on Iran’s nuclear programs and its leadership exactly one day after President Trump’s 60-day deadline for a negotiated settlement expired. Iran immediately counter-striked with a barrage of missiles on Israel’s population centers. Since then, the world has been watching successive Israeli air raids on Tehran and Iranian missile attacks on Israel.
To Israel this is a
war of necessity. Iran has promised to destroy Israel since the Ayatollahs came
to power in 1979. Over the years Iran built up its proxy fighters in Gaza, Syria,
Lebanon, and Yemen. However, with the destruction of Hezbollah in Lebanon, the
removal of the Assad regime from power in Syria, and the degrading of Hamas in
Gaza, Israel, for the first time, had a free hand to strike Iran.
Israel’s goal is to eliminate
Iran’s capability to develop nuclear weapons. To that end it has decapitated
much of the program’s leadership and has degraded parts of its facilities.
However, Iran’s major uranium enrichment facility is buried 1500 feet below ground
at Fordow. It is not clear that Israel has the ability to take out Fordow,
which might require U.S bunker-busting bombs. If Fordow remains operational,
the war would be a failure.
As of this writing it
is unclear whether the U.S. will attack Fordow and risk a much wider war in the
middle east. Alternatively, if the U.S. does not act, the risk of a nuclear
Iran would be far greater. Absent Israel pulling a rabbit out of the hat, the
ball is in Trump’s court.
What happens at Fordow will determine the course of the war and that will not be televised. Without U.S. support can Israel use special forces in a very risky operation and/or taking out the above ground infrastructure (electric power, water, ventilation) by air that keeps Fordow operational remains to be seen. We know Israel has a presence on the ground in Iran, but it is likely inadequate to overcome the heavily guarded and forewarned Fordow site. Remember, Israel cannot conquer Iran, it is pursuing a limited goal of removing Iran’s nuclear capability and that has to be done quickly because Israel doesn’t have the resources for a long war.
Stay tuned.
The Tragedy of Joe
Biden
Joe Biden was elected
president in 2020 on his being both a moderate and a transition candidate who
would serve one term. He failed on both accounts by swerving to the Left under
the aegis of Bernie Sanders and Elizabeth Warren and then by declaring himself
a candidate for re-election in April 2023. Little did the voters know that as
early a 2015 Biden was on the road to cognitive decline that rapidly
accelerated in 2022. Much has already been written about reporters Jake Tapper
and Alex Thompson, well-sourced, albeit largely anonymously sourced book, so I will
limit my comments here.
My sense is that had
there not been the COVID pandemic in 2020, Biden would have lost. Why? He would
not have been able to handle the stress of a national campaign. Because of
COVID he ran from his basement and the public hardly saw him. Once elected he
was placed in a cocoon by what Tapper and Thompson characterize as the politburo
which consisted of four of his top aides. They included Mike Donilon, Steve Ricchetti,
Anita Dunn, and Bruce Reed, all of whom had family members working in the administration.
Those four along with wife Jill controlled access to Biden and controlled the
flow of information to him. For example, Biden never saw polls in Spring 2024
showing how badly he was doing.
On many occasions Biden
failed to remember the names of long-time acquaintances and because his cabinet
and congressional leaders hardly saw him, they were shocked when he appeared
distant and fragile at formal events. Indeed, Biden was forced to use a teleprompter
at intimate fund-raising events. This all came home to roost when the whole
country witnessed his disastrous performance at the June 27th debate
with Donald Trump.
In fact, we were
forewarned with the Hur report on Biden’s unauthorized possession of classified
documents. Robert Hur declined to prosecute because he though a jury would find
Biden “a sympathetic well-meaning elderly man with a poor memory.” For that
statement Hur was flamed by the politburo, while all of them knew it was true. To
be sure, Biden and his inner circle were motivated by the fear that he and he
alone could defeat Trump. At the end of the day, they ended up with the worst possible
world; Trump being elected and Biden in disgrace.
Tapper and Thompson
are especially good at describing an almost daily tick-tock of the post-debate
events leading up to Biden’s withdrawal from the race. Along the way the politburo
was kicking and screaming to keep Biden in the race, but ultimately, they were
forced to accept the reality of a debacle in November.
Although I think Tapper and Thompson have written an important and very readable book, there are three failures that come to mind. First, far more blame should be put on the compliant press in covering up Biden’s cognitive decline. Second, Jill Biden’s role in this affair in this reading is limited. She knew, but my guess is that she loved the trappings of power. She loved being the first lady and being on the cover of Vogue magazine four times. Third, at a time when foreign policy crises were happening almost daily, there is no discussion as to what Biden’s foreign policy team thought of him. Biden might not have seen his cabinet that often, but he was in constant contact with Secretary of State Antony Blinken and National Security Advisor Jake Sullivan. Different decisions might have been made had we a more alert president.
American Original
He came into this world with Haley’s Comet (1835), and
he left this world with Haley’s Comet (1910), and for a time his star shined
brighter than the brightest stars in heaven. In his encyclopedic study of Mark
Twain’s life, biographer Ron Chernow follows Twain from the backwater town of
his birth, Hannibal, Missouri, to his being feted by the crowned heads of
Europe.
Born Samuel Clemens from a family of modest means,
Twain was a troublemaking kid in his hometown. He rises from being a printer’s
devil to holding a highly lucrative job as pilot on the Mississippi River. Twain’s
life on and near the Mississippi became the backdrop for his most famous works.
His piloting job ended with the start of the Civil War and for a fleeting time
he serves in the confederate militia. Recall that Missouri was a slave state
and Twain was part of the culture.
One of my criticisms of Chernow is that he applies 21st
century mores to 19th century America. He should remember Genesis
6:9 “Noah was a righteous man; he was blameless in his age.” So too was Mark
Twain and Chernow traces his evolution from supporting slavery to becoming a
supporter of civil rights for women, African Americans, and his opposition to
antisemitism.
Twain leaves Missouri for Nevada and then California
by working as a reporter. His breakout work “The Celebrated Jumping Frog of
Calaveras County” established his reputation as a humorist and writer and leads
him to the lecture circuit where his reputation for exaggeration became widely
known and appreciated.
From there it is onward and upward. He travels abroad
and coins the phrase “Gilded Age,” and as a result of a trip abroad he meets
through her brother Olivia Langdon and marries her. Langdon is the heiress to a
coal mining fortune and the couple sets up housekeeping in her home in Elmira,
New York. It is from there that Twain writes “Tom Sawyer” and later
“Huckleberry Finn.” Those two works give him a worldwide reputation and travels
and lives abroad for many years using Hartford, Connecticut as his base. Unfortunately,
Olivia was never in the best of health and his three daughters all die young.
Wherever he traveled Twain was treated as a conquering
hero, especially in Germany and England. He meets all of the movers and shakers
at home and abroad, including Woodrow Wilson Theodore Roosevelt, Nikolai Tesla,
and Kaiser Wilhelm II. His political views evolve from being a Southern
Unionist, to being a staunch Republican, to being a “mugwump” reformer and
later in life he adopts a strongly anti-imperialist worldview. Despite being
critical of Theodore Roosevelt, he enlisted his aid in extending the time
period for copyrights for the benefit of his heirs.
Chernow goes into great detail about Twain’s failed
investments in publishing and a linotype machine. In the 1890’s he actually went
bankrupt, but he was rescued by Henry Morgan, a Rockefeller partner in Standard
Oil. Although Twain sympathized with the downtrodden, his personal lifestyle
took on many of the aspects of the gilded age.
My primary criticism of the book is its length. It is 1196 pages including footnotes; way too
long, maybe 200 pages too long. Towards the end it became a slog to read.
Last week brought with it the International Trade Court opinion declaring Trump’s use of the Emergency Economic Powers Act declaring his reciprocal tariffs on all of America’s trading partners to be illegal, the arrival of the new acronym TACO and a breakdown in trade talks with China. Coined by Financial Times columnist Robert Armstrong, TACO stands for “Trump Always Chickens Out.” That was brought home by Trump’s sudden pullback from his 50% tariff on the EU. (See: https://shulmaven.blogspot.com/2025/05/debt-tariffs-and-stocks.html ) When Trump was asked about it at a White House event he reacted very defensively because the one thing a bully can’t stand is being called “chicken.”
While the trade court ruling is being appealed, the Trump team said it would use all of the other powers available to him, of which there are many, to maintain his high tariff wall. On Friday he acted by doubling the tariffs on steel and aluminum from 25% to 50%. That will work as a dagger in the heart of America’s steel and aluminum using industries, namely automobile, aircraft, and machinery. This certainly won’t help Boeing, America’s leading exporter, on its road to recovery.
The steel and
aluminum tariffs will further estrange Canada from the U.S. where its direct
exports will be clobbered, and it will make Canadian manufactured autos and
parts even more expensive. If Canada weren’t heading for a recession before, it
is now.
My guess is that in the long run the TACO trade maybe right, but in the short run, Trump will keep tariffs much higher than the 10% the market now expects. Thus, when the 90 day pause on high tariffs rolls around on July 2nd, a whole new round of high tariffs will be put in place. Just when investors thought it was safe to go back in the water, a dangerous riptide will be pulling away from the shore
On Friday Donald “The
Tariff Man” Trump struck again with his new 50% tariff on EU products scheduled
to take effect on June 2nd and a new 25% tariff on I-Phones.* (See: https://shulmaven.blogspot.com/2025/02/the-tariffman-strikes.html
) Earlier the House of Representatives passed its budget reconciliation bill
that called for continuing the 2017 tax cuts plus further tax cuts along with
spending cuts that would increase the national debt by about $3 trillion over
the next ten years with the higher deficits front-loaded into the earlier
years.
However, not counted
in the budget calculations is the revenue coming from the tariffs. The current
run rate is $250 billion/year, and a 10% universal tariff would yield in excess
of $300 billion/year, which would totally offset the cumulative deficit of the reconciliation
bill. Essentially Trump will be using tariffs to offset his tax cuts. Because
there is little new stimulus in the tax bill and the drag from the tariffs is
new, the economy will stall out. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html
)
Nevertheless, the
bond market evidenced its unhappiness by sending the yield on 30-year U.S
Treasuries over 5% for the first time since 2007. The bond bear market is in
full force. ( See: https://shulmaven.blogspot.com/2025/01/we-are-in-early-stages-of-bond-bear.html
) Reflecting
a run on U.S. assets, the dollar index declined 3% from just two weeks before
and it stands 1% above its April low and down 11% from its January high.
Until last week stocks
were enjoying a powerful 20% rally off the April lows. Even after last week’s
decline, the S&P 500 was trading 22.3X the $260 earnings estimated for this
year. That equates to an earnings yield of 4.48%, equal to the 4.51% yield on
10-year treasuries. Put simply, the equity risk premium has vanished.
A narrow equity premium might be justified if the economy were about to experience a growth spurt. On the contrary, we are now in the beginning of a stagflation era. Growth will be slow, and inflation will be higher than what we have been used to. (See: https://shulmaven.blogspot.com/2025/04/regime-change-end-of-economy-as-we-have.html ) Thus, if anything, we will soon be entering and era of high rather than low equity premiums and the S&P 500 will plumb new lows before the year it out.
*- Subsequent to this post Trump announced the deadline for the new 50% tariff on EU products was postponed to July 9th. I guess someone in the White House read this blog. HaHaHa
“The Americans” in Real Life
In this deeply
researched book, which included interviews with former illegals in Russia and
his use of the Mitrokhin files Walker puts together a history of Russia’s use
of this method of espionage. He uses several case studies that would include
Dmitry Bystrolyotov, Stalin’s Romeo and “Baron von Hohenstein.” To me the most
fascinating spy was Iosif Grigulevich who was involved in a failed attempt to
assassinate Trotsky and later as Teodoro Castro became a Costa Rican diplomat,
As depicted in the TV
show, despite all of the training, the pressure on families was
significant. Many broke under the pressure
of the job and the need to maintain there new identity. Indeed, there is a
scene where an illegal in labor was fearful of blurting out Russian language
expressions for pain.
The Mogul and the Genius
Former Los Angeles Times
film critic Kenneth Turan has written a dual biography of Louis B. Mayer and
Irving Thalberg and how their partnership built the most profitable motion
picture studio from the 1920’s into the early 1940’s. Mayer, the mogul, a Russian/Jewish
immigrant from Russia and former scrap dealer in Canada became a theater owner in
Boston and eventually ended up in Hollywood. He knew the business end of the business
and he knew how to spot talent. Thalberg came from an upper-middle class Jewish
family from Brooklyn who through his family connections became an assistant to
Carl Laemmle, the boss of Universal studios.
Thalberg, through his genius
and instinct, knew how to make great movies and by 1924 he was in charge of
production at Metro Goldwyn Mayer (MGM) studios. Loew’s Theaters orchestrated
the merger of Metro, Mayer and Goldwyn Studios thereby creating a vertically
integrated behemoth that controlled production, distribution, and the exhibition
of motion pictures. That model was rendered illegal as a violation of the
antitrust laws by the famous 1948 case of United States v. Paramount. Interestingly,
the model of production, distribution and exhibition has been successfully
reincarnated by Netflix and its streaming competitors.
With stars like Greta Garbo, Clark Gable, Joan Crawford, Norma Shearer, Jean Harlow, Dick Powell, Myrna Loy, Judy Garland, the Marx Brothers and Mickey Rooney’ MGM couldn’t miss, especially under guidance of Irving Thalberg and his crew of directors and writers.
Despite his congenital heart
condition, which would kill him at the age of 37, Thalberg was a workaholic.
One scene in the book has him lying in hospital bed looking at the rushes from
the 1925 production of Ben Hur on the ceiling. Along the way, Thalberg found
love and married Norma Shearer, one of his stars, and had two children with
her. Shearer converted to Judaism prior to the marriage.
Between Mayer’s business sense and Thalberg’s creative talents, MGM, in the words of Turan, had the whole equation. Although MGM prospered for awhile after Thalberg’s death, Mayer lost his touch, and the studio entered into a long- term decline and was recently acquired by Amazon. Nevertheless, for a dozen years MGM stood astride of Hollywood like no other.
Investors in the U.S. stock market are living in a state of denial. To be sure, the S&P 500 advanced nine days in row for the first time since 2004, and it has bounced 14% off the early April low, investors are wishing away the trade tsunami that is about to hit the economy. As I write this, the west coast ports are shutting down, bringing with it layoffs among dock workers and truckers. That malaise will soon spread eastward.
Consumer confidence remains in the toilet. Thus, it is no surprise that year-over-year same store sales for McDonald’s, Chipotle, and Starbucks are down. Indeed, domestic airline travel is down, and foreign tourists are staying away from America in droves. On the business side, save for the Magnificent 7, capital spending plans are plummeting. Although the recent employment report for April was better than what I would have expected, my guess is that it will turn out to be the last good report we will see for quite some time. As a result, my March forecast calling for a recession starting in the current quarter still stands. (See: https://shulmaven.blogspot.com/2025/03/the-recession-of-2025.html )
Investors remain in denial that the postwar global architecture of the past 80 years is in ruins. (See: https://shulmaven.blogspot.com/2025/04/regime-change-end-of-economy-as-we-have.html ) To me this means that all of the old rules of thumb concerning the economy and the stock market are no longer valid. Simply put, we are entering a new world with unknown economic and geopolitical consequences. In a nutshell, the world has become a much riskier place.
For those who believe that the U.S. will win the trade war with China, I have a few words of caution. According to the “Sinocism” newsletter, the domestic Chinese media are portraying the trade war as a “protracted war.” The members of the Chinese Communist Party know full well that the term “protracted war” harks back to Chairman Mao’s 1938 pamphlet calling for protracted guerilla warfare against the Japanese aggressors. That war lasted for seven years. Further, Thucydides taught us 2500 years ago that nations go to war for “honor, fear, and interest.” To China the trade war with the United States is a matter of honor.
The bottom line is that soon the denial phase of the current bear market will soon turn to anger as investors realize that the Trump tariff policy will bring with it higher prices and reduced output yielding a stagflationary recession. When that realization crystalizes, the S&P 500 will breach the April low before too long.
