My Amazon Review of Joanne Lipman's "Next!: The Power of Reinvention in Life and Work"

 Reinventing Yourself

Veteran journalist Joanne Lipman has written an important guide to career change and life. Simply put, change is hard, but in the final analysis, it is necessary. Although personal reinvention is small change relative to statecraft, I would like to quote Niccolò Machiavelli here, “It ought to be remembered that there is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in success, than to take the lead in the introduction of a new order of things.”

 

She highlights among others how James Patterson gave up his successful career as an advertising executive to become a bestselling author, jazz musician Alan Greenspan became the central banker to the world and mild-mannered White House budget analyst Ina Garten, became the “Barefoot Contessa” of cooking fame. She further discusses how the recovery from trauma forces change upon people. Simply put, they have no choice. In the realm of physical reinventions, she notes how a wallpaper cleanser was reinvented as Play-Doh and how a failed heart medication became Viagra.

 

Her formula for career change is search-struggle-stop-solution. To change careers the process begins with search and the use of wide connections, not necessarily close connections, is most helpful. The exception to that is having a mentor really helps, and it was Ina Garten’s husband Jeffrey Garten, who encouraged her all the way. However, in the case of personal trauma, struggle comes first.

 

My own personal experience through numerous reinventions parallel much of what Lipman writes about. To me the most important aspect is to be open to new ideas and be in the flow where you can capitalize on them. However, sometimes one does not have the luxury of James Patterson, where he kept his day job while writing his novels. Circumstances force us into reinvention. Further the existence of a secure day job can become a security blanket. For example, I walked away from a tenured position in academia for the private sector. I wanted to make it work, so I did not want to have the option to retreat and I did that with a young family. In other words, change can be a risky business.

 

As for my own reinventions I have worked in aerospace, was drafted into the army, became a Ph.D. student and later a university professor, was a political activist along the way, did macroeconomic forecasting, became a leading real estate researcher, and left Los Angeles to work on Wall Street where I met the author when she was a cub reporter.  I wasn’t looking to go to Wall Street, but Wall Street came to me. Thus, being in the flow is what counts. With respect to that my leaving academia was the result of helping a friend find a job. In the course of helping him, I ended up being introduced to my new employer.

 

On retiring from Wall Street, I returned to academia with simultaneous posts at Baruch College, UCLA , and the University of Wisconsin. The most rewarding of which was helping to set up a program for Baruch College students for high profile careers in financial services which hitherto were unavailable to them.

 

Joanne Lipman backs up her anecdotes with serious social science research. Although that slows down the pace of the book, it puts her anecdotes on a firm foundation by turning the anecdotes into data. I highly recommend this book for those who are interested in career change and to those who may be too contented with the way things are.

For the full Amazon URL see: Reinventing Yourself (amazon.com)

My Amazon Review of Ben Bernanke's "21st Century Monetary Policy"

Fighting the Last War

Central bankers are like generals; they fight the last war. In his updated history of Federal Reserve policy since the 1960’s former Fed Chairman Ben Bernanke spends much of his effort in his too long and textbook-like book on monetary policy from the financial crisis of 2008-09 to the present. He is rightly concerned with operating monetary policy under the constraint of a zero-bound policy rate that for the most part has been the case since 2008. However, he ignores the new war to come as inflation becomes more endemic.

 

He discusses the role of the Fed as a lender of last resort in the tradition of Walter Bagehot where unprecedented lending in face of the financial crisis in 2008 and the pandemic of 2020 where the Fed came close to discounting practically anything, perhaps even my personal IOU. To be sure the Fed did save the day in both cases, but in the case of 2008, it gave rise to a populist movement on both the right and left which saw the Fed bailing out the big banks, but not the proverbial little guy/gal.

 

Bernanke cites his interest in monetary policy came from reading Friedman and Schwartz’s “A Monetary History of the United States 1867-1960.” I too had a similar experience. However, where the role of money is central to Friedman & Schwartz, aside from the 1970’s, it is only peripheral in Bernanke’s work. My guess is that Bernanke will regret not mentioning the explosive growth in the money supply over the past two years.

 

I wish he would have devoted more time to the role of the Plaza Accord in 1985 in which the finance ministries of the G-7 orchestrated a decline in the international value of the dollar. The Fed aided and abetted that process which in my mind ignited the commercial real estate bubble of the late 1980’s. That did not end well, and it nearly broke the U.S. banking system, so much so that the Greenspan Fed in late 1991 lowered the discount rate by 100 basis points. As an aside I participated as a real estate expert in a briefing to the Board of Governors just prior to the rate cut.

 

The reason Bernanke and the Fed are fighting the last war is that it is my contention that the U.S. economy entering a new thirteen-year cycle (Shulmaven: The U.S. Economy is Entering a New Thirteen Year Cycle) that will be characterized by much higher inflation than we have been used to. It will involve more than a cyclical rise in inflation that Summers-Furman-Blanchard warned of that Bernanke rightly noted in his book. ( Also see my comments  Shulmaven: "Is the Pandemic Hiding Future Inflation," UCLA Economic Letter, January 2021 ) Further, if inflation were measured the same way it was in the 1970’s where house price changes rather than owners’ equivalent rent was used to calculate the housing component of the consumer price index, year-over-year inflation would be running in the 12-13% range, not the 8% currently being reported. Simply put, the house is on fire.

 

Inflation will become more endemic because the economy is deglobalizing and decarbonizing at the same time. Both will lead higher energy prices specifically and higher overall prices as limitations will be put on the international division of labor in an environment of an aging global workforce. This will lead to a substantial increase in capital expenditures as production is in-shored and huge investments are made in energy transition. As a result, not only will inflation increase, but the real neutral rate of interest, R*, will increase as well. Add to this higher defense spending to deal with an aggressive Russia and increased concerns about China, interest rates have nowhere to go but up.

 

Net net. Instead of worrying about the last war’s zero bound, the Fed will be worried about the new war of fighting an inflation amidst a capital spending boom.

For the full Amazon URL see: Fighting the Last War (amazon.com)

The U.S. Economy is Entering a New Thirteen Year Cycle

 

I believe the U.S. is about to enter a new thirteen-year cycle with unknown consequences. I first became interested in the topic of thirteen-year cycles in 1995 when I was Chief Equity Strategist at Salomon Brothers. I wrote “1996: Stock Market Bubble or Paradigm Shift?” in December 1995. In that report I discussed what appeared to be distinct 13-year stock market cycles in equity valuations. After a long 27 years this post updates that view to help explain the U.S. economy over the past eight decades. In fact, I have identified seven such cycles.

 

In that report I noted that there was a thirteen-year period, 1918-1931, between the end of World War I and the onset of the Great Depression. I choose 1931 instead of 1929 because the year 1931 was the year when the depression became Great. Because the Great Depression was not the only episode where a major economic contraction followed a war, investors and economists wondered if history would repeat after World War II ended in 1945.

 

The first cycle occurred from 1932-1945 where the hitherto laissez faire economy of the United States was transformed in the dying moments of the Hoover Administration, the New Deal, and the war economy into an economy with substantial government involvement, the rise of industrial unions, the creation of a social safety net and the commandeering of resources to win World War II. It truly was a revolution in economic affairs.

 

The second cycle (1945-1958) was characterized as the transition from a war economy to a peacetime economy leading to a sustained consumer boom centering on suburban housing and automobile production. The boom was reinforced with a high level of peacetime defense spending to handle both the Korean War and the exigencies of the Cold War. Despite the boom, the gret fear during that period was the fear of a renewed depression.

 

The third cycle began with the 1957-58 recession which was the third and worst downturn since the end of the war. The economy did not evolve into a depression, but rather fiscal and monetary policy came to the rescue and a sharp recovery ensued. With the arrival of the Kennedy Administration in 1961, Keynesian economics offered the promise that government policy had the ability to tame the business cycle and fear of a new depression disappeared. Both investors and economists cheered the “soaring 60’s.” Thus, a thirteen year cycle was born beginning in 1958 and ended in 1971 with Nixon taking America off the gold standard and implementing wage and price controls. Something went awry in the Keynesian wonderland.

 

What went awry was, of course, inflation. In December 1967 Milton Friedman delivered his now famous presidential address to the American Economic Association. He argued that there was no long run trade-off between unemployment and inflation. As a result, the counter-cyclical policies advocated by the Keynesians would lead to ever higher inflation, which was proved out in the 1970s. The next thirteen-year cycle 1968-1981 was a period of high inflation and stagflation. Admittedly there is some overlap here. Thus, if the 1960’s represented the heyday of Keynesian economics the 1970’s represented the heyday of monetarism.

 

A new cycle emerged in 1982-1995 where after Fed Chairman Paul Volcker broke the back of inflation, the fear of a renewed inflation dominated both the economy and the financial markets. Instead of fearing depression, investors feared a renewal of inflation. It was the mirror image of the 1945-1958 period.

 

However, a new thirteen-year cycle, 1995-2008, emerged after Fed Chairman Alan Greenspan pre-empted an emerging inflation in 1994 by doubling the federal funds rate from 3% to 6%. That action put a dagger into inflation expectations and ushered in the heyday of the Federal Reserve. Economists and investors believed that price stability was the path to long term growth and the Fed had the ability to keep the economy on an even keel. A key feature of the period was the full flowering of globalization which suppressed inflation.

 

The Fed was so good at maintaining economic stability that a “Minsky moment” arrived in 2008. Macroeconomic stability led to financial instability where investors were lulled into taking and unprecedented level of financial risks. As a result, housing crashed, and layers of financial derivatives caused the financial system to buckle as it had not done so since 1931-32.

 

The 2008-09 financial crash signaled the onset of new cycle which forced the Federal Reserve to engage in hitherto unprecedented monetary policies and caused to the new Obama Administration to revive expansionary fiscal policies that were long thought to be obsolete. To head off an impending debt deflation the Fed adopted a zero-interest rate policy, bought trillions of dollars of questionable paper and proceeded on a policy of quantitative easing to keep the economy flush with liquidity. Those policies were reintroduced on steroids in 2020 with the emergence of the COVID pandemic. The great fear during this period was the potential for new financial crisis and the ongoing risk of an incipient deflation.

 

With respect to fiscal policy the Obama Administration offered up a large, but inadequate, $900 billion fiscal package. In 2021 the Biden Administration overlearned the lesson of 2009 and offered up an unprecedented level of fiscal stimulus. That stimulus along with supply constraints associated with the pandemic brought with it an inflation rate unseen since the early 1980’s. Put bluntly, the thirteen-year cycle that began in 2008 came to an end in 2021.

 

My guess is that we are at the very beginning of new thirteen-year cycle with unknown consequences. I would speculate that the next thirteen years will bring with it a much higher rate of inflation than we have been used to, a multiyear bond bear market and a partial deglobalization of the economy caused by local politics, supply chain issues and geopolitical tensions. To me the big question is whether this cycle will bring with it a stagflation or a high cap-ex/high inflation economy with a cap-ex boom coming from the in-shoring production and energy transition. As they say, time will tell.

Time for a Fed Intermeeting Move

With the year-over-year consumer price index now running at a 7.5% and with Core CPI at 6%, it is so obvious that the Fed's zero interest rate policy is way behind the curve. In ancient times the Paul Volcker of 1979 and the 1980's and the Alan Greenspan of the late 1980's and early 1990's would have acted with alacrity, meaning there would be an intermeeting rate hike to highlight the seriousness of their concerns about inflation. 

The 20 year era of Fed gradualism on the upside is over as the low inflation environment of the past two decades is now behind us. Moveover both the housing and healthcare components of the CPI are lagging realtime pricing making it likely that inflation will remain higher for longer. Indeed wages are up 5.7% year over year and are likely to move higher as the fully employed economy will continue to be strong.

Remember as Milton Friedman, another member of the ancien regime, noted that monetary policy acts with long and variable lags. Thus it is time to act and furthermore an intermeeting move will restore the Fed's and Chair Jerome Powell's waning credibilty as an inflation fighter.

I would note that this is not a prediction, but rather what I think the Fed should do. We'll see.

My Amazon Review of Howard Marks' "Mastering the Market Cycle: Getting the Odds on Your Side"

Understanding Cycles

Howard Marks of the very successful Oaktree Capital Management has written a way too long and very repetitive book on understanding market cycles. Where was his editor when we needed him/her? Nevertheless his “Mastering the Market Cycle” is an important book that will give disciplined investors great insight. Discipline is the operative word, because without it Marks’ insights are of limited value.

Marks cites five critical cycles: 1) economic, 2) profits, 3) stock market 4) credit and 5) risk. An investor has to know where we are with respect to each of those cycles and most important is the risk cycle which is determined by the psychology of investors. Simply put are they greedy or are they fearful. Although this sounds easy in theory it is very difficult to implement. For example it is very hard to be bearish when the whole world is bullish, this I know from experience, and conversely it is even harder to be bullish when the whole world is bearish. It is at the extremes where the most money is to be made and where discipline is most needed.

The problem with implementing Marks’ ideas is that it is difficult to know how long a cycle will go on. Marks’ cites Greenspan’s famous “irrational exuberance speech of late 1996, only to witness the late 90s bull market to roar on for another three years. Although Marks was brilliant in backing up the truck in the credit markets at the height of the Lehman crisis in 2008, even he admits it was a close run thing and his success was dependent upon the efforts of Paulson, Bernanke and Geithner in stemming its worst effects.

Putting Marks’ ideas to use today I find that the current economic upswing is much closer to the end than the beginning, profit growth is certainly peaking, the credit market is wide open to most borrowers on very favorable terms and aside from the past few days in early October most investors remain bullish after a ten year bull market that quadrupled the major stock market indices, and investors seem oblivious to global macro and political risks. Thus the way I read Marks it is at least time to be cautious and consequently a time to de-risk portfolios.

Making one last point, I wish Marks cited the late Hyman Minsky who noted that stability leads to instability and although he didn’t directly state the converse, instability leads to stability. That would be Marks in a nutshell. Although too long and too repetitive “Mastering the Market Cycle” is worth the read. There is much wisdom here.

For the full Amazon URL see: https://www.amazon.com/review/R2WH5246HCRNPE/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Diana B. Henriques' " A First-Class Catastrophe: The Road to Black Monday, The Worst Day in Wall Street History

The Sorcerer’s Apprentice

On October 19, 1987, the very day of the crash that brought stocks down by 22%, I was flying to Colorado Springs to present a paper at the annual Q Group conference. Many of those in attendance were in up to their eyeballs in the quantitative finance that was putting the market decline into overdrive. New York Times reporter Diana Henriques has written an intriguing story about the plumbing of the financial markets where conflicting regulators, the rivalry between the cash market in New York and futures market in Chicago, and the emergence of quantitative finance in the form of portfolio insurance/dynamic hedging forced the stock market to turn in on itself much like the sorcerer in the Hall of the Mountain King.

She tells a very good story about the personalities that fueled the rivalry between the SEC and the Commodity Futures Trading Commission and its parallel rivalry between the New York Stock Exchange and the two Chicago futures exchanges, the “Merc” and the Board of Trade. The upshot driving the controversies was that, contrary to what most people expected, the futures market drove the cash market, a phenomenon that the regulators were not ready for.

She also is very good describing the academic and business origins of portfolio insurance where the theories of two Berkeley business school professors, Hayne Leland and Mark Rubinstein merged with the business smarts of John O’Brien to form Leland O’Brien Rubinstein & Associates (LOR) to market their new product. By the way, I overlapped with Rubinstein in the UCLA finance Ph.D. program in the early 1970’s. At its core the problem with portfolio insurance is that it required a continuous trading in the cash, futures and options markets. A breakdown in anyone of these markets would trigger a massive dislocation. None of this mattered when only a few investors were engaging in the dynamic hedging necessary to insure a stock portfolio, but once it became popular among pension managers the assumption of continuous markets became questionable. By way of example when all is calm, fire insurance is readily obtainable, but when the whole city is burning down, there are very few sellers of fire insurance. That is precisely what happened on October 19^th.

Henriques rightly notes that the real risk to the system occurred a day later when trading halts in both the cash and futures markets occurred. The markets were rescued by the newly installed Fed Chairman Alan Greenspan acting as lender of last resort and the timely buying of an obscure index product by traders Stanley Shopkorn (a friend) of Salomon Brothers and Bob Mnuchin of Goldman Sachs.

Although Henriques is very good at describing the drama of the minute by minute trading on the exchanges she glosses over the big macroeconomic causes of the crash.  It was part and parcel of the great 1980s bull market that took the Dow Jones Industrial Average up from 776 in August 1982 to 2722 just five years later.
In fact the Dow Stood at 1890 as 1986 drew to a close and then skyrocketed to 2722 in less than eight months, a gain of 44%. So no one should be surprised that a correction occurred. Indeed if you were in a coma for most of the year and you woke and saw that the market closed at 1739 on October 19^th it would have been logical to surmise that not a whole lot happened in 1987.

The mid-1980’s bull market was fueled by the 1985 Plaza Accord that was designed to lower the value of the dollars by dramatically increasing global liquidity, a Fed easing cycle in 1986 caused by a collapse in the price of oil, and the emergence of leveraged buyouts. By October of 1987 all three of these factors were called into question as the Fed began a tightening cycle in early 1987, a very public currency dispute between the U.S. and Germany broke out into the open thereby questioning the Plaza Accord and Congress was considering proposals to limit the tax deductibility of interest deductions associated with leveraged buyouts. Thus the stock market had every reason to go down. What portfolio insurance and the regulatory cacophony did was put the decline into overdrive.

Thus I wish Henriques would have devoted her writing talents to place what happened in 1987 into a broader macroeconomic context. But make no mistake much of the regulatory issues she discussed remain with us today and were partially responsible for the 2008 meltdown.

The Full Amazon URL appears at: https://www.amazon.com/review/R3QEZXTEFCWZQ0/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Henry Kaufman's "Tectonic Shifts in Financial Markets: People, Policies and Institutions"

Too Big to Fail is Still with Us

Henry Kaufman, my former boss at Salomon Brothers, has written an easy to read and an important book about our nation’s financial structure. Simply put, Dodd-Frank did not solve the “too big to fail problem” and in fact made it worse by ratifying the undo concentration of the giant “financial conglomerates” that rule finance today. He further argues that this financial concentration impedes Federal Reserve policy. In a crisis that might be true, but it is not clear whether that is true in more normal times. After all Canada has run monetary policy for decades with a highly concentrated financial system with few issues than what occurred in the United States.

His book is part autobiographical as well in that he discusses his years at Salomon Brothers where in the late 1970s and early 1980s the financial world waited with baited breath for his comments. He notes his great friendship with Paul Volcker where he is very kind; he is not so kind to Alan Greenspan where the he believes the Fed became more political. This is not to say it wasn’t political in earlier times.

He makes an acute observation about Margaret Thatcher who impressed him with her sophisticated knowledge of macroeconomics.

What troubled me about his book is his discussion of Lehman Brothers where he was a board member before and at the time of its high profile bankruptcy. He argues that the Fed had more options than letting the firm go bankrupt and suggested that Treasury Secretary Henry Paulson was driving the bus, not the Fed. That could very well be true, but I wish he discussed what happened in the Lehman boardroom when the firm ran up its debt/equity ratio to 33-1 and loaded up their books with highly illiquid real estate, including the giant Archstone transaction. Further in late 2007 Lehman had a chance to walk from that transaction, but didn’t. Were it not for their real estate heavy transactions in both physical real estate and what was to become highly illiquid positions in commercial mortgage backed securities, the firm could very well have survived. In the interests of full disclosure I left Lehman in 2005.

Thus having opened the discussion about Lehman, I wish he would have given us more details. Otherwise this is a fine book for those interested in how our financial system evolved over the past 60 years.

The full Amazon URL is:

https://www.amazon.com/review/R2M7PQ7FJGMFC0/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv