My Amazon Review of Bridgett M. Davis' "The World According to Fanny Davis: My Mother's Life in the Detroit Numbers"

 

Love and Capital in Motown

Baruch College creative writing professor Bridgett M. Davis has written a loving biography of her mother Fanny and along the way a partial autobiography of herself and the Black experience in declining Detroit through the prism of the subculture around the numbers game. (Note: I received this book as a gift and although I have an association with Baruch College, I have not met the author.) Fanny Davis moves her family from Jim Crow Nashville to Detroit in the mid-fifties and the author, the last of five children is born there in 1960. It is through her eyes and the research that she had undertaken we see the larger-than-life Fanny Davis.

After winning a big 500-1 payout to the tune of $25,000 Fanny has the cash to “buy” (actually a land contract of sale because the neighborhood was redlined.) a house and is also taken with the idea of at first being a numbers bookie and then a numbers banker. All of this is illegal. For the uninitiated, the numbers game involves betting on three-digit number that is derived from the last digits of a parimutuel pool in a given race. The odds of winning are, of course, 1,000-1 while the payoff varies between 500-1 and 600-1 making the expected value of a $1 bet 50 or 60 cents. Thus, there is huge “vigorish” for the house. However, the house faces the risk of ruin if too much is bet on the winning number. It is the success of this business that enables the family to grow up with a middle-class lifestyle.

The author was born in 1960, the youngest of five children and she is treated like a princess. She wears fancy clothes, has lots of shoes and most importantly many books to read. There is an early incident where her first-grade teacher questions the number pairs of shoes she has and further questions how her family makes its money. Fanny soon puts her into her place. We see similar incidents in high end department stores where store clerks question Fanny’s ability to pay. She then either roles out $100 bills or a stack of credit cards.

Fanny and other members of the numbers reinvest their profits back into their businesses and into the community at large by founding legitimate businesses and funding the local NAACP and Urban League chapters. Capital accumulation occurs at different levels.

In 1972 new competition enters in the form of a legal state lottery. Fanny had to adjust her whole business strategy. In the parlance of today’s Wall Street, she creates a derivative bet on the state lottery. She allows people to bet with her on the same numbers, but she pays out 600-1 instead of 500-1 and because the activity is illegal the winning better avoids the income taxes associated with winning in the formal state lottery. Further the risk of ruin is gone, because if there were excessive betting on a given number, she laid off the bet with the official lottery. Again, using Wall Street terminology this is called delta hedging. In a different era, Fanny could very well have run a casino or worked as a trader on Wall Street. To highlight her acumen in that regard, she bought Chrysler stock when it was on the brink of bankruptcy in 1980.

We also see her family in turmoil as three of her children die young, her divorce from her first husband who moved with her from Nashville, and her dying of cancer. The author brought tears to my eyes as she recounted her Mom’s death.

All the events in the book are going on amidst Detroit’s long wave decline. The auto industry is collapsing, whites are fleeing the city and the crime rate skyrockets. Indeed, the house that the author grew up in was later vandalized and ultimately bulldozed. The triggering event was the 1967 riot where the Army was called in. I would disagree with the author that the passage of the 1968 Fair Housing Act was the trigger for the white flight. In my opinion the white flight was already underway and that the Fair Housing Act did not have the perverse effect of advancing racial segregation.

Although I largely focused on the business side of things, Bridgett Davis’ endearing story of her Mom is an American story of success and capital accumulation against the backdrop of a major American city in decline. I would end by noting that this story will soon(?) be a major motion picture. I can’t wait.

For the complete Amazon URL see:  Love and Capital in Motown (amazon.com)

My Amazon Review of Ian Kershaw's "The Global Age: Europe 1950-2017"

From Renewal to Decline

After giving a rave review to Ian Kershaw’s “To Hell and Back” three years ago, I was looking forward this sequel on the history of Europe from 1950- 2017. Unfortunately I was somewhat disappointed. Perhaps it is difficult for historians to write about events they lived through, and like him I lived through many of the events he discusses.

In 1950 Europe was in ruins and the nuclear sword of Damocles was hanging over the continent by the American and Soviet super powers. The Marshall Plan was just beginning to take effect and it remained to be seen whether or not a real recovery would take place. Twenty years later Western Europe was largely booming and in the east a drab poverty was the rule of the day.

To Kershaw Europe’s great success during that period was the establishment of the welfare state. To me, on the other hand, the great achievement was placing the economy largely on a market-oriented footing that enabled the boom. Here much credit goes to the German economic miracle.

Kershaw is a child of 1968, but never mentions his own role in the youthful cultural and political revolution that took place then. He was 25 at the time. Although I experienced 1968 in America it is my understanding that far from being separate, the cultural revolution was part and parcel with the political revolution. Even the most serious of politicos of the day we caught up in sex, drugs and rock ‘n roll.  Nevertheless Kershaw rightly states that to the youth in the East, the western revolutionaries were clueless had had no idea how repressive a state could be. In other words they were spoiled children.

Kershaw gives great credit to Gorbachev in ending the Cold War Personality is important, just as the roles of Hitler, Stalin and Churchill were important in his earlier volume He also rightly gives credit to German prime minister Helmut Kohl However, he fails to credit the very deft handling of bringing about the end of the Cold War to the Bush-Baker team in the U.S.

He is way too critical of Margaret Thatcher’s harsh neo-liberalism. In my opinion Thatcher saved Britain by being Churchillian in reorganizing the economy for economic growth. Kershaw is way too concerned about the collateral damage, but to paraphrase the master builder Robert Moses, “you have to break eggs in order to make an omelet.  

Although the E.U. started with great promise, its survival is open to question. The first failure was its lack of intervention in the Yugoslavian Wars, a humanitarian disaster that required U.S. military force and diplomacy to bring it to an end. The E.U. failed to listen to the anti-immigrant stirrings in the late 1990s that would come to a full boil in 2015. To all too many Europeans the E.U. is being run for the elite by a group of nameless and faceless bureaucrats. That is one reason why the U.K. wants to leave. Kershaw is part of that elite. And to top it off, Europe remains unwilling to fund its own defense.

He rightfully calls out unregulated finance capitalism to for causing the 2008 financial crisis. Although the crisis had its origins in the U.S., Wall Street was aided and abetted by greedy European banks chasing yield. Further, while the U.S. required its banks to recapitalize, Europe did not. Hence the crisis lingers today where negative interest rates are becoming normal.

I don’t think Kershaw was harsh enough on the communist governments of the East. I was in East Berlin and Moscow in the spring of 1990. The contrast between East and West Berlin was striking. Simply put the West was alive and the East was dead. In Moscow such common drug store items as Bayer Aspirin and Tampax was not available even for upper middle income consumers.

I have two other quibbles he leaves out data on the collapse in birthrates across Europe, especially in the East, Italy and Spain. That is evidence of the lack of a future orientation and it will make the welfare state promises made to elderly untenable. Lastly he completely leaves out the rise of antisemitism, the scourge of Europe in his first volume.  It is not only coming from the far right, but we see it in the Moslem immigrants and in Britain’s Labour Party.

Despite my criticisms, Kershaw has given us a very usable history of how modern Europe came into being and for that he deserves credit.

For the full amazon URL see: https://www.amazon.com/review/R1AIX5VT8R7ZF4/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Seth Klarman's "Margin of Safety: Risk -Averse Value Investing"

A Primer on Value Investing

Seth Klarman through his Baupost Fund is one of the greatest investors of the current generation, perhaps of all-time. This 1991 book is an investing classic, so much so that it sells for $780 on the secondary market. The key insight for most value investors is the all investments must have an inherent margin of safety. That means looking at the downside before looking at the upside. The notion of risk is asymmetric, not the standard deviation of returns as modern portfolio theory suggests. For example for any given stock under modern portfolio risk is independent of price; for a value investor risk is extraordinarily dependent upon price.

Klarman is focused on absolute performance, not relative performance. Thus unlike the bubbleheads on CNBC he doesn’t have to be invested all of the time. He is rightly skeptical of Wall Street research and the exotic products their investment bankers come up with.

The key earnings metric for Klarman is rightly free cash flow. It is not earnings per share and it is not EBITDA. Depreciation is real and so too are capital expenditures which do not enter the income statement.

The reader has to remember that this book was written in 1991 against the backdrop of the 1987 crash, the junk bond collapse and the 1990 bear market. He is critical of newly issued junk bonds (high yield in today’s terminology). Little did he realize that 27 years later high yield would dominate the new issues. He is also critical of the index funds that now dominate today’s stock market. For the average investor index funds make a great deal of sense.

Why? Simply put the average investor doesn’t have the talent or the time to be a value investor like Klarman. To be another Seth Klarman takes more than a few brains and much hard work.

“Margin of Safety” is written in clear and concise language. My two criticisms are that there are far too few examples of value investing in action and it is obviously dated. Nevertheless the lessons to be learned from reading the book are timeless.

The full Amazon URL appears at: https://www.amazon.com/review/RLBRF216819WU/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Steven Brill's "Tailspin: The People and Forces Behind America's Fifty-Year Decline - and Those Fighting to Reverse It"

The Unprotected

I wanted to like “Tailspin”. Author Steven Brill had very nice things to say about my alma mater Baruch College in its efforts to create successful paths for its student body that is largely made up of immigrants and children of immigrants. To mention Baruch in the same sentence as Amherst warmed my heart. He had nice things to say about the Financial Leadership program of which I am a co-founder. As an example of the program’s success is that the son of a night cleaning lady became an analyst at the major investment bank where she worked.

He starts off with a very simple thesis that the meritocracy created by opening up the Ivies to all comers in the 1960s created a new self- perpetuating elite. That is all to the good, but then he conflates this with campaign finance, the decline of unions, the smug civil service of the Veterans Administration, the “rubber rooms” of the New York City teachers’ unions and the financialization of the economy. All of that has been said before. In fact he is a bit out of date because the big driver of income inequality has shifted from Wall Street to Silicon Valley over the past ten years. His representations of the economy would have been far more accurate in 2006 than 2018.

More importantly Brill leaves out perhaps the most important factor in perpetuating his meritocratic elite, assortative mating. It is this mating process where investment bankers marry lawyers and doctors marry doctors and so on that is at the heart of creating a new establishment. In my opinion leaving out assortative mating is a major failure of his book. Brill also spends too little time on the role elitist zoning plays in perpetuating income inequality.

Brill also fails to cite Wall Street Journal columnist Peggy Noonan for coming up with the terms “protected” and “unprotected.” It came from her 2016 award winning column. To me the first two chapters are great and then the book goes downhill from there.

The full Amazon URL appears at: https://www.amazon.com/review/R2JNZF3OA414UZ/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv