America Turns Inward

If we didn't need any more evidence the results of yesterday's primaries indicate that the American electorate is turning inward. The rise of Trump and Sanders proves that there is a strong anti-free trade consensus. Although Sanders and Trump voters vote with their pocketbooks in favor of free trade every day at Wal*Mart, at the ballot box they resoundingly vote against it. These facts will be confirmed when the Trans Pacific trade deals goes down to defeat, if it is ever voted on.

Moreover with Trump appearing to be a direct descendant of the isolationist America First movement of the early 1940s and with Sanders firmly believing in the American retreat of his socialist roots, the world will soon become a more dangerous place. We have written many times before that we are in the process of reliving the 1930s and unfortunately the evidence grows with each passing day. We are getting pretty close to gangs of Trump and Sanders supporters fighting it out in the street. Simply put, the political situation is getting very ugly. Soon the markets will reflect it.

My Amazon Review of Scott Sumner's "The Midas Paradox: Financial Markets, Government Policy Shocks and the Great Depression"

He Doesn’t Love Gold

Scott Sumner has written a fascinating book on how interaction between the operation of the gold standard and the labor policies of the New Deal influenced the course of The Great Depression. I only wish he had a better editor who would have tightened up a writing style that tends to wander in a way that mixes up the important from the unimportant.

His critical variable is the gold reserve ratio of the United States individually and the collective gold ratio of the then developed world. He makes a strong case that as the gold ratio rose policy tightened and as it fell policy loosened. Unfortunately aside from a few instances there was very little in the contemporaneous press, which he quotes extensively, that discussed this issue. Thus it seems policy makers were flying blind.

Similar to most economic historians of The Great Depression the seminal event that turned the economy around was Roosevelt’s abandonment of the gold standard in 1933-34 and then revaluing gold from $20.67/oz. to $35.00/oz. It was that action that enabled the Fed to open up the monetary floodgates. In Sumner’s view had the New Deal left well enough alone the economy would have fully recovered by 1935.

However, offsetting the gold policy, the National Industrial Recovery Act of 1933 triggered a 22% increase in wages during the summer of 1933 that completely stalled the industrial recovery that was well underway in the spring of 1933. He then goes on to discuss, in the tradition of Cole and Ohanian the additional wage shocks that came from the Wagner Act of 1935 and the Fair Labor Standards Act of 1938.

He makes a major point in discussing why the monetary ease of early 1932 failed and it was that failure that turned Keynes away from his belief in the efficacy of monetary policy. To Sumner the Fed’s policy was not credible because under the gold standard it was not able to continue its bond buying program. Only after gold was revalued did the Fed have the greenlight to engage in quantitative easing, to use today’s term.

I wish he would have spent more time on the Treasury’s gold sterilization policy of 1935-37 which Douglas Irwin mentions as the leading cause of the 1937-38 collapse. Nevertheless there are many fascinating nuggets in this book such as the role of the Young Plan bonds issued by Germany had on the financial markets of 1931-32. To my mind Sumner has written a very important book on what made the Great Depression great.

For the Amazon URL see:

https://www.amazon.com/review/ROSQFMUB67B5B/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Chris Christie's Temper Tantrum

Chris Christie proved himself to be Donald Trump's soulmate. They are both schoolyard bullies who if they can't have their own way they go off on their own. What Christie was saying with his endorsement of Trump today is that I if I couldn't take him, I am going to try my best that the rest of the Republican field can't take him down either, especially Marco Rubio. For whatever reason Christie can't stand Marco Rubio. Be that as it may, today Christie found his inner spoiled child.

Another reason is that Christie can't wait top get out of New Jersey. It is fast becoming a failed state like Illinois. He won't be Trump's VEEP, but he is certainly angling to be his attorney general. I would hope that voters see through all of this and give Trump the licking he so well deserves on Super Tuesday. I know this may be the triumph of hope over experience, but one can always hope.

My Amazon Review of Robert J. Gordon's "The Rise and Fall of American Growth"

It’s All about Growth

Northwestern economics professor Robert Gordon has a written a mostly very good and a very long book (762 pages in the print edition) on the history of economic growth in the United States from 1870 to the present. In his view it is all about the rise and fall of total factor productivity (the gains in output not due to increased labor and capital inputs, or if you will technological improvements). I know this sound very boring, but he explains the growth in output in terms of how it affected the daily home and work lives of average Americans. In other words he tells a very good story as to how the typical American moved from a completely disconnected life without indoor plumbing in 1870 to a fully connected life with water, sewerage, electricity, radio and telephones by 1940. The American of 1940 would not recognize the life of an American in 1870 while the American of today would readily recognize the life of a typical 1940 American.

To him much of this improvement is due to what he calls the second industrial revolution which was brought into being by the widespread adoption of electricity and the internal combustion engine. along with indoor plumbing remade the economy. In a way his book is a paean to industrial capitalism whose innovations brought about this revolution. Further, although it is hard to believe today, the introduction of the automobile in the early 1900s was the clean technology of its day. Simply put the major cities of the country were knee deep in horse poop and horse piss that local residents struggled to avoid. They were literally swimming in pollution.

Compare this to the third industrial revolution we are experience today involving information technology, computers and communications. Sure those technologies have improved our lives, but how do they compare to indoor plumbing and electric lights. Gordon demonstrates through a careful analysis of the data that the information revolution peaked from 1996-2004 and has since slowed down. Specifically Moore’s Law which states computer chip capacity doubles every 18-24 months which held from the late 1960s to the early 2000s broke down in the past decade to a pace of doubling every four to six years.

Going forward Gordon is a “techno-pessimist.” He views the 1870-1970 period as a one off event. The recent slowdown in productivity and economic growth certainly supports his view. Whether he is right, or not, only time will tell. Where I would disagree with Gordon is that he labels the rise of income inequality as an impediment to growth. To me that is a stretch because during his golden age of 1870-1940 there were two distinct periods of high and rising income inequality. The first was the gilded age of 1895-1910 and second was the roaring twenties. During those two time periods the standard of living for the average American grew rapidly and it is hard to see in the data that it was an impediment to growth especially when Gordon admits the official data grossly understated overall economic growth.

I know that this review has hardly done justice to Gordon’s magisterial work. I highly recommend it for those interested in how our lives came to be.

For the full Amazon URL see:

https://www.amazon.com/review/R13GCQ9VTKYY3S/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Barron's Joins Shulmaven on Trump-Sanders Risk to the Stock Market

Barron's arrived this morning with a lead story on the impact of Trump and Sanders on the stock market. See: http://www.barrons.com/articles/trump-and-sanders-are-they-killing-the-stock-market-1455341656?mod=BOL_hp_highlight_1?mod=BOL_hp_highlight_1 (Paywall) It is nice to see the financial press waking up to what has been in front of them for the past six weeks. 

See the recent Shulmaven on this issue: http://shulmaven.blogspot.com/2016/02/the-trump-sanders-market.html

Meantime I fear that despite Friday's strong rally, the course for stock prices over the near term will continue to be volatile as it follows the ups and downs of the political campaign. The one bright spot is that the economic news remains good with a decline in unemployment claims and a rebound in retail sales.

The Trump-Sanders Market

Stocks broke to new closing lows today with the S&P 500 down 1.2%. CNBC mentioned five reasons for the decline:
1.Central banks out of bullets.
2. Continued drop in oil prices.
3.China worries.
4. Global recession fears.
5. An emerging European banking crisis.

Amidst the decline in  share prices treasury bonds rallied strongly, but gold soared with a $56 advance and the dollar actually declined against the Euro. If the five reasons mentioned were the only causes then we would not have expected gold to rally and the dollar to decline. There is something else going on.

Simply put CNBC left out the big elephant in the room, the forthcoming presidential election whose primary contenders are Donald Trump and Bernie Sanders. If market participants didn't believe this was so, this week's New Hampshire Primary certainly disabused them of that notion. Both of these candidates have one thing in common; they want to blow-up the global trading system. They may or may not realize it, but they are playing with the fire that the stuff global depressions are made of. Thus the market is beginning to price in the very real political risk facing the U.S. stock market.

For my prior comment on Trump and the stock market see:

 http://shulmaven.blogspot.com/2016/01/trump-and-stock-market-connect-dots.html

Amazon in the Mall: Putting the Fox in the Hen House

Last week General Growth Properties CEO Sandeep Mathrani noted on an earning conference call that Amazon was planning to open up from 300-400 mall stores. He quickly back-tracked by stating that his comment "was not intended to represent Amazon's plans." 

I have no idea whether or not Amazon will embark on such an ambitious plan, but what I do suspect is that Amazon is not going to blow up its business model by opening up a bunch of book stores on very expensive real estate. My guess is that if Amazon is going to go the physical retailing route it will be more than selling books and their proprietary hardware. 

Picture if you will a catalog store that offers the customer the entire Amazon product line in a very easy to use format that goes well beyond today's smart phones. Of a sudden the mall customer would be able to readily comparison shop the entire mall and with that the pricing structure within the mall will crater. This would not be a happy outcome for retailers and their landlords, the giant mall REITs.