Will Trump Tariffs Force Gary Cohn Out?

As I write this stocks are in free fall after President Trump announced that he will impose a 25% tariff on steel and a 10% tariff on aluminum. It signals the opening salvo in a trade war that will raise prices domestically, harm export industries and weaken alliances abroad.

However the knock-on effect could trigger the resignation of National Economic Council Director, Gary Cohn. Cohn clearly lost a very public internal fight against the protectionist wing in the White House, namely Peter Navarro, Wilbur Ross and Robert Lighthizer. Because the financial markets have been reassured by the presence of Cohn, a former Goldman Sachs executive, his leaving of the White House would trigger further selling. Given the wholesale resignations from the Trump White House, why should Cohn's leaving be any different.

My Amazon Review of Benn Steil's "The Marshal Plan: Dawn of the Cold War"

The Cold War through the Lens of the Marshall Plan

Benn Steil, a senior fellow at the Council on Foreign Relations has written a very well researched history on the role of the Marshall Plan as the fulcrum of the Cold War. He previously wrote a history of the 1944 Bretton Woods monetary conference and that certainly prepared him to deal with the economic and geopolitical issues facing Europe at the beginning of the postwar era. He chronicles how the U.S. attitude changed from plans to deindustrialize Germany and to make the U.N. central to foreign policy toward rebuilding Germany and making NATO the focus of U.S. policy in Europe.

The very fact that the U.S. would take part in both the rebuilding of Europe and entering into peacetime multi-lateral alliance represented a revolution in U.S. foreign policy. Steil highlights the role of such key figures as Marshall himself, Harry Truman and George Kennan. More importantly he brings to light the roles of Republican Senator Arthur Vandenberg moved the necessary legislation through Congress and Under-Secretary of State Will Clayton, a former cotton baron, who first articulated the strategic vision of a united Europe.  We also witness the work of former car executive Paul Hoffman running the day-to-day operations of the plan along with General Lucius Clay who acted as America’s proconsul in Germany.  He also noted the important role played by Massachusetts Congressman Christian Herter who led a congressional fact finding delegation to Europe that was influential in generating the political support for the plan.

The Marshall Plan was enabled in Europe by the far sighted leadership of British foreign minister Ernest Bevin and his French counterpart George Bidault. Here we had a socialist politician working hand in glove with a center-right one. Most interesting was the fact that Stalin understood the implications of the Marshall Plan far better than his western counterpart. He knew that it would divide Europe and that in turn would make it impossible for him to neutralize a united Germany. Thus it was the Russian backed coup in Czechoslovakia to prevent that government from participating in the plan that sealed the fate of Europe. From there it was quickly realized that aside from economic support, Europe would need military support. That realization was crystalized by the Berlin Airlift where a logistics wizard, General William Tunner did the nearly impossible task of supplying Berlin by air. NATO would come soon thereafter.

Steil does a service in describing the role of British spies (The Cambridge Five) of informing Stalin of western plans and the role Soviet mole Henry Dexter White in Treasury in his continued support of keeping Germany down. We also see Henry Wallace following Stalin’s line in opposing the Marshall plan in the 1948 presidential race. Although it is not clear the full role Russia played in the 2016 election, it certainly had a candidate in Henry Wallace.

Steil goes on to present his views on the NATO expansion after the Cold War ended in 1991. His take is that the U.S. was far from being clear-eyed in the 1990s of the implications of moving NATO east and the effect it would have on the Russians. I don’t think that was necessary in this book. This topic should be taken up in a future book.

I read Steil’s book with a great deal of sadness. In the 1940s we had brilliant statesmen who rose to the occasion.  Unfortunately our statesman of the past twenty years or so have been found wanting and this is especially true of the current administration.

The full amazon URL appears at: https://www.amazon.com/review/R3RBSFMIF1IODA/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Andrew Lo's "Adaptive Markets: Financial Evolution at the Speed of Thought"

Biological Finance

I am a sucker for kids from middle-class Queens who become great successes. (I am one, without the success part.) Andrew Lo, a M.I.T. finance professor and hedge fund manager is one of the more notable ones. Aside from being a finance super-star, Andrew Lo is a great story teller. I wish I could take his class. However at times he tells too much and as result his 504 page book in the print edition is too long.

Lo’s thesis, building on the work of Kahneman, Tversky, Thaler and Haidt argues rather convincingly that the home economicus model that modern day financial economics relies on is a special case and shouldn’t be generalized for all markets in all seasons. Thus the physics math that finance uses, while it creates reasonably good heuristics, is not complete. Simply put the efficient market hypothesis works most of the time, but not all of time.  

Lo is an expert on modern finance and he presents a well-documented history as to how it came into being starting with an obscure mathematics dissertation written in French by Louis Bachelier which ultimately became the foundation for options pricing models. He makes one mistake here by noting that Paul Samuelson received his Ph.D. in 1947. It was 1941 while his Ph.D. was formally published in 1947.

Be that as it may Lo brings to the table of modern finance neuroscience, evolutionary biology and behavioral economics. When doing this much of the rigor of physics math goes away but it makes his adaptive markets far more relevant to the real world. After all, despite the rise of the machines, markets are made by human beings who have a multitude of motives many of which are not “rational” and many of which are unconscious. Instead of thinking about the day-to-day chaos that appears on the stock exchanges, think of traders fighting for survival on the African Savannah. This would certainly put the concept of seeking alpha in a different light.

Professor Lo also comes up with a neat idea for mass funding of cancer research through the creation of a $30 billion biotech fund that is following the science rather than the near term dictates of the venture capital market place.

In sum, Andrew Lo has written an important book and it should be part of the curriculum in all serious finance departments.

The full Amazon URL appears at: https://www.amazon.com/review/R195W82T8ICM10/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Robert Harris' "Munich: A Novel"

Two Flies on the Diplomatic Wall

Author Robert Harris has given us a well-researched fast paced novel on the 1938 Munich Conference where Britain and France surrendered the Sudetenland portion of Czechoslovakia to Nazi Germany to avoid a war that was surely coming. His two protagonists Hugh Legat, a junior secretary at 10 Downing Street, and Paul von Hartmann, an official in the German Foreign Office, act as flies on the wall as Hitler and Chamberlain meet at the Regina Palast Hotel in Munich to settle the crisis. Legat and von Hartmann are linked by their past connections at Oxford.

The book opens with Hitler’s September 27th ultimatum to Czechoslovakia to surrender the Sudetenland or face an invasion. It is here where Legat and von Hartmann watch as events transpire and we hear conversations of the very real historical figures on both sides. We see Chamberlain scrambling to get Mussolini to act as a mediator which quickly brings about the conference. Both Legat and von Hartman end up at the conference as interpreters through the manipulation of the intelligence services of both countries. In von Hartmann’s case, he is a member of the Oster conspiracy to bring Hitler down. It failed in 1938 and failed spectacularly in 1944. Von Hartmann is bringing to Munich the minutes of a 1937 meeting which Hitler announced his plans for a general European war to his senior military and foreign policy officials. Von Hartmann naively believes that if Chamberlain had that information he wouldn’t yield to Hitler forcing a war that the German military would rebel against Hitler.

Through the very anti-Nazi Legat Harris paints a sympathetic picture of Chamberlain trying to avoid the second Great War in 20 years. He has Chamberlain understanding that Britain was both militarily and psychologically unprepared for war and his appeasement policy was buying time to strengthen the country. However he avoids bringing up the facts that it was the Baldwin-Chamberlain policies that put Britain in the position of weakness.

Along the way we get a sense of what life was like in 10 Downing Street, the precariousness of air travel and the general yearning for peace in both Britain and Germany. Chamberlain was hailed as a hero in both countries, much to the chagrin of Hitler. I found the book to be a great read and it was hard to put down.  

For the full Amazon URL see: https://www.amazon.com/review/R15EDI4IZZT9YF/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Eerie Parallels: January 2018 - January 1987

                             "History doesn't repeat itself but it often rhymes"
                                               Attributed to Mark Twain

The amazing run of stock prices since the start of the year has me thinking about a similar rise in January 1987. Thus far this month the S&P 500 is up 7.5%, not as extreme as 13.2% gain recorded in 1987, but nevertheless quite a move. We all remember what happened after that as stocks continued to a gain of 39% by August, but to give it all back and then some by October. From peak to trough the S&P 500 declined by 33%. However by year end the index ended up for the year by a nominal 2%.

The parallels to 1987 look striking when we look at the economic back drop then and compare it to today. Because history rhymes I will also note a few striking differences.

                                               Simlarities

Indicator                                     January 1987                     January 2018

S&P 500                                       +13.2%                               +7.5%*
Extended Bull Market                Started 8/82                     Started 3/09
Computer Trading                      Portfolio Insurance         Algo Trading
Economy                                    Strengthening                      Strengthening
Profit Growth                             Accelerating                         Accelerating
Dollar                                         Weakening                           Weakening
Oil Prices                                    Up from lows.                     Up from lows
Inflation Rate                             Increasing                            Increasing
Fed                                             Tightening                           Tightening
10-Year Treasury Yields            Bottoming, about to rise    Rising       
Pro-Growth Tax Reform            1986 Tax Act                     2017 Tax Act
Trade Tensions                           Japan/Germany        China/NAFTA
White House Scandal                Iran/Contra        Russian Interference

                                                 Differences

Europe                                        Uniting                                   Dividing
Big Power Rivalry                      Declining                               Increasing
Shiller CAPE                               14X                                        35X

*-As of January 26.

To me the parallels to 1987 are too striking to ignore. So if 2018 stock market rhymes anywhere near its 1987 history we should see a continued advance in stock prices through the summer with the S&P 500 rising well above 3000 and then a severe decline thereafter with stocks ending the year with a modest gain. Fasten your seat belts; it's going to be a wild ride.

Why is the Economy so Strong?

Forget about the below consensus 2.6% increase in real GDP for the fourth quarter. Looking under the hood we find that final sales to private domestic purchases, which takes out the effects of trade, inventories and government, increased at a very strong 4.6% annual rate. Growth was propelled by a 3.8% increase in consumer spending and an 11.4% increase in equipment spending.This follows two quarters of 3% real growth. Simply put the economy is hot and the bond market looked through the headline number and declined. Moreover inflation as measured by the deflator for personal consumption expenditures increased at 2.8% well above the Fed's target and services inflation ran at a very hot 3.1%.

What accounts for this strength after years of so-so 2%  growth? In my opinion it represents a combination of the lagged effects of the extraordinarily easy monetary policies of the past decade, a rebound in the global economy, the deregulation policies of the Trump Administration and the prospect of major tax cuts that were enacted at the end of the quarter. It is not only the deregulation policies, but also businesses no longer live in fear that new regulations will not come from out of the blue as was the case under the Obama Administration. Thus of a sudden capital spending is exploding witnessed by the very strong gain in equipment spending.

Further we appear to be in a self reinforcing cycle of rising stock prices working to push up both consumer and business spending. Nevertheless the party won't go on for too long as the economy is running out of labor in an environment of low productivity growth and that will further increase inflation and lead to more Fed tightening that the market now expects.

My Amazon Review of Tim Harford's "Fifty Inventions that Shaped the Modern World"

The Making of the Modern Economy

Financial Times columnist Tim Harford has written a very enjoyable book about the inventions the brought about today’s globalized economy. At the outset he pays tribute to science historian James Burke who brought us “Connections” the late 1970s BBC series on the history of science.

As the title notes Harford discusses the origins and the implications of 50 inventions. I note ten of them below to give you a sample:

·        Barbed Wire – Established the practically of legal boundaries in the American West.

·        The Pill – Enabled female sexual autonomy that opened the way for women to enter the professions in the 1970s.

·        The Dynamo – The broad transmission of electrical energy.

·        The Shipping Container – Without which global commerce would be a shadow of its current self.

·        The Elevator – Perhaps the foremost mass transit invention that enables dense cities.

·        Double- Entry Bookkeeping – The way measure and control

      the efficacy of enterprise.

·        The Limited Liability Company – Enables risk taking on a grand scale.

·        The Compiler – Enables computers to be programmed in English (well sort of).

·        Property Registry – Converts land into tradeable capital.

There are, of course 40 more and Harford tells the story of all of them in a very breezy style. The chapters are short and that makes the book easy to put down and pick up with ease.

To sum up I highly recommend Harford’s book for lay readers, history buffs and economists alike interested in getting a better understanding how our world came to be.

The complete Amazon URL appears at: https://www.amazon.com/review/R1S73ESGPG95DZ/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv