My Amazon Review of Ted Mann's and Thomas Gryta's "Lights Out: Pride, Delusion and the Fall of General Electric"

 

The Tragedy of General Electric

 

For a century General Electric was one of America’s most iconic corporations with roots going back to Thomas Edison and J.P. Morgan. Yet over the past two decades it has shriveled up into a shadow of its former self. Wall Street Journal reporters Ted Mann and Thomas Gryta  vividly tell a deeply researched story of GE’s slow motion collapse that began at the at the start of this century. Let me say at the outset that several years ago I was a preliminary Loeb Awards judge for the best business book of the year. Although they no longer offer an award for books, if they did, this book would most assuredly be a finalist.

 

The seeds of GE’s demise starts with their rock star CEO of the 1980’s and 1990’s, Jack Welch. Wall Street uniformly admired the house that Jack built, but in many respects its foundation was shaky. Specifically Welch created a “make the numbers” culture and he used the ever growing GE Capital subsidiary to meet his quarterly earnings target by coming up last minute financial transactions. Thus by 2000, 40% of GE’s earning were coming finance; not generators, jet engines and appliances.

 

During that era GE kept a close watch on the analysts who covered GE stock. Mann and Gryta’s comments on this process ring true to me. It 1997 as Chief Equity Strategist for Salomon Brothers I remover GE from the firm’s recommended list of stocks. Within minutes Russ Leavitt, Salomon’s analyst covering GE, received a complaining call from investor relations. He had to grovel before them by saying it wasn’t him, but rather it was me.

 

Welch wanted to end his career with the mega-acquisition of Honeywell. That would have created an even bigger electric behemoth, reduced the role of GE Capital as a relative source of earnings and in, my opinion, it would have created accounting opportunities to sweep under the rug past mistakes via a special charge that analyst usually ignore. This last proposition is mine, not the authors.

 

After a drawn out selection process, Welch selects Jeff Immelt to be the new CEO. Those passed over include David Cote who would soon run Honeywell, Bob Nardelli who would go on to Home Depot and Jim McNerney who would run both 3M and Boeing. Yes, GE’s vaunted management had a very deep bench. In picking Immelt Welch got probably the best salesperson in the company. I met Immelt once at a charity function, and in a very short conversation his sales personality came through and that experience was very consistent with what you get from the book.

 

Unfortunately Immelt was not really strong on finance; he didn’t really understand GE Capital and he was a deal junkie with a penchant to overpay for acquisitions. He did that when he ran the health care equipment division in the 1990s and would do that in spades later with acquisitions in media, oilfield equipment and power generation when he ran the whole company.

 

Immelt had the misfortune of starting to run GE just a few days before 9/11 which signaled the end of the 1990’s boom that so propelled the Welch era. The environment made it more difficult for GE to reach its earnings targets and the passage of the Sarbanes-Oxley accounting reforms in 2003 made it much harder to generate earnings with the stroke of a pen. Thus Immelt had to rely more and more on GE Capital expanding its balance sheet, so much so that by 2007 it accounted for half the company’s earnings. Then in 2008 as the financial crisis hit with full force, GE could not roll over its commercial paper and had to be bailed out by the Fed. With that GE became known as a finance company that made industrial equipment and its multiple suffered.

 

To get out of this fix, Immelt began to slim down GE Capital and went on an ill-timed acquisition binge buying into oilfield equipment at the top of the market and grossly overpaying for the French generator company Alstom. The deal was predicated on cost synergies that the French government wouldn’t allow, but Immelt when ahead anyway. Much of the details on this transaction comes from the author’s version of “deep throat,” a deal team member they identify as “Adam Smith.” To make things worse the conventional power market was entering a secular decline as wind and solar were gaining market share.

 

It is downhill from there. In order to make their numbers the power division rejiggers its service contracts to generate accounting earnings as opposed to cash earnings. It seems that GE was utilizing something akin to gain on sale accounting for their service contracts where they booked earnings upfront rather than over the life of the contract. It this accounting that triggered a very negative analyst report from J.P. Morgan’s Steven Tusa that opened up the gates of hell for GE.

 

Then, of a sudden, GE discovers it had a long term care insurance problem that the executive team, the board and market thought was behind them with the spin-off of Gentworth in 2004. Yet it was there to the tune of $15 billion. That was the end of Immelt. In his place John Flannery was appointed in 2018. He tried his best, but he was gone in 18 months. Then the board appointed Larry Culp, GE’s lead director and formerly a very successful CEO at Danaher. He had his work cut out for him.

 

Perhaps what is most staggering is that from 2004-2018 GE bought back $108 billion worth of stock as the market value collapsed to $56 billion at this writing. All the while GE’s board was mindlessly approving the share buybacks and Immelt’s acquisitions. You could say that that it was complete abdication of authority while they were collecting their $300k a year annual retainers. They weren’t the only ones who missed the mark. I too owned shares of GE during most of Immelt’s reign as I was blinded by the firm’s iconic image and reputation for good management.

 

As I said at the outset, Mann and Gyrta have written an important book and should be read as a case study for investment professionals and corporate managements alike. My one quibble would be that an annotated stock chart would have been very helpful in visualizing the history presented here.  

For the full Amazon URL see: https://www.amazon.com/review/REM986Q7TZ4RO/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Judith Bishop's "Changing Channels:From Just the Facts to Outrageous Opinions"

Newsmakers and Noisemakers

 

Long time television news producer Judith Bishop has offered up a serious critique of the news business in the age of Trump. Her book is more like a long magazine article, but it is worthy just the same. Although the issues she cites long predates Trump, it has been especially hard on serious journalists who have to report the consistent stream of lies put out by the Trump Administration. We are truly living in Orwellian times.

 

Bishop’s focus is largely on television news where she recounts the well-known story of the three network oligopoly being decimated by the rise of cable and later the internet. We can’t go home anymore back to the days of Walter Cronkite. Her well researched book highlights her interviews with such luminaries as veterans Ted Koppel of ABC and Frank Sesno of CNN to newbie Katy Tur of NBC.

 

She discusses the rise of Fox News as a rightwing alternative to the more liberal networks along with CNN and MSNBC. She understates the genius of Roger Ailes in finding a market for his views. She also is very acute at highlighting the cost pressures facing media as viewers found other alternatives. Those pressures engendered the rise of opinion journalism as it is far less expensive to have four talking heads around a table in a studio than having real correspondents in the field in say Berlin, Beijing or Bagdad. As a result outrageous opinion dominates the delivery of facts. And outrage generates ratings. That is why CNN and MSNBC covered Trump like a glove in 2016.

 

I largely agree with Bishop’s thesis but I think she leaves out an important issue and that is what is not covered is sometimes far more important than what is covered. To me part of the reason why the mainstream media lost its way is that it does not cover a host of issues. For example a center-right viewer like myself would like to see coverage on the Marxism and antisemitism of Black Lives Matter, the risks of COVID spread arising from the demonstrations around the horrific death of George Floyd, and the huge hit to small businesses in Portland, Seattle and Minneapolis arising from the demonstrations. If the mainstream media is to be rehabilitated it has to look itself in mirror.

 

Lastly I would highlight the rise of the “woke” culture in the news business. If Trump’s lies are Orwellian so too are the “woke” censors policing journalists and the language they use. It’s a real mess but I remain hopeful that television journalism finds a way out of this morass. Judith Bishop points us in the facts-based direction.

For the full Amazon URL see: https://www.amazon.com/review/R3VQE1C6KL8C02/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Robert Gerwarth's "November 1918: The German Revolution"

The Socialist Center Holds

University College of Dublin historian Robert Gerwarth has written an important book on the creation of the Weimar Republic that rose out of the ashes of Hohenzollern Empire in 1918. Although many historians have viewed the new republic as doomed from the start, Gerwarth rightly believes it had a fighting chance to succeed. His history is largely written through the lens of the MSPD (Majority Social Democratic Party) and its leader Friedrich Ebert.

His story begins in 1914 with the start of World War I with the Social Democratic Party unified save for Karl Liebknecht in supporting war credits to finance the war. The party splits a year later between pro-war (MSPD) and anti-war factions (USPD) with the majority supporting the war. In late 1917 and early 1918 with Russia’s withdrawal from the war a wave of optimism sweeps Germany. That was quickly dispelled as the Americans enter the war and the final German offensive is crushed in August of that year. Nevertheless, even with potential defeat Germans remain optimistic that President Woodrow Wilson’s Fourteen Points would lead to a just settlement.  

With Germany headed for defeat in the fall of 1918 a revolution starting with sailors in Kiel spreads throughout the country. Unlike the French and Russian revolutions which started in the capitals, here the German revolution starts in the periphery and ends up in Berlin in November.  On November 9 a republic is proclaimed in Weimar with Friedrich Ebert as its president.

Then things go to hell in a handbasket. A revolution from the Left is orchestrated by the Spartacists Karl Liebknecht and Rosa Luxemburg. That revolution is crushed by the army with the rightwing paramilitary Freicorps. Similarly the so-called Bavarian Soviet Republic in Munich is again crushed by the army and the paramilitaries. Here we see Ebert showing no mercy for his former colleagues on the Left. From the Right there is the Kapp Putsch which is put down by Ebert calling for a general strike. Ebert and the MSPD genuinely believed in democracy and order and even though they were men of the Left, they rightly feared the chaotic consequences of a Bolshevized Germany.

So here we have new government challenged from the Left and the Right and further it is demoralized by the harsh terms of Versailles in complete contradiction of what they believed to be the moderate terms of a Wilsonian Peace. Simply put, they were sold out by Wilson. And if that were not enough the government faces a French occupation of the Ruhr, a runaway inflation and the assassination of its highly regarded finance minister, Walter Rathenau.  Yes despite all of this by 1925 the government is stable, the center parties are in control and the extreme parties of the Right and Left are marginalized. It would take a global depression and a conspiracy of the Right and the Left to bring down Weimar. Absent that, sitting from the vantage point of 1925, the prospects for Weimar looked good.

My two quibbles with Gerwarth’s book is that he spends way to little time on the events of 1920-23 that he advertises in the beginning and he doesn’t spend much time on the role of the nonsocialist center parties had in forming the government. Otherwise “November 1918” makes for interesting history.

For the full Amazon URL see: https://www.amazon.com/review/R1W9DUGA4109F4/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of A.J.Baime's "Dewey Defeats Truman: The 1948 Election and the Battle for America's Soul"

Never Give Up, Never Sit on a Lead

Political journalist A.J. Baime tells the often told story of Truman’s come from behind victory over Dewey with great insight and drama, no easy feat. Simply put President Harry Truman never gave up and New York Governor Thomas Dewey sat on a lead. Further Truman was handicapped by having Progressive Henry Wallace run to his left and Dixiecrat Strom Thurmond run well to the right thereby splitting the Democratic Party.

Of interest is that contrary to the title the election was not about America’s soul. Dewey and Truman agreed on international affairs, expanding social security, supporting a federal role in housing and on civil rights. As governor of New York Dewey pushed through the first major civil rights legislation in country. To be sure during the campaign Truman was far more full-throated in his support for civil rights. Dewey along with his running mate California Governor Earl Warren were perhaps the two best governors in America at the time. Had they won, my guess is that it would have been a successful administration.

What Truman understood is that there was a fundamental split between liberal Dewey and the largely conservative congress. Truman was not running against Dewey, per se, but rather on cross country whistle stop tour he lambasted the do nothing Republican Congress while begging for cash to keep the campaign going. While Truman was outlining specific programs, Dewey was mouthing the platitude of “unity.”

Truman had more on his mind than winning re-election. He was running the Berlin Airlift, negotiating with the Russians in Paris and dealing with the Arab-Israel War. He also found the time to order the integration of the armed forces.

Baime is especially good on his discussion of the Wallace campaign, a campaign largely run by a Communist Party cell. Wallace praised Stalin and attacked the Marshall Plan with great vehemence. Along the way he attracted a coterie of celebrities who objectively acted as, in Lenin’s term, “useful idiots.”

Then why did Truman win against all odds and with 90% of the newspapers against him including The New York Times. Baime suggests it was a combination of broad prosperity, strong labor union support, the Black vote in the great urban centers, technical changes in farm legislation that made it hard for farmers to profitably store their 1948 bumper crop and perhaps most important, the American people admired Truman’s spunk. It makes for a great read.

For the full Amazon URL see:https://www.amazon.com/review/R1J52ZAO05J9HG/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv 

My Amazon Review of David Paul Kuhn's "The Hard Hat Riot: Nixon, New York City and the Dawn of the White Working-Class Revolution"

The Day the New Deal Coalition Died

On May 8, 1970, the 25^th anniversary of VE Day and four days after the Kent State shootings a mob of construction workers, many of whom were veterans, assaulted a large group of anti-war demonstrators in New York’s financial district. With great acuity political journalist David Paul Kuhn not only describes with fully sourced details the progression of the riot, but he also sets the stage by describing the New York City of the 1960s and the political aftershocks of the riot.

For the most part the police stood by as the construction workers assaulted the demonstrators. After all the police sympathized with them and they lived in their neighborhoods. Theirs were the neighborhoods of Staten Island, Queens and Brooklyn, not the elite upper eastside of Mayor Lindsay and the suburbs of Westchester and Long Island from whence most of the students came. Simply put is was a class war. Remember the Vietnam War was fought by the children of the working class of all races, not by the children of the elite.

Interestingly the construction workers also opposed the Vietnam War, what they didn’t like is the appearance of a strain of anti-Americanism among the antiwar demonstrators. Removing American flags from flagpoles and shouting support for the Viet Cong hardly improved the situation. But perhaps far more important was the image of privileged upper-middle class college students protesting a country that had given them everything. The typical construction worker only wished that someday his children would be able to go to college.

Beneath the veneer of a construction boom in low Manhattan (i.e. the World Trade Center was under construction) New York City was falling apart. Crime was rising rapidly and the profligacy of the Lindsay Administration was undermining the fiscal health of the city. Further the workers knew that they not only would pay higher taxes to fund the fiscal profligacy of the city, they would also bear the brunt of school busing and scatter-site public housing projects.

In the White House President Nixon and his aide Pat Buchanan were watching with great interest. In the hard hat riots the saw the collapse of the New Deal coalition which at its core was the white working class. To the extent that the Republican Party could pick off these voters a political realignment of monumental proportions could take place. The fruits of which were harvested 10 years later with Reagan’s victory in 1980 and in 2016 with Trump’s surprising win. Simply put the Democratic Party became an image of Mayor John Lindsay’s coalition in New York City, upper-income liberals, minorities and young voters and that coalition haughtily looks down as white working class voters as know-nothing racists. That is certainly not the way Franklin Roosevelt viewed them.

To me Kuhn’s book was very personal. I grew up in middle-class Queens and in 1970 I was going to graduate school in Los Angeles after just getting out of the army.  While in the army I watched with my fellow soldiers the demonstrations at the 1968 Democratic Convention in Chicago. Most of us were all for the demonstrators until they flew the Viet Cong flag and with that most of their support melted away. To me that reaction typified the hard hat reaction two years later. In 1972 I canvassed the working class neighborhoods of Los Angeles with other veterans for George McGovern and after that experience I knew McGovern was a goner.

Now 50 years later, America has changed. The white working class is a shadow of what it once was and for the most part real wages have gone nowhere so perhaps the Democrats can resurrect the Lindsay coalition in 2020. But I would warn them that with crime once again on the rise, public safety will once again become a potent political issue that will affect all races. Read this book to see how we got here.

For the full amazon URL see: https://www.amazon.com/review/RW7IZ05D0KKZB/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Steven Johnson's "An Enemy of All Mankind: A True Story of Power and History's First Global Manhunt"

Piracy on the High Seas

Steven Johnson tells a true story of how a 1695 mutiny on the British ship Charles II, renamed Fancy, led to an historic act of piracy off the coast of India a few months later. Henry Every capably leads his band of pirates to capture the Indian treasure ship Gang-i-Sawai loaded with a thousand pilgrims on their way back from Mecca. Once on board the pirates raped, pillaged and plundered their way to about $20 million in bounty. One of the victims was the granddaughter of Grand Moghul Aurangzeb.

Because the pirate ship was waving the British flag it leads to the jailing of British East India company officials. It is with that Johnson tells of the intrigues within the East India Company both in Britain and India designed to maintain the company’s tenuous position in India. To avenge the piracy Britain authorized a global manhunt to bring Every and his band to justice. They are called “hostis human generis” or enemies of all mankind.

Every escapes first to the Bahamas and it is there the crew splits up. Some going to America and others going to Britain and Ireland. Some get captured, others not. Along the way we learn about pirate life and the egalitarian nature of governance aboard ship and the equitable sharing of the bounties earned. It was a hardship filled risky life, but if successful the rewards were great.

Meantime as a result of British efforts, the East India Company entrenches its position in India and lays the basis for the empire that was to come. The book is far more interesting on the pirate side then on the politics of the British position in India. One thing I would have liked to learn is how Every learned and used his navigational skills, first to intercept his prize and later to make the journey to the West Indies, no easy task in 1695.

Johnson tells a good story and there is much to learn about the globalizing world of the late 17^th Century.

For the full Amazon URL see: https://www.amazon.com/review/R1D9QYTSQVXCEK/ref=pe_1098610_137716200_cm_rv_eml_rv0_rvReview of 

My Amazon Review of Matthew Klein's and Michael Pettis' "Trade Wars are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace"

Global Keynesians

Barron’s economics columnist Matthew Klein and  Peking University economics professor Michael Pettis have written a widely discussed book bemoaning the global savings glut that they believe to be the cause of the increase in trade tensions over the past two decades. And it is the high rate of savings by the wealthy that reduces aggregate demand globally thereby suppressing output and wages. It is Keynes’ classic under-consumption view of the world. Klein and Pettis try to prove their point by examining the economies of China, Germany and the United States.

But before that they go through a serious history of trade policy and economic crises from the 1820’s on. Unfortunately they make a few mistakes along the way. They admire Henry Clay’s American System of tariffs, internal improvements and national bank. However they ignore the secret sauce of American protectionism in 1800s, that being a tidal wave of immigration. Instead of importing products, America imported labor, much of it skilled. When immigration was cut-off in the 1920s and record high tariffs were imposed, the economy collapsed into the Great Depression. Along the way the authors surprisingly have some nice things to say about the gold standard.

Klein and Pettis early on cite Keynes’ discussion of how well the French economy fared with the payment of an indemnity arising out of their defeat in the Franco-Prussian War. What they leave out is that the excess savings generated by the French economy in the 1850’s and 1860’s was the source of funds. Hence what the Asian nations and Russia learned after the 1997-98 crisis, was the need for central banks to establish precautionary balances. It is those balances that make nation resilient to the vagaries and vicissitudes of the international economy. And as Klein and Pettis rightly note, the Asian and Russian response to the crisis greatly contributed to the savings glut.

The overarching thesis of the book is that capital flows drive trade flows. Simply put a trade deficit in the U.S. requires a capital inflow and a trade surplus in China requires a capital outflow. The authors use accounting identities to make their point. However accounting identities do not define causation because other items are not held constant. For example an increase in government spending, other things being equal increases GDP, but other things do not remain equal as consumption or investment or exports could be simultaneously reduced.

The authors make a very straight forward case that China should reduce its exports, which line the pockets of the Communist Party Bigs and the industrial elite at the expense of the workers. In turn the economy should shift towards domestic consumption through a policy of higher wages and a stronger social safety net. That all makes sense, but the high wage-stronger social safety net policy is inimical for the trade deficit-prone United States. All that would do is increase the U.S’s trade deficit.

Klein and Pettis also offer up other polices one of which is akin to modern monetary theory. Simply put, if the world is short of safe assets, the U.S. should sell all the bonds the rest of the world is demanding. They leave unsaid the impact of that policy on the foreign exchange value of the dollar. They also believe that the Dollar Standard that the global economy is now is instead of it being an exorbitant privilege, it is now an exorbitant burden. They would substitute Keynes’ Bancor, an idea that failed at the 1944 Bretton Woods Conference, but it is certainly worthy of discussion today.

There was one line in the book that really intrigued me. The authors note that the three areas of intense government involvement; housing, healthcare and higher education are the primary drivers of U.S. inflation. I would suggest that it would be in keeping with their concern about the immiseration of the U.S. working class to focus their next book on this topic.

To sum up, the Klein-Pettis book is being taken very seriously in policy circles and it could very well have a real influence on a potential Biden Administration. It is worth a critical read.

For the full Amazon URL see: https://www.amazon.com/gp/customer-reviews/R4B7PKBQT8DPR/ref=cm_cr_arp_d_rvw_ttl?ie=UTF8&ASIN=B087TJKJRQ