A Change in the Weather: Is the Summer Rally Over?

 After advancing four straight weeks taking the S&P 500 up 17% of its June low, socks retreated 1.3% in the past week. However, beneath the surface the damage was far greater with the leading edges of the bear market and the recent rally falling by a far greater amount. For example, Cathy Wood’s Ark Innovation ETF is now off 13.5% from its recent high and Bitcoin, the poster child of the bull and bear market, is down a similar 12.5%. As we noted previously crypto currency has been deeply embedded in both the bull and bear cycles. (See:  Shulmaven: The Crypto Crash and the Bear Market in Stocks)

 

When we wrote two months ago, we thought the bear market was entering its “anger phase.” (See: Shulmaven: The Bear Market Enters the Anger Phase ) It seems that lasted for only about a week as stocks embarked on the previously discussed 17% rally. For awhile it seemed that all anger had left the market as high valuation money losing companies led the charge and the “meme” stock mania returned in near full force.

 

Nevertheless, under the surface all is not well. The great bond rally that took 10-year yield down from 3.48% in June to 2.60% in early August has reversed with the yield closing at 2.99% on Friday. Further the market seems blind to the fact that inflation is not quiescent. As of July, the CPI is up 5.4% from the start of the year and by December, using some very modest assumptions, it will still be up 6.5% on a year-over-year basis. Similarly, with the core CPI is up 3.7% thus far this year, it more than likely than not, it will close out the up around 6.3%. 

Further you have to remember that if the CPI were calculated on the same basis as it was in the 1970’s, inflation would have peaked in the 12%-13% range, not the 9.1% reported. With data like this, the Fed will continue to tighten policy making it more likely than not, the terminal funds rate will exceed 4% and we have yet to see the full force of its quantitative tightening program which will start in a few weeks. That action will double its balance sheet shrinkage from $45 billion/month to $90 billion/month. We will learn much from the Fed this week when Chair Jay Powell delivers his remarks at the annual Jackson Hole Conference.

 

So just as summer turns to fall, the recent rally is likely over, and the anger phase of the bear market will resume. My guess is that we are heading for a retest of the June lows. Only then will we move to the final acceptance stage of the bear market.

My Amazon Review of Matthew Continetti's : The Hundred Year War for American Conservatism"

 

Triumph and Tragedy

 

As I write this Liz Cheney, the scion of Reagan Republicanism and what used to be the heartbeat of American conservatism, lost her primary battle to a Trump acolyte in Wyoming. Simply out, the Republican Party is no longer a conservative party, but rather a cult of personality populist party. This is the end point of Matthew Continetti’s hundred-year history of American conservatism. Continetti, now a fellow at the American Enterprise Institute, has been a writer/activist on the conservative scene for two decades and is the son-in-law of William Kristol, a leading neoconservative and one of the foremost anti-Trumpers on the Right.

 

Continetti begins his history in the 1920’s when the conservative Republican Party stood for protectionism, anti-immigration and more or less and isolationist foreign policy. Sounds familiar, doesn’t it. However, there is a major difference from today that Continetti doesn’t mention. That is in the 1920’s conservatives were an optimistic bunch believing in the new technologies of automobiles, electrification, radio, aircraft, and talking pictures that was underpinning an economic boom. Thus, when the Great Depression came, it was truly a shock turning optimism into pessimism about the future of the country under the New Deal.  

 

As a result, conservatives stayed in the political wilderness for years as the Democratic Party and liberal Republicans dominated the scene. However, beneath the surface a disparate group of conservatives rallied around anticommunism and the leadership of William Buckley and his National Review. Elitist to the core Buckley and crew became the backbone of conservative revival, but beneath the surface their remained vestiges of racism, antisemitism, and authoritarianism. Those would resurface many years later.

 

When liberalism cracked up under the strains of the Vietnam War and the stagflation of the 1970’s, conservatives were ready to seize the mantle of power. Instead of the dour conservatism of say, 1940’s Bob Taft, conservatives were led by the sunny optimism of Ronald Reagan who offered economic growth at home and the defeat of communism abroad. Reagan united social, economic, and foreign policy conservatives under one banner. However, the Soviet Union collapsed in 1991 and with that the unity of the conservative movement fell.

 

In fact, one year later, in a forerunner to Trump, Pat Buchanan mounted a populist challenge to President George H.W. Bush and soon Ruch Limbaugh would dominate the airwaves of talk radio.  For a time, the conservative establishment held these forces in check, but failures in the Iraq War and the Great Financial Crisis destroyed its legitimacy. All the while a populist revolt was brewing against trade, immigration, and foreign wars that Continetti and his intellectual buddies in the think tanks and K-Street were oblivious to. They were too busy talking to each other rather than going out into the country to visit the dive bars and fast-food joints of the Midwest and the South. They soon would have discovered that there was a revolt brewing against the know-it-all coastal elites of both parties who in the words of Hillary Clinton, called them “deplorables.”  I hate to break it to Continetti, but all too many conservatives felt the same way.

 

Continetti’s goal is to blend historical conservatism to the new populism. My guess is that train has passed the station, at least for now. When CPAC features Hungarian autocrat Victor Orban as a speaker, you know the world has changed. Thus, it looks like that conservatives will once again be spending long years in the wilderness. If it is to recover it will have to come with an optimistic vision similar to what happened in the 1920’s and the 1980’s.

For the full Amazon URL see: Triumph and Tragedy (amazon.com)

 

My Amazon Review of Michael Benson's "Gangsters vs. Nazis"

 

The Jewish Gangster Army

 

In the late 1930’s Nazism was on the rise, even in America. There were two very active Nazi groups, the German American Bund and the Silver Legion who spewed out Hitler’s hateful rhetoric. Alarmed by the growing Nazi menace New York Judge and former congressman Nathan Perlman calls the gangster Meyer Lansky to ask for help. As evil as the Mob was, sometimes the Lord works in mysterious ways. This is where Michael Benson’s story begins.

 

Yes, Perlman was a judge, and it seems that he had every major Jewish gangster in America on speed dial, to use an anachronism. How a sitting judge had such access one can only speculate, but given his closeness to the Mob, it wouldn’t be surprising if he were on their payroll. Benson is silent on this issue.

 

What Perlman asks of his literal murderers’ row of gangsters is to directly take on the Nazis and break up their rallies. These would include the aforementioned Meyer Lansky, Bugsy Siegel, Leo “Lepke” Buchhalter, Longy Zwillman, Moe Dalitz, and Mickey Cohen. He was indifferent to the fact that most of their rallies were lawful. Nevertheless in New York, Newark, Chicago, Minneapolis, Cleveland, and Los Angeles the mob breaks up Nazi rallies with brass knuckles, baseball bats, pipes, stink bombs, and sawed-off pool cues. Also in the mix was the famed Jewish boxer, Barney Ross. Although quite illegal and certainly offensive to civil liberties sensitivities, it showed the world that Jews were no longer the cowering masses of the shtetl, but they actually could fight. This would be proven out in the resistance to the Nazis in occupied Europe and the in the nascent Jewish army in Palestine.

 

One interesting sidelight that Benson points out is that one of the Chicago mobsters was a man named Sparky Rubinstein. He would later turn up 25 years later as the Jack Ruby who assassinated Lee Harvey Oswald. Part of the antisemitic milieu of the 1930’s the radio priest Charles Coughlan. His publication was called “Social Justice.” This is a real irony for me in that social justice has become the new religion in much of America’s Jewish community.

 

With antisemitism on the rise today on both the Left and the Right, Benson asks who will defend the Jewish community today?  My criticism of the book is that sometimes it gets too detailed and is too pedantic, but it is still a great story.

For the full Amazon URL see: The Jewish Gangster Army (amazon.com)

My Amazon Review of Mark Leibovich's "Thank you for Your Servitude"

 It’s a Miracle we Survived

 

Former New York Times reporter and current Atlantic writer Mark Leibovich has offered up a readable, humorous, and a downright scary account of the Trump years, which are unfortunately still with us. He spends most of his time not on Trump, but rather on his bootlicking lackeys in the Republican Party and a coterie of sycophantic hangers on in search of lucre. It is a miracle the country survived Trump’s four years in office.

 

What becomes very clear is that the Republican Party has become a party of moral eunuchs. With the few honorable exceptions of the late John McCain, Mitt Romney, and Liz Cheney the party luminaries cowered before the great orange one. It makes you want to puke just to think about all of these grifters at the seat of power living large and paying tribute at the Trump International Hotel.

 

I met Donald Trump at a business breakfast at the Plaza Hotel in 1992. It was obvious to me that he was a complete slime and what boggles the mind is how he conned the Republican electorate which then forced his acceptance on the grand poohbahs of the party, who were in on the joke all along. Yet, they did nothing. It was all about power.

 

What is most troubling is thus far from there has been no real explanation how this spoiled child of privilege has such a hold a large chunk of low-income white Americans. Trump doesn’t have a clue about the lives they live, and he really can’t stand them. The standard explanation on the Left is racism, but that does not account for Trump’s and the Republican Party’s growing support in the Latino community.

 

My explanation is that Trump channels their disgust with America’s cultural elite who constantly look down on their folkways by thinking of them as, using Hilary Clinton’s word, “deplorables.”  Afterall it is hard to support a Democratic Party that foists pronouns and the ill-conceived term Latinx down the throats of the general public. Thus, it pains me to say it, a Trumpy Republican can win again.

For the full Amazon URL see: It's a Miracle we Survived (amazon.com)

 

 

My Amazon Review of Andrew Lo's and Stephen Foerster's "In Pursuit of the Perfect Portfolio:........."

 

Thinking About Retirement Portfolios

 

Finance professors Andrew Lo and Stephen Foerster have given us a tour or modern finance theory through the lives and ideas of its leading academics and practitioners with the goal of coming with a “perfect” retirement portfolio. He starts his intellectual history with the mean-variance work of Harry Markowitz and then goes on to discuss the “betas” of Bill Sharpe, the efficient market hypothesis of Eugene Fama and the options pricing world Black-Scholes/Merton. We also have Jeremy Siegel who’s “Stocks for the Long Run” became the bible of the 1990’s bull market, yet Siegel did call the top in the NASDAQ in early 2000.

 

His practitioners are index fund founder John Bogle, pension consultant Charles Ellis and bond guru Martin Leibowitz. We also have the behavioral economist Bob Shiller of irrational exuberance fame. In the interests of full disclosure Marty Leibowitz was my boss for a time at Salomon Brothers and I worked with Myron Scholes there as well. I also first met with Bob Shiller at the infamous Fed meeting on the stock market in 1996 where I was a participant.

 

What all of them had in common is that they were math “nerds” as kids. Further something must have been in the water at the University of Chicago and M.I.T. in the late 1960s. It was at those two places along with Sharpe’s UCLA that modern portfolio theory exploded on to the scene. For my perspective I received an MBA from UCLA in January 1966 in finance where modern finance was barely discussed and four years later when I returned for a Ph.D. in finance it was all that was discussed.

 

So, what is an investor contemplating retirement to do? The general consensus is that there is no generic retirement portfolio. It depends on the individual investor’s tolerance for risk and consumption patterns. Within that framework nearly all of them would recommend low-cost index funds and TIPs. There is some support for the traditional 60/40 stock bond portfolio, but Siegel and Ellis are skeptical of bonds when interest rates are extraordinarily low as they have been for the past several years. However, this presents a quandary, if bonds can be over-priced why can’t stocks be and vice versa. This is where Shiller’s cyclically adjusted price earnings ratio might be a tool to be used qualitatively.

 

Several of them recommend adding international stocks through a low-cost index fund, small cap stocks and value stocks to the mix. Although this was certainly theoretically sound around the turn of the century, over the past two decades those substitutions within an equity portfolio would have severely detracted from investing the S&P 500 alone.

 

My criticism of the book is that it gives to great a weight to the concept of efficient markets. While the markets are efficient most of the time, that is always not the case. Witness the recent collapse of high value-money losing companies as an example. The authors mention the term “black swan,” in passing, but they do not mention Nicholas Nassim Taleb who popularized the term a decade ago. This omission is unfortunate because Taleb is one of the keenest critics of modern finance theory. Simply put the tails of return distributions are much fatter than in a normal distribution and the probability distributions are not stable over time. Moreover, we know our lives are path dependent, why shouldn’t markets be path dependent, at least, in some cases and especially when the economic regime changes.

 

Although cited, the 1900 dissertation by Louis Bachelier in Paris, should have been given more emphasis. As mentioned, Bachelier anticipated Einstein by five years on the idea of Brownian Motion, he also had a well-developed idea on the pricing of stock options that pre-dated Black-Scholes by 70 years. Specifically, he defined the notion of put-call parity which is essential for modern options theory to work.

 

Nevertheless, Lo and Foerster have written a very helpful book for investors seeking sensible guidelines for retirement planning and who also would benefit from modern finance theory.

For the full amazon URL see: Thinking About Retirement Portfolios (amazon.com)

A High Noon Moment for Liz Cheney in Wyoming

 Congresswoman Liz Cheney, the hero of the January 6th Committee, is fighting for her political life in her Republican primary election in Wyoming set for August 16th. Cheney is down 22 points in the latest poll against her Trump-backed opponent Harriet Hageman. Moreover it is no secret that Wyoming is Trump country and Cheney is further handicapped because she faces very credible death threats making it hard for her to campaign in the normal way.

So, what is she supposed to do? To me it is time for a High Noon moment. In that 1952 movie marshall Will Kane, played by Gary Cooper, stood alone against the notorious Miller gang as the town stood idly by. What Cheney should do, and I am aware that this will not be a movie, is that she should face off the death threats and campaign openly in the Wyoming towns and cities of Cheyene, Cody, Pinedale, and Rock Springs. This would stand in sharp contrast to Senator Josh Hawley's cowardly actions on January 6th.

Admittedly this is a high risk strategy, but it will gain the respect of all but the diehard Trumpies and it would amplify the role of stong women standing up to Trump today and a smilar strong woman tradition in Wyoming. I would note that the then Wyoming Teritory granted women the right to vote in 1869, fifty years ahead the 19th Amendment which granted women the right to vote nationally.

My Amazon Review of Walter Russell Mead's "The Arc of a Covenant: The United States, Israel and the Fate of the Jewish People"

 

America’s Changing Views on Israel

 

Bard College professor and Wall Street Journal foreign policy columnist Walter Russell Mead has written three books in one. The first is a history of the U.S- Israel relationship, the second a history of American foreign policy and the third is a recent history of domestic politics in the United States. In Mead’s view all three are inter-related. This book is above all on the how’s and why’s of the American view on Israel. I write this just as President Biden has left the middle east after visiting Israel and Saudi Arabia signaling a reconfiguration of the region’s chessboard.

 

At the outset Mead completely debunks the view that U.S.-Israel policy is controlled by the so called “Jewish Lobby.” To be sure there is a pro-Israel lobby, but it is far from controlling and it suffers from as many failures as successes. Further American presidents, Nixon, Reagan, W. Bush, and Trump who did much to cement the relationship between the United States and Israel were decidedly unpopular among the largely liberal Jewish community.

 

Mead starts his history in the late 19^th century where a group of Philo-semitic Protestants articulated the support for a return of the Jews to their ancient homeland. Steeped in the bible and the classics these Christians thought it was only natural for the Jews to have a state of their own especially after Greek independence earlier that century and the creation of new Rome in the form of Italy. These views predated Herzl’s Zionism.

 

Mead goes into great detail the policy arguments that took place in the Truman Administration concerning the formation of the State of Israel. His Secretaries of State and Defense were firmly against it, but Truman finally came down on the side of independence. Much was made at the time of the importance of the Jewish vote in the upcoming 1948 presidential election. However, Truman needed the support of the liberal internationalists under the leadership of Eleanor Roosevelt who viewed the success of the U.N resolution on Israel to be critical to that organization’s future. Truman needed to keep Roosevelt from supporting the far-left candidacy of Henry Wallace.

 

Of interest in 1948, Stalin, motivated by his need to make trouble for Britain and the United States in the middle east, gave the greenlight to Czechoslovakia to sell arms to Israel. Those arms made the crucial difference in Israel’s war for independence. It also supplied hard currency to the Czech’s who desperately needed it after turning down Marshall Plan aid.

 

As difficult as it seems today, the American Left was the home to most of Israel’s support in the 1950’s and 60’s. Israel, for all practical purposes, was a struggling socialist country supporting the dispossessed Jews of Europe and the Arab world. However, today the Left sees Israel as militaristic, capitalistic settler-colonialist state. It seems that the American Left just loves to penalize Israel’s success in building a modern state in an otherwise impoverished middle east. Those are the very attributes praised by the “Jacksonian evangelical Zionists” of the American Right.

 

Nevertheless, Mead leaves much out of his history. Not much is said about the 1956 Suez War where Eisenhower backs Egypt against Israel, France, and Britain; the 1982 Lebanon War which turned American public opinion against Israel, and the taking out of the Iraq nuclear program. Mead resumes his discussion U.S.-Israel relations in the 2000’s and highlights the failures of the magical thinking of George W. Bush’s neocons with the Iraq War and Obama’s with respect to the Arab Spring, Iran, and Israel. Ironically Obama’s missteps in region led the Abraham Accords and burgeoning alliance between Israel and the Sunni Arabs.

 

Although Mead supports the need for a Palestinian state, he like most others doesn’t present a roadmap to getting there. Regardless, Mead has offered up a work of history at its best.

For the full Amazon URL see: America's Changing Views on Israel (amazon.com)