The Fed's "Coup de Whisky" to the Stock Market

 Last week’s 50 basis point cut in the federal funds rate to 4.875% served up a “coup de whisky” to the stock market. Those words were spoken in July 1927 by Benjamin Strong, President of the New York Fed to Charles Rist, the Deputy Director of the Bank of France at secret central bank meeting on Long Island.* Much like today the U.S. economy was humming along, but Britain was rapidly losing gold. To take the pressure off the British Pound, Strong and several other regional banks cut the discount rate from 4% to 3.5%.

 

In response an already strong stock market was off to the races and would double over the next two years. That move put the roar in the roaring twenties. Although today’s circumstances are far different, but not so different; the economy is at roughly full employment, real GDP has likely grown at a 3% clip over the past six months, and inflation remains moderately above the Fed’s 2% target. Nevertheless, just like 1927 stocks roared in response to new highs.

 

The Fed’s move and it signals of further cuts of 100-150 basis points over the next nine months, is a bright green light for the stock market as investors now believe that the risk of recession is off the table and faster growth will ratify the very optimistic profits estimates for next year. I don’t think that we will repeat the late 1920’s blow-off but further new highs in stock prices appear likely.

 

Interestingly the yield on longer maturities increased. Why? On the margin the 50bp cut will increase both growth and inflation. The lower short-term interest rates will support corporate borrowing and auto finance. Housing, on the other hand, won’t be helped all that much because mortgage rates responding to higher long rates actually increased. That will force house buyers into variable rate paper.

 

The real risk in the Fed’s move is that inflation will not be as quiescent as it now believes. Simply put, the rate-cutting cycle that the market is banking on might be cut short.

* For a full discussion of this event see Ahamed, Liaquat, "The Lords of Finance" (New York: The Penguin Press, 2009) pp. 290-304

My Review of William Inboden's "The Peacemaker: Ronald Reagan, the Cold War......"

 Reagan v. Evil Empire

 

On March 8, 1983, President Ronald Reagan spoke before an evangelical conference where he called out the Soviet Union as “the focus of evil in the modern world.” This became known as his evil empire speech. Although he was roundly criticized for his choice of words, Reagan was dead right. University of Texas professor and former national security aide to George W. Bush, William Imboden rightly focuses on the ideological content of Reagan’s foreign policy which became known as the Reagan Doctrine in his deeply researched history.

Although known as a super-hawk during his career, Reagan’s goal was to seek peace through a negotiated surrender of the Soviet Union. In this task he succeeded and along the way he liberated Eastern Europe and started the process of reducing the huge stocks of nuclear weapon controlled by the U.S. and the Soviet Union.

Reagan’s policy was that of peace through strength. He orchestrated a huge arms build-up and started the Strategic Defense Initiative (Star Wars) which scared the living daylights out of the Soviet Union. Listening more to Andrew Marshall Office of Net Assessment in the bowels of the Pentagon than the CIA, he understood that the Soviet economy was far weaker than previously thought. (Shulmaven: My Amazon Review of Andrew Krepinevich's and Barry Watts' "The Last Warrior: Andrew Marshall and the Shaping of Modern American Defense Strategy") Simply put, the Soviets couldn’t keep up.

Inboden covers the shaky start of the administration where both his national security advisor and Secretary of State were fired. While looking to meet with the Soviets, three of their leaders died on him, Brezhnev, Andropov and Chernenko. But once Gorbachev came into power the way was open for both of them to achieve Reagan’s longstanding goal of reducing nuclear weapons. Reagan was aided by having A-players in his administration. These would include William Clark, George Schultz, James Baker, Jeanne Kirkpatrick, Paul Nitze, Colin Powell, and George H.W. Bush. It is sad that today A-players in today’s Washington, D.C. are few and far between.

Reagan really did care about human rights. He consistently supported the rights of Jews in the Soviet Union to emigrate. He worked hard to end the dictatorships in Chile, Taiwan, the Philippines, and Korea. He learned the lesson from Iran and Nicaragua, that right wing dictatorships despite being allied to the U.S., were brittle. Hence, he supported the transition to democracy among many of our allies.

Throughout his administration Reagan had the support of Margaret Thatcher, Helmut Kohl and especially of Yasuhiro Nakasone of Japan. He viewed Japan as our most strategic ally. He also received advice from Richard Nixon, mostly good, some bad; and Russia expert Suzanne Massie who came up with the “trust but verify” policy.

Inboden does not sugar coat the Iran/Contra scandal that nearly brought down his administration. How these presumably smart people got sucked into doing an arms for hostages deal with Iran and then using some of the proceeds to illegally fund the Nicaraguan Contras. You couldn’t make up the comedy of errors involved in this fiasco.

 

Inboden’s history of Reagan’s foreign policy sheds new light on this one of our most consequential presidents. It is well worth the read.

My Thoughts on the Harris -Trump Debate

 No Knockout, but a Clear Win for Harris

 

Although Vice President Kamala Harris did not “float like a butterfly, sting like a bee” in the words of Muhammad Ali, she clearly won last night’s debate. She came off as a cool and accomplished leader who many would see as presidential. In contrast Trump came off hot as the angry old man that he is. It is OK to show flashes of anger on television, but it is very hard to sustain anger for a full ninety minutes.

 

Harris was consistently forward looking, while Trump was looking back to the past. In a way Harris came off more as a challenger than Trump did. It was quite a trick for the sitting vice president to come off as the change candidate. On substance she was at her best in discussing abortion and weakest when talking about her changed positions. Here the ABC moderators failed in not following up on her radically changing views. They also failed in not focusing on the foreign policy and military challenges facing our country. It was Trump’s failure in not taking this fight to Harris. In a real sense, just like Biden two months ago, Trump lost the debate more than Harris won it.

 

Finally, to put a cherry on top of the cake, Taylor Swift endorsed Harris as soon as the debate ended.

The State of the Presidential Race

 Over the past two months the Democrats have risen from their severely depressed state of being in mourning over Joe Biden to an exalted manic state hailing Vice President Kamala Harris as their new savior. Last week’s very successful convention cemented Harris’ leadership in the party, and she is now a small favorite to win the election in November.  However, I would caution that the current manic phase can quickly turn once again to a depressive state.

 

The most important thing that happened at the convention was what did not happen. As many feared, including myself, the convention did not turn out to be a rerun of 1968. It went off flawlessly and Harris came out of the convention as a forward-looking optimist as opposed to Donald Trump’s backward-looking pessimism. Indeed, somehow the sitting vice president became the candidate of change and Donald Trump became the de facto incumbent. As I wrote in July, this will be the year of the anti-incumbent and if Harris can maintain her image as challenger she will win. ( See: Shulmaven: Incumbents Beware )

 

Further buttressing her position is that the propaganda organs  of the state (ABC, CBS, NBC, MSNBC, CNN, Washington Post, New York Times, Facebook, and TikTok)  gushed over her acceptance speech. (See: Shulmaven: America's Party Line )  So craven have the mass media been is that their unqualified support for Harris has yet to pass the test of a single interview. In fact, Time magazine did a hagiographic cover story on her without an interview, truly unprecedented.

 

Meantime Harris’ economic proposals have drawn criticism from even normally left-of-center quarters. Her proposals for price caps on groceries, rent control and a $25,000 tax credit for new home buyers make little sense. Of course, Trump’s proposals calling for mass deportations, tariffs on all imports and executive branch control over the Federal Reserve are zanier than what Harris has proposed.

 

The critical tests for Harris will come when she actually has to do real interviews and the September 10^th debate with Trump where she is the presumptive favorite. If Harris is to maintain the mantle of change, she will have to successfully answer the following question: On, what policies do you differ with President Biden? My guess is that she will be hard pressed to answer that question which will leave a big opening for Trump.

My Review of Joseph Kanon's "Shanghai"

 Shanghai Dreams, Shanghai Nightmares

 

This is the third historical novel by Joseph Kanon I have reviewed. (See: Shulmaven: My Amazon Review of Joseph Kanon's "Defectors: A Novel" and Shulmaven: My Amazon Review of Joseph Kanon's "Leaving Berlin: A Novel" )  Here the scene shifts from Europe to Asia where journalist Daniel Lohr is escaping 1939 Berlin via first class passage from Trieste to Shanghai. We learn later that Lohr had ties to the Comintern which would become useful. On the ship he as an affair with Leah Auerbach, another Jewish escapee from Vienna. Auerbach is received in Shanghai by a Jewish welfare agency aiding refugees from Europe. Also, on the boat was a Col. Yamada, a member of the Japanese secret police. We will see much more of him as the novel progresses.

 

Lohr’s trip was financed by his Uncle Nathan, a mobster from Berlin and the United States. He bailed from the U.S. after crossing the Mafia. Uncle Nathan puts Daniel in charge of running his new casino, The Gold Rush. He soon realizes that Nathan has partnered with two rival Chinese gangs in this venture that would ultimately put him in a crossfire.

 

As with his other novels Kanon gives us a real feel for the smells and the depravity of Shanghai as the international concessions await the full occupation of the Japanese. We also get a sense of the intrigue between the Japanese, the gangs, Chiang Kai-Shek’s government, and the rising communist movement. As with his other novels, Kanon tells the story with style and grace.

My Review of Percival Everett's "James"

 A Literate Runaway Slave on the River

 

Percival Everett has written an alternative version of Mark Twain’s “The Adventures of Huckleberry Finn.” Instead of Huck being the central character, the protagonist is Jim, the runaway slave. While Jim in public speaks like a slave, in private he is James, a very literate man who communes with the likes of Locke, Rousseau, and Voltaire. He has to keep himself from speaking like a man of letters because his owners and the public at large would become very suspicious.

 

The original Huckleberry Finn took place around 1840, Everett’s takes place in 1861. Similar to the original novel much of it takes place on a raft on the Mississippi around Missouri. We watch Huck and Jim fish, float on their raft, and run from slave hunters. The dangers on the river are apparent through unpredictable currents, river traffic and boats burning. Through it all Jim remains focused on his mission to free his wife and daughter who were sold to a slave breeder.

 

Through Everett we witness the everyday horrors of being enslaved. There are whippings, rapes, and the daily indignities of kowtowing to their masters. To me the book started slow, but after a while I caught up with its rhythm and humor and became thoroughly engrossed in the adventure.

America's Party Line

 In a recent article in The Free Press Niall Ferguson wrote that “We’re All Soviets Now.” (See: https://www.thefp.com/p/were-all-soviets-now)  Among the notions he discussed were our gerontocracy elite, declining health care for the average citizen abetted by alcohol and opiods, and the rise of the DEI apparatchiks. However, he left out another crucial factor. In America we have a party line that appears little different from the days of Pravda and Izvestia.

 

All you have to do is to look at the shifting party line on the Democratic nominee for president. Six months ago, President Biden was at the top of his game and fully capable of serving another four years. Then of a sudden in June, he was a doddering old fool who had to go. Once Biden withdrew there was to be a contested mini-primary, but in a day or two Kamala Harris became the anointed one. It would be enough to get a dedicated Kremlinologist’s head spinning.

 

With the exception of Fox News and a few heterodox media outlets, the media now speaks as one by being all-in for Harris and through it all Donald Trump, the new Trotsky, has to remain in exile from power. Although being anti-Trump remains the media’s lodestar, I would not be surprised that with respect to Kamala Harris, the fickle party line will yet again shift a few more times.