Tuesday, August 23, 2016

Monetary Policy on the Eve of Destruction

The world’s central bankers will meet later this week at their annual confab in beautiful Jackson Hole, Wyoming. The meeting’s topic is “Designing a Resilient Monetary Policy.” All of that is well and good, except monetary policy has reached a dead end. Simply put after eight years of QE, zero interest rates, negative interest rates, corporate bond buying and forward guidance all the central bankers have succeeded in placing the entire financial system on the eve of destruction.

To be sure their policies likely avoided The Great Depression 2.0, but that that was six years ago and along the way asset values were boosted to levels unimaginable only a few years ago. But not only does a low interest rate policy increase asset values; it also increases liabilities and undermines the profitability of the banking system. Simply put there is very little margin left in bank lending thereby jamming the monetary policy transmission mechanism through the banking channel.

More important the decline in interest rates exploded the explicit unfunded liabilities associated with public and private pension plans which now stand at $3.4 trillion (using private sector accounting rules) and $560 billion, respectively. In Europe the situation is far worse. The fundamental issue is that plan sponsors never contemplated a sustained period of extraordinarily low interest rates. Where once an 8% rate of return on plan assets was viewed as conservative, now a 6.5% return can rightly be viewed as aggressive. Similarly discount rates have dropped from around 6% to the 3-4% range. Remember bond math the lower the discount rate, the higher the liability. As a result under the current regime most plans are effectively bankrupt which will require either a cut in future benefits or a substantial increase in contributions/taxes. How can that be conducive to growth? Similarly the same dynamics apply to life insurance and annuities.

Moreover implicit retirement liabilities have also exploded. How so? In a low interest rate regime individuals have to put more money away in their 401k’s and IRA’s to meet their retirement goals. Thus instead of low interest rates working to reduce savings, the real world result yields higher savings, thus turning on its head microeconomic time preference theory. This phenomenon of higher savings in the face of lower interest rates and higher asset prices is one of the reasons that monetary policy has not ignited a consumption boom.

Thus when the central bankers meet later this week they had better recognize they are at the end of their rope. By excessively using monetary policy over the past eight years the bankers have destroyed its efficacy. As Fed Vice Chairman Stanley Fischer noted last week, perhaps it is time for fiscal policy and regulatory reform.

Thursday, August 11, 2016

My Amazon Review of Max Hastings' "The Secret War: Spies, Ciphers, and Guerrillas, 1939-1945"

Sigint, Humint and the Focus of the NKVD

Journalist/historian Max Hastings has written an encyclopedic history (640 pages in the print edition) of the secret war being fought by all sides during World War II. It is too much for the average reader, but that being said one comes away with the view that signals intelligence (sigint) was far superior to human intelligence (humint) over the course of the war with the notable exception of the role of the Soviet NKVD and its military counterpart the GRU.

The heroes of the book are the quirky academics, most notably Alan Turing, at Bletchley Park in breaking the German enigma code and America’s unsung hero Joseph Rochefort who by the dint of intense effort, broke the Japanese naval code. What Bletchley did was to enable the British navy to locate German submarine traffic, a fete that was instrumental to winning the Battle of the Atlantic. Similarly Rochefort code breaking enabled America’s surprise attack at the Battle of Midway which changed the course of the war in the Pacific. It also enabled to ambush Admiral Yamamoto in flight over the South Pacific. Sigint also broke the Japanese diplomatic code which enabled the Allies to listen in on the correspondence of the Japanese ambassador to Berlin on his transcripts to Tokyo enabling the allies to understand Hitler’s war strategy after 1943.

On the other hand the Soviet Union relied very successfully on humint. They had Richard Sorge working in the German embassy in Tokyo who supplied them with more than enough information to warn them about the pending German invasion. It was no avail, because Stalin refused to believe it. This highlights a fundamental problem with intelligence gathering; it has to be believed and it is vulnerable false information. Stalin also benefitted from his spies in Europe operating under the umbrella of “the Red Orchestra” or the “Rote Kapelle”. His agents there also warned him of the pending German invasion.

Unlike the other allied powers, Stalin spied on his allies, the UK and the U.S. The notorious Cambridge Five located in MI-5, MI-6 and the foreign office tipped him off on allied strategy. Thus at every summit meeting he knew the Roosevelt/Churchill positions going in greatly strengthening his hand. His spying on the U.S. penetrated the nuclear program thereby giving him the greatest intelligence coup of World War II and perhaps of all time. Stalin before anyone else understood that nuclear weapons were a game changer. Hastings portrayal of his agents and agent handlers in the U.S. is especially acute.

One of the key lessons that Hastings draws is that intelligence has no meaning unless the users of the information have forces on the ground to influence events. Thus knowing the position of German submarines is of no value unless you have destroyers ready to take them out.

Hastings also discusses the roles of both German and Japanese intelligence. The Germans were good early in the war, not so good later. And Admiral Canaris, the head of the Abwehr does not come off as a great spymaster. Similarly, the same goes for Major General William Donovan of the American OSS. However he does give credit for the research and analysis section of the OSS in its understanding of the German economic capabilities.

Hastings has written a long book and this review does not give true justice to it. I recommend it for those interested in the craft of intelligence and its role in World War II.  

The full amazon URL is:

Saturday, July 30, 2016

Why This Republican is Voting for Hillary Clinton

I will vote for Hillary Clinton in November. I will do this knowing full well that Hillary Clinton has more baggage than United Airlines and that she would nominate Supreme Court justices that would do violence to the First, Second and Fifth Amendments to the United States Constitution. She flat out lied about her home brew server and was careless with the classified information on it; thereby imperiling national security.  I recognize that she is owned in fee-simple by one of the most reactionary groups in America, the public employee unions. Further I assume that the SVR, the foreign intelligence service of the Russian Federation, will cause to be released documents showing a very unsavory connection between Hillary Clinton’s actions as Secretary of State and the Clinton Foundation.

Had Trump not been nominated, I would have proudly voted for Marco Rubio, John Kasich or Jeb Bush and would have supported Scott Walker, Chris Christie and yes, Mike Pence. But compared to these candidates Donald Trump lives on another planet. Simply put he is not a Republican or a conservative as we have known those terms to be defined.

So you might rightly ask, why will I vote for her? The reason is simple. Hillary Clinton, as cynical as she sometimes can be, believes in America and its values. Trump does not by wanting to establish religious tests for immigration and ethnic tests for judges. She is open to the world; Trump is not. Donald Trump believes in only himself. As Khizr Kahn, the Muslim father of a slain U.S. Army captain noted at the Democratic Convention of Trump: “You have sacrificed nothing.”   And hopefully we will soon know the contents of Trump’s tax returns which will demonstrate that he is not as rich as he says he is, has given only pittance to charity and has played the tax code like an aria by paying a minimal amount of taxes. The media should think about not covering him until he releases his tax returns, like every modern candidate for the presidency. Why do they let him get away with it?

Trump represents a steak of authoritarianism that goes back to the proto-fascist America First movement of the early 1940s championed by Charles Lindbergh. He doesn’t have a clue about foreign policy and has no advisers of stature, military or diplomatic. This is evidenced by his “bromance” with Putin and his playing fast and loose with our commitments to NATO. In contrast Hillary Clinton is a tough minded foreign policy realist who understands the dangers we face with Putinism and ISIS.

As I wrote in two prior blog posts (http://shulmaven.blogspot.com/2014/05/reliving-1930s.html and http://shulmaven.blogspot.com/2014/08/reliving-1930s-part-2.html )  we are in the process of reliving the 1930s where Russian expansionism in the Ukraine is analogous to Hitler’s moves in central Europe and the rise of antisemitism in Europe today has a parallel to that dark era. Similar to the 1930s, Trump wants to close America off from the rest of the world. He doesn’t realize that we benefit from trade and immigration. To be sure there are losers in the process and we as a society have to do much better for them going forward.

Further, if you think Hillary has a problem with the truth, she doesn’t hold a candle to The Donald’s prevarications. Simply put, as the old adage goes, “How can you tell when Trump is lying? Answer: When he is moving his lips.”  You really can’t tell from one day to the next what he will say and whether or not he will say the same thing again the following day. He is an unstable egomaniac who is unfit for public office, any office. That is why I will be voting for Hillary.

Now I will close with some internal Republican Party dynamics. We brought Trump on ourselves. The Congressional leadership, K-Street lobbyists and public policy intellectuals (save a few) only talked to themselves. They had no clue as to what was going on out in the country and became completely out of touch with the working class base of the Republican Party. Instead of the toney restaurants of D.C., I suggest they visit the fast food joints and bars of the Midwest and South. Simply put a whole lot of soul searching is ahead of us.

Tuesday, July 19, 2016

My Amazon Review of Baruch Lev and Feng Gu's "The End of Accounting and the Path Forward for Investors and Managers"

Tension is Mounting in Financial Accounting

Accounting Professors Baruch Lev and Feng Gu have written a very important book on the need to update century old accounting practices. They open their book by presenting the financial statements for U.S. Steel in 1902 and 2012. There point is that not much has changed from an accounting standpoint, but from an economic standpoint U.S. Steel’s profitability dramatically declined over the century.

Lev and Gu describe in great detail the accounting and finance literature demonstrating the 50 year decline in importance of traditional accounting data’s influence on stock prices. Although stock prices do move in the very short run in response to earnings announcements, over the intermediate term they respond far more to non-accounting data.

According to Lev and Gu the problem with current financial accounting is that it ignores intangible assets that are developed internally, for example research and development, trademarks and investments designed to improve organizational efficiency. All of those expenses are expensed. The authors would capitalize them, which is exactly what occurs when those assets are acquired in a merger or by individual purchase. Second accounting today is more about estimates rather than hard facts. These estimates would include the provision for bad debts, pension expense, stock option expense, and even revenue recognition. Finally accounting does not take into account such unrecorded events as the receipt of a patent, a new drug approval, the signing of an important contract, and the rise or fall in the number of subscribers. It is this last category that seems to matter the most to investors. For example yesterday Netflix reported better than expected earnings, but far fewer than expected new subscribers. The result the stock dropped 15% in a heartbeat.

To remedy the situation Lev and Gu would like to see corporations present a more fuller “Strategic Resources and Consequences Report.” This is really a very enhanced management discussion and analysis section that would take into account the issues raised above. The problem here is whether accountants are capable of producing such a report and whether or not management would be candid enough to put it in writing. One would hope so, because it goes to the heart of what serious analysts are interested in.

This is not an easy book for the lay reader, but for the professional investor and manager “The End of Accounting” is a most useful book.

The full Amazon URL is:


Thursday, July 14, 2016

Tuesday, July 5, 2016

Hillary Bumper Sticker - Not Indicted,Vote Hillary

F.B.I. Director  James Comey walked right up to the line of recommending a charge of criminal negligence against Hillary Clinton, but he did not cross it. Instead he declared that she was "extremely careless" with the handling of Top Secret  information. There goes all of her prior denials about sending and receiving classified information. He further noted that she "should have known that an unclassified system was no place for that conversation." Indeed Comey noted how lax Hillary's State Department was with the whole process of handling classified information. Hardly the hallmark of a good manager.

Although she was not charged criminally, if she were still Secretary of State it would be grounds for impeachment. Further, if any government employee with a Top Secret clearance were so cavalier in handling such information, at minimum that employee would have had their clearance suspended, more likely would be fired.

As a result, this issue ain't going away.