Too Soon for the Democrats to Break Out the Champagne

All of the signs are now pointing to a Democratic wave election this coming November. Both the President Trump and the Republican Congress are in the doghouse in terms of poll numbers and 2018 is looking like a mirror image of the Republican sweep in 2010. For example in the 2009/10 period the Republicans took the governorships in New Jersey and Virginia and won a surprise victory in the special election for a Senate seat in Massachusetts. This year the Democrats won in Virginia and New Jersey and won a special election for a Senate seat in very red Alabama. Moreover the Democrats passed Obamacare with a straight party-line vote and this year the Republicans passed a massive tax cut on a straight party-line vote.

So what's wrong with this picture? Unlike 2010 when the economy was in the dumps the economy appears to be entering a boom phase. The unemployment rate in November 2018 will approximate a very low 3.5%. Moreover the expectations for the Trump tax cuts are so low that most voters will be pleasantly surprised when they see the tax cuts in their pay checks in February and the real pain on the limitation of state and local tax deductions won't show up until tax filing time in 2019. Thus the Republican poll numbers have nowhere to go but up.

Of course we shouldn't under-estimate the ability of the Republicans to screw up. For example Trump could blow up NAFTA triggering a stock market drop and increasing the likelihood of a recession in 2019. And over all of this looms the ongoing Mueller investigation of the 2016 election and likely a host of irregularities in the Trump Organization.

As a result the Democrats will make big gains in the House of Representatives, but whether it will be  enough to take control remains to be seen.

My Amazon Review of Victor Sebestyen's "Lenin: The Man, the Dictator, and the Master of Terror"

Paving the Way for Stalin

Victor Sebestyen has written a masterful biography of V.I. Lenin in which he covers both the personal and the political. On the personal side it is obvious Lenin, the son of an upper middle class family was no proletarian. His tastes and lifestyle strived to be middle class. Although he lived austerely he was very sensitive for the need for creature comforts. He enjoyed mountain walks and hunting. He also skillfully managed his very socialist ménage a trois with his wife Nadya Krupskaya and his 10 year mistress Inessa Armand.

However it is on the political side where Lenin becomes a man of history. He was strategically inflexible in pursuing a socialist dictatorship for Russia, and oh did he succeed. Nevertheless on the tactical side Lenin was extraordinarily flexible and was willing to be expedient to further his strategic goals. He could be for democracy and against democracy, he could hate the Germans and then become their ally, and when “war communism” failed he flipped and supported the proto-capitalist New Economic Program (NEP). All of this was in the service of his communist dictatorship.

Sebestyan clearly portrays how Lenin paved the way for Stalinism. It was Lenin who created the Cheka (forerunner to the KGB) with its terror cells for political opponents. It was Lenin who initiated the forced grain requisitions from the peasantry and made villains out of the better off by calling them Kulaks. Stalin would kill millions of them a decade later. It was Lenin who attacked deviations from the Left and the Right turning those into anti-party enemies. And it was Lenin who showed no mercy when he crushed the Kronstadt sailors rebellion. All of this was in place by 1924, the year he died. All Stalin had to do was to refine it and make a cult out of Lenin in whose name he ruled.

On two minor notes, I am glad that Sebestyen highlighted the role of the Russian feminist Alexandra Kollontai as one who was very close to Lenin and was in the room when the decision was made to overthrow the Kerensky government in October 1917. I did catch one error in that Sebestyen described Armand Hammer as an oil magnate when he entered into deals with the Soviet government under the NEP. True Hammer was an oil magnate, but that came much later. In Russia he sold pencils.

All told Sebestyen has told the story of a personality whose iron will made Soviet communism possible. For reader interested in learning more about this period in history I would suggest the Stephen Kotkin biographies of Stalin.

For the full Amazon Review see: https://www.amazon.com/review/RD5VLEG2EEQ64/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

Mall Valuation Post Unibail-Rodamco/Westfield

Earlier this week France based Unibail-Rodamco announced the acquisition of Australian based Westfield, a major owner of A+ malls in the U.S. and Europe for a total valuation of $24 billion. There was a significant difference of opinion on the transaction between The Wall Street Journal and The New York Times today. The Times headline read "Acquisition Signals Hope For the Future of U.S. Malls," while The Journal headline read "Big Name in Malls Heads for the Exits." We side with The Journal.

This is our fourth blog on mall valuation this year and readers familiar with our view know that the Class A mall business is in transition from being a great business to a good business which implies higher cap rates going forward. According to sources we believe to be reliable,  the U.S. assets were valued at a cap rate in the high 4% range, say approximately 4.7%-4.9%. In our view the seller received more than a full price and we might just get a hint of that tomorrow when November retail sales are reported. It is our guess that although traditional retail did well, online retail had a blowout month.

We believe that Westfield's founding Lowy family came to the realization that their huge investments in redevelopment (e.g. Century City) and technology might not payoff and that future investments in redevelopment would be of a defensive nature. Hence it was hard to turn down an offer that approximated Street net asset value.

Nevertheless the stock market responding by boosting the share prices of Simon Property Group, Macerich and GGP. We would view rally as a selling opportunity if only because one of the potential bidders (Unibail) will likely be out of the market for the next two years.

"Sunny 2018, Cloudy 2019," UCLA Anderson Forecast, December 2017

Sunny 2018, Cloudy 2019

David Shulman

Senior Economist

UCLA Anderson Forecast

December 2017

Of a sudden, propelled by strength (8% quarterly growth) in equipment spending, the economy is growing at a 3% clip and the near term outlook has become decidedly sunny. (See Figures 1 and 2) Moreover the 3% pace of growth is expected to continue through the second quarter of 2018. However as the unemployment rate drops below 4% and employment growth stalls in the face of a labor shortage, economic growth will drop back to the 2% growth rate we have been used to since the end of the financial crisis eight long years ago. Indeed by the end of the forecast horizon in 2019 real GDP growth could very well be running at a rate below 1.5% as the outlook becomes cloudy. (See Figures 3 and 4)

Figure 1. Real GDP Growth, 2007Q1 – 2019Q4F

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 2. Real Equipment Spending, 2007Q1 – 2019Q4

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 3. Nonfarm Employment, 2007Q1 -2019Q4

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 4. Unemployment Rate, 2007Q1 -2019Q4

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Questions about Fiscal Policy

As we are writing in late November many questions remain about the major tax bills now working their way through Congress. There is uncertainty surrounding the corporate tax rate, state and local tax deductions, child credits and the permanence of the entire package. For modeling purposes we have assumed a ten year $1.5 trillion tax cut, with a 25% corporate tax rate (a compromise from 20%), some allowance for state and local tax deductions and $100 billion in revenues coming from a tax on repatriated corporate profits in 2018. This last point is one of the reasons why the federal deficit declines in 2018. (See Figure 5)

Figure 5. Federal Deficit, FY2007 – FY2019F

Sources: Office of Management and Budget and UCLA Anderson Forecast

We are more certain that the next few years will reverse the seven year annual decline in defense spending. (See Figure 6) With the potential for missiles from North Korea reaching the West Coast, continued fighting in the Middle-East and growing worries about Russia and China defense spending will likely be on the rise over the next several years. We are assuming real defense spending will increase by 2% and 2.7% in 2018 and 2019, respectively. If anything, our forecast is more likely to be low than high.

Figure 6. Real Defense Spending, FY2007 – FY2019F

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Monetary Policy in the Post-Yellen Era

With the appointment of Jerome Powell as Fed chairman the Janet Yellen era is coming to an end. Because Powell’s views on monetary policy are very similar to Yellen’s we do not anticipate any significant changes. However, with respect to regulatory policy, Powell is believed to be far more open than Yellen to reviewing the financial crisis regulations that were put into place from 2009 – 2012.

Thus we expect that the gradual interest rate normalization policy that has been underway for a year will continue well into 2019 with a 25 basis point increase from the current 1.375% rate in December and three more increases in 2018. By the end of 2019 the fed funds rate will likely approximate 3%. (See Figure 7) We caution that the futures markets, in contrast to our forecast and the Fed’s “dot plots”, are forecasting only one rate hike next year.

Concomitantly with the rise in short term interest rates long rates will rise as well and we would not be surprised to see the yield on 10-year U.S. Treasury bonds to exceed 4%, up from the current 2.4%. Rising inflation will be the driver in the increase in long rates, more on that below.

Figure 7. Federal Funds vs. 10 Year U.S. Treasury Bond Rates, 2007Q1 – 2019Q4F

Sources: Federal Reserve Board and UCLA Anderson Forecast

The Powell Fed will also continue the policy of gradually shrinking the Fed’s bloated balance sheet that began in October. (See Figure 8) Simply put after three phases of quantitative easing that expanded the balance sheet from $800 billion to over four trillion dollars will be unwound over a period of several years with the ultimate target of $2.5 - $3.0 trillion, quantitative tightening if you will.  (See Figure 8) But make no mistake the balance sheet shrink the Fed is attempting to do is unprecedented.

Figure 8. Federal Reserve Assets, 2003 –Nov 15, 2017, In $ Millions, SA

Source: Federal Reserve Board via Fred

Inflation on the Rise

It now appears that the second quarter slowdown in inflation was transitory and the future quarterly track in inflation will be in excess of 2% throughout the forecast horizon. (See Figure 9) This will hold true for both “headline” and “core” consumer prices. Further oil prices now appear to be tracking about $10/barrel higher than our forecast of just one quarter ago.

Figure 9. Headline vs. Core Inflation, 2007Q1- 2019Q4F

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

The primary source of the rising rate of inflation will be a significant rebound in wage growth. After creeping along in the 2% range, we forecast acceleration in total compensation growth to approximately 4% by late 2018 on a year-over-year basis. (See Figure 10) The recent rise in labor productivity buttresses our view that the long anticipated increase in wages is at hand.

Figure 10. Total Compensation per Hour, 2007Q1 – 2019Q4

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Consumer Spending Supported by Rising Wages and Asset Prices

Real consumption spending is rebounding from the 1.5% increase in 2016 to 2.7% and 2.8% in 2017 and 2018, respectively. (See Figure 11) However, as auto sales slow in 2019 consumption growth will slip back to 2.2%. (See Figure 12) Simply put it is getting very late in the auto cycle. However as long as stock and house prices remain elevated the consumer, or at least the high end consumer, will remain in good shape. (See Figures 13 and 14) In the case of the lower end consumer we are encouraged by Wal*Mart reporting a strong 2.7% increase in year-over-year same store sales in their latest quarter.

Figure 11. Real Consumption Expenditures, 2007 – 2019F

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 12. Light Vehicle Unit Sales, 2007 – 2019F

Sources: Bureau of Economic Analysis and UCLA Anderson Forecast

Figure 13. S&P/Case-Shiller 20-City Composite Home Price Index, Dec 1999 – Aug 2017, December 1999 =100, SA

Sources: Standard & Poor’s via FRED

Figure 14. S&P 500 Stock Index, 18 Nov 2007 – 17 Nov 17

Sources: Standard & Poor’s via BigCharts.com

One of the big puzzles in recent years is the lack of robustness in new single family housing construction. Given low interest rates and strong employment growth housing activity should be doing much better. Two factors that are being discussed more and more are the unwillingness of the baby boom generation to move as they age in place and highly restrictive zoning in the booming coastal cities. As a result housing starts have remained below the underlying demographic demand of 1.4 – 1.5 million units a year for a decade. We are forecasting modest increases in housing starts from an estimated 1.19 million units this year to 1.27 million and 1.34 million in 2018 and 2019, respectively. (See Figure 15)

Figure 15. Housing Starts 2007Q1 -2019Q4F

Sources: Bureau of the Census and UCLA Anderson Forecast

Exports Rebounding, But NAFTA Risk Looms

In response to a recovering global economy real exports are recovering from the near zero growth of 2015 and 2016. Real exports are estimated to increase by 3.2% this year and 4.5% and 4.1% in 2018 and 2019, respectively. (See Figure 16) According to a recent Goldman Sachs report world economic growth is forecast to increase 3.7% this year and 4.1% in 2018.[i] Growth will come from, 2+% growth in the Euro Area, 6.5% in China, a very strong 8% in India and a rebound in Brazil from O.9% in 2017 to 2.7% in 2018.  (See Figure 17)

Figure 16. Real Export Growth, 2007 – 2019F

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 17. Global Real GDP Growth, 2016 – 2019F, Annual Data

Country/Region	2016A	2017F	2018F	2019F
Japan	1.0	1.6	1.6	1.3
Euro Area	1.7	2.3	2.2	1.8
UK	1.8	1.5	1.3	1.6
China	6.7	6.8	6.5	6.1
India	7.1	6.4	8.0	8.3
Brazil	-3.6	0.9	2.7	3.1
World (incl. U.S.)	3.2	3.7	4.0	3.9

Source: Goldman Sachs

The real risk to our export forecast and for that matter the entire forecast is political. In less than a year President Trump has blown up the Trans Pacific Partnership (TPP) trade treaty and the global climate accord. The North American Free Trade Treaty (NAFTA) could be next especially given the hawkish views espoused by Secretary of Commerce Wilbur Ross and Trade Representative Robert Lighthizer. Although news from the Mexico City negotiations is not on the front burner, it would be advisable to pay very close attention. Why? Leaving NAFTA is not so simple because it would undo countless supply chains among the three countries (U.S., Canada and Mexico) involved. Just as a reminder the gross trade volumes among the three NAFTA partners amounts to over one trillion dollars per year.[ii] Especially hard hit would be the U.S. automobile industry where parts cross borders several times in the manufacturing of a single automobile. In our view should the U.S. leave NAFTA the growth outlook would deteriorate and the chance of a recession in late 2018 or 2019 would significantly increase.

Conclusion

With our weather forecast analogy for a title we are hoping to be as accurate as modern weather forecasting. Economics has a lot to learn from near term weather forecasting. It looks like 2018 is shaping up to be a pretty good year. There is momentum coming from the recent strength in 2017, strong equipment spending, the likelihood of a tax cut and a consumer that is benefiting from higher asset prices and the prospect of higher wages. Unemployment will drop below 4% and remain there throughout most of the forecast horizon and inflation will experience an uptick. The Fed will respond by continuing to normalize short term interest rates with the Fed Funds rate on a path to 3% by 2019. However as we get into 2019 inflation could be approaching 3% and the economy will slow as it reaches capacity constraints.

The risks to the forecast include the unknowable consequences of the Fed reducing its balance sheet and the potential failure of the ongoing NAFTA negotiations. All told a sunny 2018 with clouds coming in 2019.

---

[i] See Hatzius, Jan et.al., “As Good as it Gets,” Goldman Sachs, November 15, 2017

[ii] See Shulman, David, “Extreme Makeover: Second Pass at Trumponomics,” UCLA Anderson Forecast, March 2017

My Amazon Review of David Ignatius' "The Quantum Spy: A Thriller"

Spy vs. Spy

David Ignatius, the Washington Post’s national security columnist, has written quite the spy novel whose backdrop is the ongoing war between the CIA and the Chinese Ministry of State Security (MSS). In this case MSS develops a mole in the CIA whose work involves funding contractors engaged in the development of quantum computers, a revolutionary computing technology that allows photons (Qubits)to superposition themselves in such a manner as to simultaneously be switched on and off. Instead of the current binary system of 0 and 1, the qubit can be both 0 and 1 at the same time.  There are primitive quantum computers in existence today, but once they are scaled up there is no encryption technology that cannot quickly be broken. Thus the first nation that develops such a technology will truly become the sole global super-power.

Thus the stakes are high. Ignatius’ protagonist is Harris Chang, ex-Army and now a CIA operations officer. He is tasked to find the mole. Along the way he sets up a Chinese scientist in Singapore, visits a lab in Seattle, spends quite a bit of time in CIA black sites in Washington D.C. as well as the Langley headquarters, meets up with an MSS operative in Mexico City and the book ends with a fast paced denouement in Amsterdam.

The book also deals with Chang’s ethnicity and how MSS uses that to put him under suspicion in the CIA. He maybe all-American, but to some in the CIA his loyalty is questioned.

We learn quite a bit about CIA tradecraft along the way. We also learn that the U.S. is likely at a disadvantage relative to China because there are far more Chinese students studying in America than there are American students studying in China. Simply put they know more about us than we know about them and there more than a few Chinese students studying computer science in the U.S. 

Although the book is slow at times, I recommend “The Quantum Spy” for those readers interested in what the post-Cold War spy versus spy is like.

The full Amazon Review appears at: https://www.amazon.com/review/R2KQ0RRVEDR0WY/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

readers interested in what the post-Cold Wa

The Sexual Harassment Purge Trials of 2017 - ?

The very serious and likely criminal allegations against producer Harvey Weinstein have opened the floodgates for all sorts of sexual harassment charges in Hollywood, the media and politics. The charges range from child molestation in the case of Senate Candidate Roy Moore to groping in the case of Senator Al Franken. But given the mob mentality and the media firestorm most of the charges are being conflated.

However there are real differences and they range from what I would call petty infractions (boorish behavior) all the way up to felony rape. I am afraid that over the near term the very real distinctions are not going to matter. Thus the near innocent will be punished along with the really guilty.

In the case of the Congress, hypocrisy reigns; no surprise here. Pro-choice Democrats shouldn’t get a pass because they line up on the feminist side issues. If they do it would be akin the middle age practice of the Catholic Church where indulgences were sold to the highest bidder. Similarly conservative Republicans shouldn’t get a pass because they vote for tax cuts and support right leaning judges.  Simply put, sexual predators know no party labels.

Indeed my guess is that once we find out, and we will find out, where the $15 million paid out by Congress to settle employee disputes went, heads will really roll. Further it is my educated guess that both Speaker Paul Ryan and former Speaker Nancy Pelosi were informed. Both of them know where the bodies are buried.   What will happen to them? Instead of passing bipartisan legislation we are now witnessing a bipartisan scandal. All the while the head “pussy grabber” is still the president.

My fear is that a short run unintended consequence of the enveloping scandals is that many men will become reluctant to mentor women. As a professor, a leader in a mentoring program and as a managing director I have had the occasions to mentor many women who have gone on to do great things. However with the temperature rising the simple solution for too many men might be to adopt the Mike Pence and Orthodox Jewish rule of never being alone with a woman not their wife. As a result the mentoring of women by men would likely decline. That would hardly be a consequence that even most feminists would desire.

My Amazon Review of Steven Kotkin's "Stalin: Waiting for Hitler, 1929-1941"

From Passenger to Engineer on the Locomotive of History

This is Princeton history professor Steven Kotkin’s second volume in his magisterial biography of Iosif Stalin. The Stalin of the first volume is a Stalin who is a passenger on the locomotive of history and thus the first volume is more history than biography. (My review of the first volume appears at:  https://shulmaven.blogspot.com/2015/01/my-amazon-review-of-stalin-volume-i.html) In the second volume Stalin is in command making history and this is where the story bogs down. Simply put there is too much detail for the lay reader and the book runs 1173 pages in the print edition. You need a scorecard to keep up with all of the players and you have keep names like Sergo Ordzhonikidze (a Politburo member in the mid-1930’s) in your head. Hence I reluctantly give the second volume four stars.

Kotkin breaks up his book into three broad epochs, the mass collectivization of agriculture (1929 -1934), the purge trials (1934 – 1939) and the great three card monte game between the Soviet Union, Germany and Britain (1939 -1941) as war envelops Europe.  Throughout it all Stalin is omni-present; he seems to see all and know all, at least in his own mind, and his attention to detail and memory is phenomenal. For example he knows the specifications of most of the combat aircraft under his control.

In Phase I, Stalin fearing the more or less capitalistic agricultural sector is a threat to the regime, decided to collectivize all of Russian agriculture and along the way causes the mass starvation of at least five million people.  It is basically an anti-Kulak (wealthier peasants) pogrom. He uses the proceeds to fund industry to modernize the Soviet state. The reasoning is more political than economic because under the Tsars Russia was well on its way to becoming a modern economy until world War I and the revolution upended it.

Kotkin like everybody else does not have a complete explanation for why Stalin’s purges, coupes against the party and the army if you will, reached into every nook and cranny of the Soviet state. It hardly makes sense, that with war clouds looming and his foreign minister Maxim Litvinov travelling throughout Europe urging collective security. In June 1934 Stalin looked approvingly at Hitler’s Night of the Long Knives where Hitler took out both his left and right opposition in a swift coup.

The purges start with the assassination of Leningrad Party boss Sergey Kirov in late 1934. Contrary to other historians Kotkin makes the case that Kirov was the victim of a lone assassin not a Stalin plot. From there huge swaths of the party and the army are taken out including the Bolshevik triumvirate of Bukharin, Zinoviev and Kamenev. Why did Stalin do this? There is no sane explanation, but a partial explanation is that Stalin wanted to create a new nomenclatura that would be loyal to him. By taking out the older party members, Stalin opened up opportunity for a new leadership that was thrilled to be part of the state building process. It also allowed those of very humble origins to rise up and live the Soviet communist dream. During this period we also see the origins of the Soviet-Chinese split where Stalin supports Chiang Kai Shek over Mao. Put bluntly it was in the Russian state interest to keep Japan occupied in China rather than have it turn its forces on Siberia. For Stalin the Chinese revolution would have to wait.

The final section of the book deals with the power politics of the three card monte game (Kotkin’s words) being played by Russia, Germany and Britain. Although Kotkin doesn’t believe that Stalin was the all-knowing policy realist that Kissinger ascribed to him, Stalin did a pretty good job in understanding the correlation of forces. His big mistake was that he failed to recognize that Hitler would win a swift victory in the West leaving the Soviet Union open to attack. World War II was not going to be a rerun of the trench warfare of World War I.

It is at this point that Kotkin writes history like a thriller. We get a day by day feel of the tri-party diplomacy and the buildup of German forces in the East. All sides are putting out disinformation and all parties were thrown for a loop when Rudolf Hess ends up in the English country-side. Stalin perceives it as potential Anglo-German coalition against him. Stalin is continually warned by Generals Zhukov and Timoshenko that Hitler plans to attack, but Stalin ever the realist believes that Hitler would not want to fight a two front war and believes instead that the troop build-up is part of an elaborate blackmail plot.  But as Kotkin notes Marxism-Leninism never anticipated a Hitler and Stalin did not learn from his early 1930’s policy of equating social democracy with fascism. Kotkin is at his best here.

I have one last quibble. I would have liked to know Kotkin’s take on Stalin’s role in the intra-party split in American communism in 1929. Why would the great leader involve himself in such a petty squabble? Nevertheless I highly recommend “Stalin: Waiting for Hitler..." for those willing to slog through this very long book.

The complete Amazon URL appears at:  Because of a screw up on my part and the complete inflexibility of Amazon's rules I was unable to post this review on their website.
















for Hitler…” for all those willing to slog through this very long book.

The Dice are Rolling in Mall Land

Last May we wrote "Thus if private equity or sovereign wealth funds don't come in soon to scoop up the apparent bargain, the Street, as I argued, is way off." (https://shulmaven.blogspot.com/2017/05/a-new-look-at-mall-reit-valuations-part.html) Of a sudden, after a long period of sustained discounts to Street estimates of net asset value the dice are starting to roll in Mall Land. First Brookfield Property Partners offered to take in the 64% of GGP that it doesn't already own with a  cash and stock offer valued at $23/share. To be sure the offer was well above the $19/share the stock was trading at, but still well below the $28/share of value ascribed by the Street. As of this writing GGP is trading about 3% above the Brookfield offer price.

We then found out that hedge funds Starboard Value and Third Point have taken a position in Macerich causing its stock to rise from the mid-50s to the mid-60s, still below the $73 valuation estimated by the Street. Further Elliott Management, a $30 billion hedge fund, has taken a position in Taubman that elevated its stock price from the high 40s to the mid-50s again well below the $85 Street valuation. Remember the hedge funds are intermediaries and are ultimately looking for a final buyer like Brookfield to take them out. If no final buyer appears they will find themselves with dead money positions that will be sold back to the market.

Sitting on the sidelines watching and waiting are David Simon of Simon Property Group, the largest mall owner and Jonathan Gray of Blackstone, the largest private equity firm in the real estate arena. How they respond could very well be despositive as to how the price discovery process works out.

My guess is that the potential buyers of mall companies and/or mall assets are looking for what they perceive to be a bargain and with the Street still estimating mall cap rates in the 4-5% range, they will not find a bargain at those prices. Simply put the bid-offer spread is too wide, and as result I do not foresee transactions at anywhere close to the offer side of the market. But again, as we noted in May, time will tell.

Donald the Destroyer

The Republicans are reaping what they sowed by getting into bed with Donald Trump in 2016. Simply put Donald Trump is systematically destroying the Republican Party. In Virginia a weak Democratic gubernatorial candidate won by 9 points and perhaps more importantly the Democrats wiped out a 36 seat Republican majority in the Virginia House of Delegates. In New Jersey the Republican leaders (Kean and Bramnick) in the legislature were reelected by unusually close margins and local Republican officials went down across the state as the Democrats reclaimed the governorship from Chris Christie's failed regime. And in New York the Republican County Executive lost his job in Westchester County.

What last night's election showed is that Donald Trump is not playing in the wealthy suburbs of of Washington D.C., New York and Philadelphia. His very unpresidential behavior against a backdrop of removing the state and local tax deductions and his opposition to gun control means that across America's suburbs the Republicans tied to Trump are going to lose big next year and no matter how artful the district maps were drawn the Democratic Party is now the odds-on favorite to take the House of Representatives in 2018. Thus instead of being its savior Donald Trump has become the destroyer of the Republican Party.

An Open Letter to Paul Ryan and Mitch McConnell

Dear Paul and Mitch,

I know both of you have very tough jobs in that you have to deal with a president who his own secretary of state called a “fucking moron” and who has an approval rating of 38%. Yes, I know President Trump is still popular within the Republican Party, but he remains an impulsive 14 year old boy in the body of a 70 year old man. And he his failing in the most fundamental role a president has that of uniting the country. To the contrary he is dividing our country to an extent not seen since the Civil War and I was around during the Vietnam era.  You know it and I know it, but what are you going to do about it? Look for guidance in the words of Senators Bob Corker and Jeff Flake.

You have to think where President Trump is taking our country and the republic for which it stands. It is not a pretty sight. You have to get beyond the vote on the tax bill and the next Supreme Court appointment and think what your children will think of you twenty years from now. You do not want to be known as moral eunuchs who stood by as everything you believed in turned to shit.  Let me leave you with a thought as I paraphrase Mark 8:36, “For what shall profit a political party if it gains the White House and the Congress and suffers the loss of its soul.”

Yours truly,

David Shulman

My Amazon Review of Nelson DeMille's "The Cuban Affair: A Novel"

Cuba Libre

I rarely review best-selling novels, but in the case of Nelson DeMille’s “The Cuban Affair: A Novel” I will make an exception. The book is a great read, perfect for the beach or a long airplane ride. DeMille’s protagonists are Mac MacCormick an Afghan War vet who operates a chartered boat out of Key West, his Vietnam Vet first mate Jack Colby and the sensuous Sara Ortega, the grand-daughter of a Cuban émigré.

The story revolves around Ortega’s attempt to retrieve land titles, jewelry and a boatload of cash thought to be hidden away in Cuba. She along with other anti-Castro Cubans recruit MacCormick and Colby to remove the treasure from Cuba. Along the way we get a sense of how dire the conditions are in Cuba along with the ever present police spying. Of course MacCormick ends up in bed with Ortega. And it wouldn’t be an adventure in Cuba without the involvement of the CIA.

It is a fun book to read and I recommend it highly to all but those readers who have a fondness for the Castro regime. One quote from Colby sticks in my head, “It is better to have a gun and not need than to not have a gun and need it.”

The full Amazon URL appears at: https://www.amazon.com/review/R1G483SCZTC4HD/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

"In the E-Commerce Revolution Brick and Mortar Defenses are Limited and Costly" UCLA Ziman Center for Real Estate Report, October 2017

See the URL below for the full report.

http://www.anderson.ucla.edu/Documents/areas/ctr/ziman/UCLA_Economic_Letter_Shulman_10.10.17.pdf

My Amazon Review of Glenn Frankel's "High Noon: The Hollywood Blacklist and the Making of an American Classic"

High Noon in Hollywood

I recently attended a screening of “High Noon” with Glen Frankel giving a short talk. I forgot how good this 1952 movie is. In his book Glen Frankel tells the story of the making of this low-budget black and white movie, his protagonist the screen writer Carl Foreman, the producer Stanley Kramer, the star Gary Cooper, the composer Dimitri Tiomkin,  and the very strong female roles of Grace Kelly and Katy Jurado against the backdrop of the growing “red scare” in Hollywood. Who knew Dmitri Tiomkin, a Ukrainian Jew,  wrote the musical score for such westerns as “Red River,” “Duel in the Sun,” “Giant,” “Gunfight at the O.K. Corral and of course, “High Noon.”  Frankel notes that Tiomkin’s biographer likened him to putting a musical score to the classic western paintings of Frederic Remington and Charles Russell. He also discusses how the movie’s theme song “Do Not Forsake Me Oh My Darlin” became such a big hit.

But Frankel is not only interested in the creation of this classic, he is also interested in the role of the Communist Party in Hollywood and the blacklist that was to come in the late 1940s and early 1950s. Screenwriter Carl Foreman was a communist for a while and then abandoned the Party, but he along with the Hollywood 10 (screen writers who refused to talk before the House Un-American Activities Committee and were jailed) refused to name names and ended up in exile in England.

In Frankel’s view “High Noon” is an allegory to Foreman standing up to the committee. Gary Cooper as Marshall Kane successfully stands alone as the townspeople abandon him to face four returning outlaws seeking revenge. The townspeople represent those in Hollywood who cringe in the face of the committee, many of whom were like the liberals Dore Schary, Elia Kazan and Ronald Reagan (a big liberal at the time).  The story brings to mind Henrik Ibsen’s “An Enemy of the People” where the bravest are the ones who stand most alone.

Frankel is clear-eyed when he discusses the perfidy of the American Communist Party in the late 1930s and the early 1940s. But somehow he seems to me to be way to forgiving of the Hollywood communists. He leaves out that Moscow targeted the New Deal, the C.I.O., the defense industry and Hollywood as pathways for subversion. The Hollywood 10 writers were following orders from Moscow and were working towards bringing Soviet Communism to America. They weren’t all that successful, but the intent was clear. I wonder if instead of being communists they were Nazis would Frankel have been so forgiving? Yes it was a bad time and yes civil liberties were being trampled upon and yes the fears of the public were legitimate. Frankel recognizes this when he cites the Venona transcripts which describe Moscow’s control of American Communism.

Despite my disagreements, Frankel has written an excellent book that tells us how a great movie was made and the fears that bestrode liberal Hollywood in the 1950s.

The full Amazon URL appears at: https://www.amazon.com/review/R1IAL3ZL9IF52V/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Diana B. Henriques' " A First-Class Catastrophe: The Road to Black Monday, The Worst Day in Wall Street History

The Sorcerer’s Apprentice

On October 19, 1987, the very day of the crash that brought stocks down by 22%, I was flying to Colorado Springs to present a paper at the annual Q Group conference. Many of those in attendance were in up to their eyeballs in the quantitative finance that was putting the market decline into overdrive. New York Times reporter Diana Henriques has written an intriguing story about the plumbing of the financial markets where conflicting regulators, the rivalry between the cash market in New York and futures market in Chicago, and the emergence of quantitative finance in the form of portfolio insurance/dynamic hedging forced the stock market to turn in on itself much like the sorcerer in the Hall of the Mountain King.

She tells a very good story about the personalities that fueled the rivalry between the SEC and the Commodity Futures Trading Commission and its parallel rivalry between the New York Stock Exchange and the two Chicago futures exchanges, the “Merc” and the Board of Trade. The upshot driving the controversies was that, contrary to what most people expected, the futures market drove the cash market, a phenomenon that the regulators were not ready for.

She also is very good describing the academic and business origins of portfolio insurance where the theories of two Berkeley business school professors, Hayne Leland and Mark Rubinstein merged with the business smarts of John O’Brien to form Leland O’Brien Rubinstein & Associates (LOR) to market their new product. By the way, I overlapped with Rubinstein in the UCLA finance Ph.D. program in the early 1970’s. At its core the problem with portfolio insurance is that it required a continuous trading in the cash, futures and options markets. A breakdown in anyone of these markets would trigger a massive dislocation. None of this mattered when only a few investors were engaging in the dynamic hedging necessary to insure a stock portfolio, but once it became popular among pension managers the assumption of continuous markets became questionable. By way of example when all is calm, fire insurance is readily obtainable, but when the whole city is burning down, there are very few sellers of fire insurance. That is precisely what happened on October 19^th.

Henriques rightly notes that the real risk to the system occurred a day later when trading halts in both the cash and futures markets occurred. The markets were rescued by the newly installed Fed Chairman Alan Greenspan acting as lender of last resort and the timely buying of an obscure index product by traders Stanley Shopkorn (a friend) of Salomon Brothers and Bob Mnuchin of Goldman Sachs.

Although Henriques is very good at describing the drama of the minute by minute trading on the exchanges she glosses over the big macroeconomic causes of the crash.  It was part and parcel of the great 1980s bull market that took the Dow Jones Industrial Average up from 776 in August 1982 to 2722 just five years later.
In fact the Dow Stood at 1890 as 1986 drew to a close and then skyrocketed to 2722 in less than eight months, a gain of 44%. So no one should be surprised that a correction occurred. Indeed if you were in a coma for most of the year and you woke and saw that the market closed at 1739 on October 19^th it would have been logical to surmise that not a whole lot happened in 1987.

The mid-1980’s bull market was fueled by the 1985 Plaza Accord that was designed to lower the value of the dollars by dramatically increasing global liquidity, a Fed easing cycle in 1986 caused by a collapse in the price of oil, and the emergence of leveraged buyouts. By October of 1987 all three of these factors were called into question as the Fed began a tightening cycle in early 1987, a very public currency dispute between the U.S. and Germany broke out into the open thereby questioning the Plaza Accord and Congress was considering proposals to limit the tax deductibility of interest deductions associated with leveraged buyouts. Thus the stock market had every reason to go down. What portfolio insurance and the regulatory cacophony did was put the decline into overdrive.

Thus I wish Henriques would have devoted her writing talents to place what happened in 1987 into a broader macroeconomic context. But make no mistake much of the regulatory issues she discussed remain with us today and were partially responsible for the 2008 meltdown.

The Full Amazon URL appears at: https://www.amazon.com/review/R3QEZXTEFCWZQ0/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv