More on the "Legacy"

I came across an article by Bob Murphy looking at some of the claims in the third presidential debate, and trying to offer some rebuttals to the immediate criticisms that were engendered.  That's an introduction to what I read, because in reality I don't really care about that part of it.  What I did find interesting is where he offers a basic retort to all the people who think our economy is anything better than anemic.  Specifically:

"However, Trump was not wrong for suggesting that the U.S. should have enjoyed—at least temporarily—growth rates of even 8 percent in the wake of the Great Recession, if indeed the government (and Federal Reserve) had enacted sound policies. Historically, the U.S. economy rebounded very strongly after a bad recession, at least partially making up for the lost output of the previous downturn...

Since the ostensible recovery began in the summer of 2009, only rarely has year-over-year U.S. real GDP growth bounced above 2.5 percent, and it has centered around 1.5 percent.

In stark contrast, going all the way back to World War II, GDP growth following a recession soared, albeit just briefly. Look, for example, at the early 1980s. In the first quarter of 1984, real GDP was 8.6 percent higher than it had been a year earlier.

The disparity in recovery growth rates is even more alarming when we consider that the depth of the Great Recession exceeded that of any other recession in the postwar era...

If the rhetoric from Obama and Clinton partisans were correct—namely, that the Great Recession had been caused by awful Republican policies which were fixed under Democratic rule—then we would have seen at least a few quarters of very high economic growth. Yet we have seen no such thing."

8 Days From Now...

From George Friedman:

"Neither seems to believe that laws and social norms apply to them. And neither knows how to close off an ongoing issue with a simple admission of error, a clear explanation of how that error occurred and a profound apology. Trump can barely get the word sorry out of his mouth. Clinton will say it more easily, but less believably. Clinton can get out of this current problem by doing two things. One, explain coherently and believably why she set up the server. Two, come clean on why she deleted 33,000 emails. She won’t, either because she can’t reveal the truth or because she can’t utter it."

Something Wicked This Way Comes...

Largely inspired by the upcoming election, I decided to read The Road to Serfdom by F.A. Hayek (1944). Writing at the end of World War II, Hayek is making the case for individual liberty as the West confronts how it will rebuild and tries to avoid episodes like Hitler and Mussolini (and Stalin) again. As with most libertarians (and those who believe in the tenets of Austrian economics), the role of the state should be minimal so as to allow market forces to work their wonders. Having said all of that, there are so many ideas in this book that feel like they could have been written and are germane today.

“…they advocate planning no longer because of its superior productivity but because it will enable us to secure a more just and equitable distribution of wealth.” While only paying lip service in the end, that quote could capture what has been the driving mantra of the Obama administration in its public proclamations. Don’t worry about outcomes, as long as everyone gets a trophy.

“…it must be the freedom of our economic activity which, with the right of choice, inevitably also carries the risk and the responsibility of that right.” This truth is at the heart of why so many frown upon the bailouts and QE globally.

“…he will be able to obtain the support of all the docile and gullible, who have no strong convictions of their own but are prepared to accept a ready-made system of values if it is only drummed into their ears sufficiently loudly and frequently.” In the context of a captive media that spits out the ideals of a preferred candidate, the uneducated masses become useful idiots and buy into the propaganda that the establishment pushes out to maintain its hold on power.

“Though we may sometimes be forced to choose between different evils, they remain evils.” Sounds like the choice in this country right now.

“…the press…will be used…to spread those views which , whether true or false, will strengthen the belief in the rightness of the decisions taken by the authority; and all information that might cause doubt or hesitation will be withheld.” It’s why the focus is on one candidate’s indiscretions versus the other’s.

“…the impetus of the movement towards totalitarianism comes mainly from two great vested interests: organized capital and organized labor.” The next President is probably the one who is a friend to Wall Street and all the other monied interest groups.

“…the single-minded idealist is likely to do the greatest harm.” Best of intentions don’t always turn out so well. Cue Obamacare.

Russia Falls Into Old Habits

A really worthwhile read from Stratfor:

Nearly 10 years ago, Stratfor published a series on Russia's historical boom-and-bust cycle. At that time, Russia was clearly at the height of a boom, rebuilding itself into a stable and robust power. Today, the country is quickly descending into the next, less pleasant stage. The strategy that revitalized the country is becoming less effective, forcing Russia and its leaders to act more aggressively at home and abroad. Though still assertive, Russia is no longer acting from a position of strength. The country may maintain some semblance of strength for years to come, but its fragility will eventually become apparent, forcing it into the next phase of the cycle.

Geography's Role in Russian History

For nearly eight centuries, Russia has been trapped in a loose cycle: It rises from chaos, returns as a regional and sometimes even global power, grows aggressive as the system cracks, and then collapses before rising again. The cycle is less about political choice than it is about geographic constraints. Geographically speaking, Russia is operating from an inherently weak position. It is the largest country in the world, covering roughly 13 time zones (split now into four mega-zones). Yet 75 percent of the country is virtually uninhabitable frozen tundra that becomes marshland in the summer, making domestic trade extremely difficult. Maritime trade is also difficult for Russia, given that its only warm-water port, on the Black Sea, is blocked by rivals, including Turkey. Therefore, the country has struggled to develop economically.

Furthermore, Russia's heartland — which runs from St. Petersburg south through Moscow and into the Volga region — lies on a series of plains, making it vulnerable from all sides. This has forced Russia to seek to expand its borders and influence outward to create a buffer zone between its heartland and rival regional powers. As Catherine the Great famously put it: "I have no way to defend my borders except to extend them." The longest sustained example of this expansion occurred during the Soviet period, when the Russian heartland was shielded by Siberia, 14 other Soviet republics and seven Eastern Bloc countries.  

Expanding Russian influence comes at an immense financial, military, political and social cost. During the Soviet period, Moscow had to centralize control over the entire Soviet space, subsidizing most of the Soviet states' economies while managing their diverse populations. Moreover, Soviet gross domestic product was half of U.S. GDP, even though the two countries had roughly the same population. By the last decade of the Soviet Union, Western intelligence sources estimated that half of Soviet industrial output went toward building up the military, causing vast shortages of industrial goods. Thus the dilemma: Russia must expand to survive, but that expansion is unsustainable and has historically led to its collapse.

A Perpetual Cycle

Russia's cycle can be divided into roughly three parts: collapse, resurrection and fragility. It starts with a catalyst that causes governance to break down and disrupts the social order, leading to collapse. Historically, this has taken many shapes. In the 13th century, it was the Mongol invasion; in the 17th century, the Time of Troubles; in the 20th century, the Russian Revolution, fall of the Soviet Union and the 1998 financial crisis.

From collapse comes the next stage of Russia's cycle: resurrection. Typically the system that governed during the crisis is transformed into something new — usually with a strong personality at the fore. This figure tends to create a stable system in which Russia can consolidate itself and its borderlands. This figure also fosters a sense of national identity, helping Russians and peripheral populations unite under a common patriotism.

Examples include Ivan III, who threw off the Mongol yoke and united Russia; the first Romanov tsar, Mikhail I, who led Russia out of the civil wars of the 16th century; the "greats," Peter and Catherine, who transformed Russia into a global empire; Vladimir Lenin, who transformed Russia into the Soviet Union; and arguably, Vladimir Putin, who ushered in prosperity following the Soviet collapse.

None, however, has been able to overcome Russia's geographic challenge. All have fallen into the problematic pattern of trying to consolidate the heartland while expanding Russian influence, practically ensuring their own collapse. When the inevitable stress points begin to emerge — whether political, social, security or economic — Moscow tends to tighten its grip and to act more aggressively within and along its borders.

The leaders, who were once seen as the saviors of Russia, are either replaced with, or evolve into, more authoritarian (and often ruthless) leaders, who quash dissent and aggressively defend Russia's borders and borderlands. This is the age of fragility. Fragility leaders lack the stability their predecessors enjoyed and have less time to devote to consolidation and nation building, making them appear more erratic.

Brutal leaders often emerge from crumbling systems. The most famous fragility leader was the Soviet Union's Josef Stalin. Similarly, when droughts and famines followed Ivan III's and his successor's successful tenures, Ivan IV — aka "The Terrible" — severely restricted freedom of movement and lashed out in a series of wars against the Polish-Lithuanian Commonwealth, eventually leading to civil war after his death.

Throughout history, internal and external pressures first lead to political, economic, social and foreign policy stagnation before the cracks in the system force a complete transformation. At times, such transformations are simply political, such as the transition from Stalin to Nikita Khrushchev; at others, the entire system collapses into chaos, such as the fall of the Russian Empire or the Soviet Union. Then, the cycle begins anew.

Putin's Edition of the Cycle

The rise and endurance of Putin and his government fit within Russia's historical cycle. After the Soviet collapse, Russia lost direct control over its borderlands. The country devolved into chaos. Broken attempts to transition to a market economy through what was known as shock therapy only led to radical privatizations and the rise of oligarchs — which in turn resulted in a 40 percent decline in GDP and a deep financial crisis by 1998. The political landscape wasn't much better. The government was made up of dozens of parties with vastly different agendas all attempting to agree on a new political system. The security services and military were further degraded by President Boris Yeltsin. The Russian people struggled to find a new identity to unite them as the Soviet Union had. Rumblings of secession arose in many of Russia's regions, with a brutal war erupting between Moscow and its Northern Caucasus republics, particularly Chechnya.

A bureaucrat from St. Petersburg, Putin was appointed by Yeltsin to head the KGB's successor, the Federal Security Bureau, in 1998. The intelligence agency was charged with containing the chaos. Yeltsin assumed that Putin, a Moscow outsider, would not be able to challenge him. But Putin and his cadre of loyalists from St. Petersburg (many former KGB agents) took strong steps against the various problems facing Russia, and by the next year he was prime minister. Once in office, he continued to consolidate and rebuild the security services and military. He issued ultimatums to the Russian regions to support the government financially and politically and to cease talk of secession. Putin's efficiency began to convince many Moscow elites to support him, and he eventually supplanted Yeltsin as president.

At the time, Putin was seen as a great reformer, consolidating the country economically, politically and socially. He cracked down on the oligarchs, seizing strategic assets for the state — such as the highly coveted energy sector. He streamlined the political process, bolstering a single party under his control with the opposition parties built into a system he could manipulate. He reined in the unruly Northern Caucasus, dividing the region's militant groups and creating a broadly loyal Chechen force to help end the Second Chechen War. Perhaps most important, he made a social pact with the Russian people to stabilize and boost the country.

Good luck also helped. Global energy prices began to rise sharply in 2004 and natural gas demand in Europe rose dramatically — just as Russia got its energy production back up following the Soviet collapse. Flush with cash, Russian GDP rose tenfold between 2000 and 2009. Russians' standard of living increased fourfold, and real disposable income rose 160 percent. Unemployment and the poverty rate were reduced by half. But with more income came more military spending: Under Putin, spending on the military increased nearly fivefold.

For most of Putin's leadership, the Russian economy and its financial position have been relatively stable. This enabled Moscow to focus on its borderlands — and specifically to push back against what it perceived as persistent foreign encroachment following the Soviet collapse. NATO and the European Union had expanded into some of the former Warsaw Pact and Soviet states, either offering them membership or association agreements. But with the United States preoccupied with the post-9/11 wars in Afghanistan and Iraq, Moscow was able to gain traction against what it perceived as expanding foreign influence on its borders.

Russia made its own security alliances to counter NATO with the creation of the Collective Security Treaty Organization in 2002. Moscow also used its energy resources to manipulate alliances on its borders. It used a series of energy cutoffs to Europe to ensure that Ukraine and Georgia would not be admitted into NATO. Then, Russia invaded Georgia in 2008, and NATO did not intervene. In 2010, Moscow pressured Ukraine to elect a more Russia-friendly leader. From 2010 to 2015, Russia expanded its economic union with Kazakhstan and Belarus to include Armenia and Kyrgyzstan.

The West painted Putin as a thug and Russia as an aggressor, but the Russian people praised the man who helped their country return to being a regional, and even global, power. Putin fulfilled his social contract with the Russian public, and in return, the people loved him.

Signs of Weakness Presage the Next Phase

Despite Putin's popularity, his rule is beginning to show signs of weakness, and threats to Russia's stability and external influence are increasing. The cycle, it seems, has not been broken. In 2014, Russia experienced a series of blows to its power. First, the Russian-friendly government in Ukraine was overturned in another uprising, leading to a staunchly pro-Western government in Kiev. Moscow attempted to incite the country against what it deemed a Western-backed coup, but its attempts only revealed the limits of Russian power. Now, Russia has only limited influence in a sliver of eastern Ukraine held by Russian-backed rebels.

Russian actions in eastern Ukraine united the European Union and the United States to exact a series of economic sanctions on the country and on several of its citizens. Meanwhile, oil prices crashed, falling from triple-digit prices per barrel in mid-2014 to the low $40s per barrel today. The combination of low oil prices and conflict with the West caused foreign investment into Russia to plummet by 50 percent in 2014. By 2015, foreign investment fell to nearly zero. The Russian ruble fell by 40 percent in 2014 and remained volatile the following year, and capital flew from the country, $160 billion in 2014 and another $85 billion in 2015.

The Russian people are bearing the brunt of the economic pain. With the decline in the currency, 25 percent of Russians have had their salaries cut, and 15 percent have lost their jobs altogether. The average monthly wage has dropped to below $450 a month, less than in China, Romania and Serbia. On average, Russians have spent half their incomes on food this year. And more than half of Russians believe that their economic position will only worsen in the years to come.

The current recession in Russia differs from the 2008-2009 economic crisis, which was part and parcel of the global financial crisis. Moreover, this recession is coupled with foreign policy shortcomings in Ukraine and in its standoff with the West. Russia is now seen as isolated on the international stage. The Kremlin has sporadically rallied national support over the past two years with its annexation of Crimea and with its intervention in Syria against the wishes of the West, but such acts have only momentarily increased patriotism.

Instead, the economic and foreign crises are starting to burden Putin's government, forcing the Russian leader to become increasingly authoritarian, according to the cycle. Even Ivan the Terrible started out popular, carrying on his grandfather's push to transform Russia from a medieval regional state to a far-reaching empire. It was not until famines and failed wars began to threaten Russia that Ivan IV became the brutal leader he is now remembered as. Putin could meet the same fate. He faces similar dilemmas, and will soon have to make tough decisions on how to maintain power and stability and protect Russia's borders.

As cash flows diminish, the political, security and business elite that make up the current Russian government are grasping for assets and power. Previously, Putin has been able to manage such power-grabs, but over the past two years the elite have pushed back, leading to the fall of some of the most powerful men in the country. Increasingly concerned that those fallen leaders will band against him, Putin is surrounding himself with loyalists who have no power of their own. Progressively uncertain of the loyalty of the Russian military and security services, the Russian leader has also created his own personal military, the National Guard, made up of 400,000 troops directly accountable to him.

Putin has been able to rule Russia with an iron grip for 16 years because of his government's popularity, but this, too, is slipping. Approval ratings for the government have fallen from 66 to 26 percent, and Putin's personal approval rating has fallen from 88 percent to 74 percent over the past two years. In recent parliamentary elections in September, voter turnout was the lowest in post-Soviet history, revealing the lack of faith in the process and government. In those elections, Putin was able to massage the results enough to give his party, United Russia, a supermajority so he could push through the tough and unpopular legislation necessary to hold power. Under the increasingly authoritarian leader, the government passed a series of draconian laws to suppress the Russian people should dissent become instability.

These domestic challenges come as pressures on the country's borders continue to mount. Russia's intervention in Ukraine has vacillated between a frozen and low-intensity conflict. The West maintains sanctions on Russia and is even discussing expanding those sanctions because of Moscow's intervention in Syria. NATO continues to build up its position along Russia's periphery, and Moscow's attempt to gain leverage in its talks with the West via Ukraine and Syria has fallen relatively flat in recent months. Russia could ramp up hostilities in the various theaters under negotiation with the West, but this risks isolating and over-extending Russia even more — similar to what happened in the period between Leonid Brezhnev and Mikhail Gorbachev.

This is not to say Russia is on the brink of collapse, only that the country is entering the next phase of its historical cycle, in which the state is highly vulnerable yet increasingly aggressive. Putin will therefore be acting from a position of survival instead of strength. Russia could muddle along in its compromised position for some time, but eventually the cycle must progress, and the next phase of transformation will begin.

 

Checking in on an old friend

Courtesy of The Real Deal:

“Jonathan Gray thinks people are getting too worked up about interest rates.

“There’s a (false) sense that owning real estate is the same as owning a bond,” Blackstone Group’s real estate head said in an interview on CNBC Tuesday. “Real estate, like stocks, can see earnings growth. And that’s what we’re seeing today because of favorable fundamentals.”

As the Federal Reserve readies itself to raise short-term rates later this year, many in the real estate industry worry that higher short-term rates could spill over into higher long-term rates, which could increase the cost of financing and put downward pressure on property prices.

But Gray argued that rising rates don’t have to be bad for the real estate market since they tend to coincide with improving fundamentals – such as employment and income. He pointed out that the real estate market “did OK” in previous eras of rising rates.

“We don’t expect to see the growth in value in the next couple years that we’ve seen in the last four or five years,” he admitted. “But we don’t expect to see some sort of sharp decline in the near term.””

It’s worth paying attention to the guys at Blackstone, as they are the biggest of the big in institutional real estate. And his logic about real estate having an ability to increase rents does distinguish it from bonds. BUT…we are dealing in unchartered territory when it comes to central bank policy, and part of what has driven recent pricing in real estate is the interest rate environment that we live in. As such, many folks have increased their allocation to the space because of its financialization and as an expression of an alternative to traditional fixed income. So, Gray may be right, but there is a lot more going on that muddies the waters in terms of what comes next.

Job Story

An interesting read on the Obama "boom".  In particular, this chart tells a story that the media often glosses over:

Interesting Links

I caught up on Glenn Greenwald's latest article today, which uses one of my current favorite terms ("Echo Chamber") in its title.  I recommend it to all.

After that, I went down the rabbit hole and came across his earlier piece from late August about The Clinton Foundation.  There continues to be hysterics anytime someone suggests that there is a clear conflict of interest in the fact that countries like Saudi Arabia, Kuwait and the U.A.E. made huge contributions to CFI in order to gain access to the highest levels of power in the United States.  To be clear, there is much insinuation but little actual proof,even as the whole thing really stinks.  But, Glenn offers up an insight on the topic that should cause everyone to see the merit in the claim -- the pronounced goals of CFI include the empowerment of women and standing up for the rights of LGBT people.  I ask, do you really think that Saudi Arabia and other such countries that have donated tens of millions of dollars really care about those causes, and that that's the reason that they ponied up?

And then there is fun bit:

"While this “no quid pro quo proof” may be true as far as it goes, it’s extremely ironic that Democrats have embraced it as a defense of Hillary Clinton. After all, this has long been the primary argument of Republicans who oppose campaign finance reform, and indeed, it was the primary argument of the Citizens United majority, once depicted by Democrats as the root of all evil. But now, Democrats have to line up behind a politician who, along with her husband, specializes in uniting political power with vast private wealth, in constantly exploiting the latter to gain the former, and vice versa. So Democrats are forced to jettison all the good-government principles they previously claimed to believe and instead are now advocating the crux of the right-wing case against campaign finance reform: that large donations from vested factions are not inherently corrupting of politics or politicians."

We should all know better.

Globalization

Courtesy of Stratfor:

Globalization...is sowing the seeds of its own undoing. By distributing its fruits so unevenly, globalization is driving wedges between upper and lower classes in the developed economies. In so doing, it is also driving further wedges between the lower classes in developed economies and the citizens of other nations, who are painted as enemies by populist demagogues.

The promise of free trade is undeniable: Everybody likes those everyday low prices. But the consequences of the differential distribution of the benefits of globalization are becoming disturbingly clear: For the upper classes, the world is their oyster. For the lower classes, the world is their competitor.

More Wrongness

Because someone on the internet is wrong again, in particular on my facebook feed, I will post. This time it relates to an endorsement of Hillary’s position the other night that Russia is not interested in fighting ISIL when it acts in Syria, but merely in securing its last and final outpost in the Middle East, thereby threatening a direct confrontation with the United States.

Nein nein nein.

For Russia, it is about creating positive optics at home for its national audience as its economy struggles (Putin gets higher approval ratings when the motherland behaves like a strong military power abroad), and finding a lever in the far more important negotiation with the West over Ukraine (as the outcome of that issue is of existential importance to Russia). ISIL is a threat to Russia, especially as its reach spreads to the Caucasus – the Russians definitely do not like jihadists on their door step. But, Ukraine is more important than even that.

So, while it seems that they are creating the real possibility of direct confrontation with the United States – something that rarely happened even during the Cold War – remember it is only happening in a venue where neither party faces a true threat to its continued existence. In other words, no one is going nuclear over Syria. And therefore both parties can get disentangled from this situation with relative ease.

End the Myth

So Warren Buffett released information today about his most recent tax returns as something of a "touche" to Donald Trump.  In the primordial visual signaling echo chamber that is my facebook feed, it was gobbled up like the gospel and proof positive of...well, I'm not really sure.  I don't have any dog in this hunt, and have known for years that Trump is a lowlife.  Yet what Buffett described only makes me think that Mr. Trump was right -- the richest of the rich have plenty of opportunities to pay "way less than their fair share."  More generally, though, it still bothers me that Uncle Warren continues to get the royal treatment amongst the uneducated masses.  But we know better.

Let's start with the basic overview.  The guy is worth $70Bn and his AGI was $11.6M?  And his effective tax rate was 16%?  So, essentially, he paid less than .001% of his net worth in taxes -- that's not a terribly impressive ROE.  So, right away we know that he did something creative.  And that's kind of the point, everyone at that level of wealth does it.  And without seeing the actual return, there is no way to know what Buffett actually did from an accounting standpoint.

Regardless of that, the history is there to prove out that Mr. Buffett is a "tax evader".  For the first 70 some-odd years of his life, he paid de minimis taxes by taking advantage of the rules.  Never paying dividends, rolling all the free cash flow that Berkshire made back on to the balance sheet, never selling any shares and paying capital gains.  All acts that fall within his rights.

And then, of course, he made the decision to give all his money to a non-profit run by his buddy.  How charitable.  But, play it out.  He is a big proponent of everyone paying their full share and 50% inheritance taxes -- yet the guy with the biggest tax bill around won't be paying a dime.  And could we also say that the subtext here is that he, and all the other billionaires who made the same pledge, don't have the most faith that their money will go the furthest if it's handed off to Uncle Sam?

Anyway, none of that makes him a bad guy.  But he definitely is not a saint either.