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Wednesday, June 1, 2011

Book Review - In the Garden of Beasts: Love, Terror and an American Family in Hitler's Berlin



The story is really just a long version of the metaphor of a frog sitting in boiling water. How do you cook frog soup? Well, if you put a live frog directly into a pot of boiling water, it will spring out. However, if you put the frog into a pot of warm water and then slowly bring it to a boil, the frog will be cooked. This is exactly what happened in early days of the Third Reich.

You see the story shows how millions of people can be seduced into following a disastrous course of events. Even with clear warnings, people followed an implausible regime to eventual destruction and looked the other way while horrible acts were committed on a specific few.

As Larson writes in the prelude, this story isn't about heroism. There are no intricate plots nor elaborate storyline. It simply tells the tale of an American family living in 1930's Berlin witnessing the creeping fanaticism of Nazism. However part of what makes this interesting is that this was the family of one William Edward Dodd, US ambassador to Hitler's Germany from June 1933 to December 1937. Dodd wasn't the typical ambassador. Prior to being appointed he was Professor of History at the University of Chicago. He had studied as a graduate student in Leipzig and had moderate knowledge of German culture and language. Unlike the archetypal foreign service officer, he bore moderate means and had a frugal, "Jeffersonian" approach to life. Roosevelt had identified several more natural choices for ambassador but each demurred for one reason or another and Dodd was chosen for the post. With his wife and two grown children, Dodd boarded a steamship for simmering Germany. The date was June 10th, 1933.

Larson tells of a Germany that is very different than what it will become throughout the course of the year. Streets are full of vibrant life. Parks are open and verdant, and people are excited about a Germany that is recovering from a terrible defeat in the Great War and years of raging inflation.

At the time, Hitler's powers were checked. He served as Chancellor of Germany with limited authority. The president of Germany, Paul von Hindenburg, was Supreme Commander of the Armed Forces and had much of the power in the country. Larson tells how Hitler and his regime of fanatics slowly assume power and spread a kind of martial law throughout the populace. The transformation of the state was dramatic yet gradual. Hitler's power was not absolute, but he used every opportunity to weaken the democracy and grab military control.

The story centers on Dodd bearing witness to an organized state receding towards autocracy. There were many signs of extreme oppression. First it started with imprisonment of communists and members of the Social Democratic Party in concentration camps. Next the government promulgated a campaign of "Coordination" that sought "to bring citizens, government ministries, universities, and cultural and social institutions in line with National Socialist (Nazi) beliefs and attitudes." This coordination started as neighbors informing on one another to the State Police (Gestapo) - frequently the result of "petty jealousies" and "human meanness".

Newly enacted laws forced ordinary citizens to salute at official processions and during the national and military anthems. Those that didn't were beaten or worse. In fact, much of Dodd's initial duties were registering official complaints on behalf of American citizens that were beaten!

Coordination also had more sinister aims. A key "Aryan clause" was put forth to ban Jews from holding government jobs, practicing medicine and law. Amazingly, Larson writes how Jews did not take these threats seriously - 90% stayed in Germany - even when a song popular with Nazi Storm Troopers was named "When Jewish Blood Spurts from My Knife!" Many believed the anti-Semitism was a populist strategy to gain further political power. Larson writes "On the surface, much of daily life remained as it had been before Hitler came to power. Nazi attacks on the Jews were like summer thunderstorms that came and went quickly..."

One thing that I didn't like about the story was Martha Dodd, the ambassador's 25-year old daughter. Much of her time in Germany was spent sleeping with one Nazi or another - all while she was still technically married. Larson spends countless pages discussing her ongoing relationship with a KGB agent named Boris. What is interesting and somewhat representative about Martha is her belief in the Nazi cause. Larson tells how she didn't believe the negative press about Nazism and believed that Hitler's policies were bringing a vibrancy and zeal to a beaten down land.

Also annoying were Larson's protracted discussions of Dodd's disagreements and conflict with the "pretty good club" at the US State Department. Many US State Department personnel in the foreign service came from privileged backgrounds and most disliked his modest ways and frugal approach to running the embassy. Larson tells how Roosevelt is really Dodd's only supporter and thus the reason why he lasts as long as he did. I believe Larson uses this and the Martha Dodd narrative to add some texture to the story but he spends too many pages on these plot lines.

Throughout the story we learn of more horrifying social programs introduced by the Nazi regime. One called the Law for the Prevention of Hereditarily Diseased Offspring required sterilization of those with mental retardation or mental illnesses. Ultimately Hitler pushes through a law allowing euthanasia. While many foreign observers are appalled, the German people remain sanguine.

Larson also creates some suspense leading up to Hitler's purge of the government. Unsurprisingly, there was much backbiting and political posturing in the regime. Hitler had enemies - some significant - throughout the government. In one narrative, Larson describes how in a matter of hours martial law is established and political executions in the hundreds are carried out. Hitler's Operation Hummingbird (more commonly known as the Night of the Long Knives) consolidates his control and positions him to eventually take the Presidency once Hindenburg dies. Until then, many in Germany and abroad believed the Nazis were a temporary political phenomenon riding the public desire for Germany to rise as a nation. Larson tells how this event is the turning point for those (including Dodd) denying Hitler's control over the German people.

A key antagonist to Dodd is George Messersmith, Consul General. Messersmith was a thorn in Dodd's side for warning Washington of Hitler's true ambitions and his ability to achieve them. In one cable Messersmith writes, "I wish it were really possible to make our people at home understand how definitely this martial spirit is being developed in Germany. If this government remains in power for another year, and it carries on in the measure in this direction, it will go far toward making Germany a danger to world peace for years to come. With few exceptions, the men who are running the government are of a mentality that you and I cannot understand. Some of them are psychopathic cases and would ordinarily be receiving treatment somewhere." (Wikipedia)

Dodd is one of a few who sound alarm bells in Washington - though too guardedly. He continuously protests Nazi policies by not attending Nazi benefits and processions. In 1933 when Hitler leads Germany to leave the League of Nations and ultimately violates the Treaty of Versailles, other nations do not militarily intervene trying to avoid a conflict that was already upon them.

What sets the story and storytelling style apart is the feeling that things in Nazi Germany are placid even though evil lurks at every corner. Normal, peaceful people are faced with outrageous events and facts but choose to deny them with the belief that they are short-lived. Some revel in the jingoism, but most just go about their daily lives aware but in denial. It is implied that people's patriotism creates blinders to the genocidal policies that the Nazis implement. There were few who voiced opposition and raised alarms but they were immediately shunted to the fringe of society. They were the doddering reactionaries or conspiracy theorists. Unfortunately they were also right.

Reading the book, I found myself marveling at people's calm reactions to a violent and sadistic regime. But then I realize that it is ex-post that I have these feelings. What if I were standing with Dodd? Would I voice my outrage or just follow suit. And then I realize how such extreme events happen. People don't want to admit what they really fear is true. Faced with unbelievable but real events that contradict people's desires of well-being, most just go with the flow. History is littered with examples of ostriches and lemmings burying their heads in the sand and rushing to be at the front of the line leading off a steep cliff.

But is this story relevant today? It sets an extreme but real scenario which has been played out and objectively recorded in countless history books. For those who believe that history tends to repeat itself, Larson's story is a necessary read.

Wednesday, March 30, 2011

Sokol - Did he do anything wrong?

Sokol resigns and Buffett maintains that his former lieutenant didn't do anything "unlawful"?

The SEC will certainly have a view on this, but certainly it was unethical. In his press release, Buffett says that Sokol's purchases were made before (his italics not mine) discussing Lubrizol as a potential acquisition candidate. But here is the issue. There are two outcomes of Sokol's January 14th or 15th conversation with Buffett:

1) Buffett doesn't buy Lubrizol
2) Buffett buys Lubrizol

Since Lubrizol wasn't pricing in a Buffett takeover when Sokol starting buying, he didn't have much to lose. Heads he wins; tails he doesn't lose. That sounds like a pretty good bet to me.

Imagine Sokol had a strategy where he would buy stock in a company and then bring the idea to Buffett as a potential acquisition. Clearly that would be a winning strategy - if it were legal.

Sokol clearly had material non-public information. If a third-party bought Lubrizol with the foreknowledge that Sokol would be discussing it as a possible acquisition target, that would clearly be trading with material non-public information.

It bothers me that Sokol did this and it bothers me that Buffett does not see that his action was wrong.

Monday, February 21, 2011

Big fan of this site...

www.stackoverflow.com

Almost every programming question answered (at least once)...

Wednesday, February 9, 2011

Well hello there...

Sorry it's been a while since my last post. I have been vigorously trying to improve my programming capabilities. I hope to have something up for everyone (meaning me) to play with soon.

Thursday, December 2, 2010

From WSJ Today

From article:

"Goldman Sachs, whose forecasters have been among the most downbeat about the strength of the recovery, said in a note to investors Wednesday that prospects for U.S. growth had "brightened significantly in recent weeks." The bank revised its 2011 growth forecast for gross domestic product to 2.7%, from 2.0%."

Translation:

While we try hard, we have no ability whatsoever to predict the future. Our forecasts are based on the prevailing sentiment of the day. Stay tuned for further revisions...

Sunday, November 28, 2010

Futures Taxation

There are a few free lunches in this world. The Commodity Futures Modernization Act (CFMA) of 2000 provides a futures investor with a distinct tax advantage over the securities investor.

First let's understand briefly what the CFMA rules say. CFMA is a long, complex piece of legislation addressing all sorts of futures vs securities issues in the capital markets. In particular, it exempts OTC derivatives from being regulated as futures or securities. It also attempts to clarify taxation treatment of commodities. Prior to the CFMA, traders used "straddle" strategies to offset the risk of an appreciated position thereby deferring capital gains on one side and potentially realizing a loss on the hedge. The CFMA clarified rules around straddles and also specified tax on Commodities defined as any regulated futures contract, foreign currency contract, non-equity option, dealer equity option and dealer securities futures contract as per IRC Section 1256.

Under the new tax rules for traders electing mark-to-market accounting (ie, realizing capital gains and losses at end of each year) 60% of futures gains would be categorized long-term and 40% short-term. These would be taxed at the prevailing long-term and short-term rates (currently 15% and 35% for those in highest bracket). The blended rate would be 23% even if trades are entered and exited intraday.

This has all sorts of implications for those that are willing to make a mark-to-market designation on their tax return (note this has other ramifications that are important for those that have large unrealized gains).

For example, if you have the choice between owning Treasury bonds for investment income and bond futures, you probably want to choose the latter. While bond futures have some complexity due to the cheapest-to-deliver option, you earn the bond's coupon income through the forward price calculation. Given CFMA designates the majority of any income/gain as a long-term capital gain, you are advantaged by substituting futures for a long cash position all else equal.

The same holds true for futures on broad equity indices. The advantage vs index funds and index ETFs could be substantial for shorter term traders.

Wednesday, November 10, 2010

Wanna Be A Miner?

Now being stuck for sixty-nine days in a cramped, dank cave with thirty-two other sweaty men is probably not what anyone wishes for. However the exhilaration and joy of emerging into the fresh air probably was the sweetest breath taken for each of the famed Chilean miners. It also doesn’t hurt that they have a movie deal, various endorsements and designated hero status in pretty much every country around the world – except maybe North Korea where being kept underground is a form of punishment like everything else. In short, after more than two months of hell, the miners are consuming the most precious of all US exports – the American Dream. Good for them.

We live in a world of interconnected imbalances. Helped by rapid advances in broadband communications, the world has begun to resemble the Net itself – nodes and branches. The interconnections are everywhere. For example, the US depends on India for cheap customer service, and in turn India depends on the US for routers and other gear. The imbalance is driven by the US net trade balance relative to overall world trade. Or more simply, the US imports significantly more than it exports - so much more in fact that roughly half of the total trade surplus generated by countries running a surplus is generated from the US.



When a country runs large trade balances it is generating foreign currency. In today’s world this is seen in the large dollar reserves held by the world’s central banks most notably China. Once a country obtains the currency, they have to decide what do with it. They can leave it in cash (dollars), use the dollars to buy an asset, or convert the dollars to another currency. Since cash pays no interest, most holders of dollar reserves have elected to buy high quality US government guaranteed obligations or Treasuries. By doing this they earn a slight interest rate and maintain their reserves in dollars.

Dollar reserve accumulation has been the trend for many years as evidenced by the persistent negative US trade balances. Since dollars have been viewed as the preferred global reserve currency post WWII, central banks have been willing to accumulate them.



Many headlines predict catastrophe by the large foreign exchange reserves held by China worried that the US is being “bought”. This is the wrong way to think of it. The US is not like a corporation; there would be no bankruptcy, foreclosure or liquidation of the US in any circumstance. The country in a precarious position is China. They hold large amounts of US debt that is backed only by the US promise to pay (ie, “full faith and credit”). Remember if they want to change their holdings out of dollars, they have to sell the bonds and then convert the currency. But how can they do this? At $2.5 trillion, China cannot easily sell. Selling the Treasuries may be the easiest of the actions as the Fed is a committed buyer. What about converting out of the dollars? What would they buy and how much could they buy?

As a thought experiment, let’s assume they wanted to allocate 10% of their dollar reserves (assume $200bn) to another currency. If it’s the euro or yen, this can likely be done with minimal market impact over several weeks. But the euro and yen have their own issues. The euro is plagued by sovereign credit concerns and the yen is facing its own structural issues, so these may not be the best options. There are smaller currencies that may be better bets such as the Swiss Franc or Singapore Dollar, but these are too small to allow any meaningful percentage.

What about gold? How easy would it be to buy $200bn of gold? At a price, $1400/oz they would need to buy about 143mm ounces or 4400 tons. Given the annual production of gold is less than 3000 tons, this volume would be impossible. The same would hold true for almost every other store of value.

Adding to their woes, they are growing their reserve position by over 10% every year. When you add the fact that most of the world’s resources are owned, controlled or influenced by the West, you arrive at the simple conclusion that China cannot get out of their reserve position!

What is likely is that spurred by their ever increasing position and the new willingness by the US to debase the currency (ie., Bernanke’s QE2), China will become more aggressive in securing non-dollar assets such as mines, pipelines, ships, gold, silver and other goods in regions where the US has less sway (ie., Africa, Cuba, South America, Russia). China will also take a longer term approach to diversification and this will be supportive to commodity prices globally. The dual forces of continued development in emerging markets and the need to diversify reserves may bring about a commodity price boom that we have not seen in history.

Higher commodity prices will create the incentive to produce and extract more resources and this will have ripple effects on the demand for equipment, labor and logistics – which brings me back to wanting to be a miner. Chile with its massive copper reserves will likely be the preferred destination for Chinese delegates for a long time. Even with the risks, being a miner wouldn’t be so bad.