Q4 ’15:   Uncertainty

The world is in a state of confusion, reflected in markets across the board, which went nowhere for all of 2015 (see BloombergThe Year Nothing Worked”). The new year started off with a sharp, but historically normal, selloff in stocks (Dow -13%, S&P -11%). Market fundamentals suggest more downside but the selloff precipitated a level of pessimism usually only seen at significant market bottoms.

Some good things are happening…notably the global climate agreement and the nuclear deal with Iran. At the same time there is plenty to be concerned about.

Global deaths from terrorist activity rose 80% in 2015 to the highest level ever. And the long running conflicts in the Middle East have boiled over into a geopolitical bar fight. Refugees from the conflict have thrown the European Union into chaos. The long overdue correction in China threatens to swamp the global economy. Disputes over the South China Sea and North Korean provocations are simmering in the background.

In the U.S., mass shootings (4 or more casualties) occurred on a daily basis in 2015. Black communities (Black Lives Matter) are venting their anger at aggressive police tactics that leave too many of their young men dead. A victim cult is roiling campuses with demands for “safe spaces” where they won’t be subjected to anything that offends them (see “The Real Victims of Victimhood”). And in this presidential election year the usual hyperbolic political rhetoric has ramped into outright hysteria.

If you’re not confused, you’re not paying attention.

Is this the calm before the storm? Or is this an ugly but relatively stable transition to a new normal? Stay tuned.


Financial markets are now all about the Fed, which finally began raising the Fed Funds rate for the first time in 7 years (1/4% in December). Market commentators are endlessly opining on what the Fed did, might do, might not do, should do, must do, must not do…”how could they; it’s madness,” “how could they not; it would be catastrophic.”

Market participants are equally confused. Credit Suisse recently posted a piece based on a survey of clients in the U.S., Asia and Europe entitled “Client perspectives: lost and bearish.” The bottom line…”Never have we seen so many clients who just do not know what is happening…” This pretty much sums up the state of the marketplace.


Fed confidence notwithstanding, the economy is pretty uninspiring. Job growth has been steady but the economic value of the jobs created is a fraction of the value of jobs lost. The result is stagnant growth in wages along with steady increases in cost of living…persistent, low-grade stagflation for wage earners!

Investors increasingly need to take a global view of economic developments. Monty Guild, President of Los Angeles based Guild Investment Advisors, offers an expanded and generally upbeat perspective on the global economy.

“Many market participants look at manufacturing data to get a picture of the economy…So when manufacturing data is slowing in the U.S., Europe, and China, some uninformed and shallow researchers begin to panic.

Of course it is slowing down and it can slow more in coming years. Why? Because China especially, and the developed world as well, are not on a manufacturing trajectory to economic growth. Software, services, consumer spending, and technology are all the drivers of these economies. China is in the midst of an epochal transition from an economy driven by manufacturing to one driven by the domestic consumer…

Accordingly growth is in these areas, and there is no problem with the economy if it shifts partly from metal fabrication to services and software. The changes require investors to decipher which metrics to follow in order to understand the new economy.


America was treated to a rare example of balance and honesty in a public figure when Pope Francis descended on the mad state of American public life, sending a breath of fresh air across the toxic landscape, and a brief pause in the relentless focus of our media on dysfunction and catastrophe.

The enlightened Pope gave American politicians an example of honorable public discourse. He demonstrated a combination of balance, compassion and integrity along with a deft political sensibility that communicated readily across the political spectrum to all but the rabid ideologues on the extremes. His well considered positions on divisive social issues demonstrated compassion and inclusiveness without compromising his core beliefs.

I hope that some among our political elite actually took note of the Pope’s demonstration and committed themselves to a higher path.

Beltway “wisdom” is that this is a naïve and foolish sentiment. I think the American people are weary of beltway “wisdom” and hungry for some integrity in our political process.

In fact, it is the virtually universal disdain for the corrupt and inbred beltway culture that has resulted in the election of two consecutive unqualified candidates as President, in a desperate attempt by the American people to choose a leader who will bring real change to Washington. Frustration has now turned to anger, manifest in the popularity of Fascist leaning Donald Trump on the right and Socialist Bernie Sanders on the left.

Meanwhile, actions in Washington continue to erode any remaining semblance of our government as a representative democracy. E.g. After several failed attempts (due to widespread bi-partisan opposition) to extend and expand the profoundly un-American Patriot Act, the deed was accomplished by slipping the Cybersecurity Information Sharing Act (CISA) into the must-pass 2,000 page year end Omnibus spending bill so it could become law without debate.

So who is benefiting from our national dis-integration? For a clear and concise picture of what is really happening behind the scenes, read Bill Moyers’ recent essay “The Plutocrats Are Winning.”


The “Arab Spring” inspired civil war in Syria along with the dismantling of neighboring Iraq created the perfect environment for the rise of ISIS, a medieval Islamic cult with 21st Century social media skills. ISIS is eager to provoke another U.S. invasion of the region so as to usher in The Day of Judgement (Armageddon) and the Final Victory of Islam. This of course has Republicans clamoring for…you guessed it…another U.S. invasion in the Middle East!

President Obama is trying to keep the U.S. out of it, but at the same time has ordered Special Forces “advisors” into Syria after repeatedly stating unequivocally “no American troops in Syria.” For those with memory of Vietnam, this will sound very familiar.

Ironically, the U.S. is huddling with Iran and Russia to coordinate a campaign against ISIS, even as both of those nations continue to pursue multiple agendas in opposition to the U.S. And President Obama’s nuclear deal with Iran is now a done deal, freeing up $100 billion in frozen assets for Iran. Our allies in the region, the Saudi’s in particular, are extremely unhappy over both of these developments, and are trying to galvanize opposition to Iran by inflaming regional sectarian conflicts. And for the icing on the Mideast FUBAR cake…U.S. ally Turkey’s President Erdogan recently praised Hitler’s Third Reich as “an example of effective government.”


The best opportunity these days, as it has been for quite some time, is to play defense and try to avoid losses. Continuous central bank intervention has rendered market fundamentals irrelevant, so it is difficult to take a position in anything with any degree of confidence. Bonds of all stripes are the most important area to avoid. The U.S. dollar and the U.S. stock market, especially stock in large cap global companies that can move assets globally and are in a position to take advantage of the massive growth in Asian markets, are generally seen as the preferred safe haven. These assets are currently in a correction and may soon offer a buying opportunity.

Precious metals, a traditional safe haven, have been constrained by deflationary pressures but when that cycle completes, which could be very soon — even as soon as right now — precious metals will provide excellent safety and value.

With no reliable fundamental drivers and so many potential triggers for turmoil, expect volatility and BE CAUTIOUS. Lost opportunity is far easier to endure and recoup than lost capital.


Q2 ’15:   Green Shoots

“Two things have always been true about human beings. One, the world is always getting better. Two, the people living at that time think it’s getting worse.” Penn Jillette

Political, economic and technological changes are rapidly changing the face of human civilization on planet Earth. At such a time it is easy to become overshadowed by the destruction of the old and miss the “green shoots” of the new, manifesting simultaneously.

I recently had a takeout lunch from Chipotle and to my amazement I discovered a short essay on the bag by one of my favorite public intellectuals, Steven Pinker, who frames the situation perfectly. Kudos to Chipotle management! The piece follows:

“It’s easy to get discouraged by the ceaseless news of violence, poverty, and disease. But the news presents a distorted view of the world. News is about things that happen, not things that don’t happen. You never see a TV crew reporting that a country isn’t at war, or that a city hasn’t had a mass shooting that day, or that millions of 80 year-olds are alive and well.

“The only way to appreciate the state of the world is to count. How many incidents of violence, or starvation, or disease are there as a proportion of the number of people in the world? And the only way to know whether things are getting better or worse is to compare those numbers at different times: over the centuries and decades, do the trend lines go up or down?

“As it happens, the numbers tell a surprisingly happy story. Violent crime has fallen by half since 1992, and fiftyfold since the Middle Ages. Over the past 60 years the number of wars and number of people killed in wars have plummeted. Worldwide, fewer babies die, more children go to school, more people live in democracies, more can afford simple luxuries, fewer get sick, and more live to old age.

““Better” does not mean “perfect.” Too many people still live in misery and die prematurely, and new challenges, such as climate change, confront us. But measuring the progress we’ve made in the past emboldens us to strive for more in the future. Problems that look hopeless may not be; human ingenuity can chip away at them. We will never have a perfect world, but it’s not romantic or naïve to work toward a better one.”

Following are links to inspiring developments toward the creation of a better world.


The Rodale Institute has been quietly conducting research into what they call “regenerative agriculture.” Not just organic and healthy for the consumer; this is systemically organic and healthy for the entire planet.

Rodale has conducted a 30 year test of regenerative vs chemical farming and demonstrated that regenerative agriculture not only revitalizes the soil and eliminates toxic chemicals from our food, air, water and land; it produces better yields than chemical agriculture, and restores balance to the general ecology in the process.

But according to Rodale, the big surprise is that if adopted widely, regenerative agriculture will solve the problem of carbon pollution, a major contributor to global warming…as a side effect!

“Simply put, we could sequester more than 100% of current annual CO2 emissions with a switch to widely available and inexpensive organic management practices, which we term “regenerative organic agriculture.”

This research has been incorporated into The Carbon Underground to promote the adoption of broad-scale regenerative agriculture.

Meanwhile, alternative energy has been making steady gains in market share, efficiency and cost. 32% of all new electric generating capacity in the U.S. in 2014 came from solar. Lots of interesting data on the growth of solar at SEIA and Clean Technica. It is noteworthy that the U.S. Department of Defense is a leader in alternative energy development and deployment. Keep up to date with the latest developments in alternative energy at Alternative Energy News and E2 Environmental Entrepreneurs.


Geometrically expanding computing power is generating change much faster than we can grasp. The nature and variety of future applications are difficult — if not impossible — to predict, as leapfrogging technologies and the intersections of various technologies create new realities, from which even newer technologies and applications will spring. Following are a few items providing some insight into the magnitude of changes on the horizon.

  • Researchers in the U.S. and Germany have made major progress on a “brain to text” system that converts speech brainwave patterns to text, opening up direct mind to computer communications.
  • Researchers at Stanford have created an inexpensive water splitter that operates 24/7. Conventional water splitters require precious metals that make the process too costly. The new splitter uses inexpensive base metals, raising the prospect of a cheap and virtually unlimited supply of locally generated hydrogen fuel.
  • Recent advances in 3D printing are bringing real efficiencies and innovation to major industries, offering the promise of distributed economy and bringing manufacturing back home. See recent trade articles here and here, including a video of a 3D printed Shelby Cobra. “Print Thyself,” in the November 24, 2014 issue of The New Yorker, highlights the amazing array of applications already spawned by 3D printing.


Driven by technology, the field of medicine is being transformed through research and new tools and tactics. Following are a few amazing stories from the cutting edge of medical research and practice.

  • Heart attack treatment. The 6/21/15 New York Times featured “A Sea Change in Treating Heart Attacks” resulting in a 38% reduction in the death rate from coronary heart attacks.
  • Cancer treatment. 60 Minutes dedicated two segments to an amazing cancer treatment using the polio virus engineered to make it harmless to normal cells but deadly for cancer cells. Immunotherapy has become a hot area of cancer research, utilizing a variety of viruses.
  • “Electrocutical” drugs could induce growth of new brain tissue, addressing birth defects or brain injury. Early clinical trials have also demonstrated positive results for pain management and insulin regulation.
  • Australian researchers have created a non-invasive ultrasound treatment for Alzheimers that restores memory function.
  • General good news to set your mind at ease…cell phones do not cause brain cancer.

Fresh Thinking

The pace and scope of change is creating a need for fresh thinking about how we organize our affairs and interact with each other. Following are some fresh ideas on a number of fronts.

“Everyone is looking for a purpose in life…We are always wondering why we’re here. But I’ve learned that we have to create that purpose for ourselves. My purpose, which I finally found thanks to social media, is helping all of these people find their purpose.”

  • And for those obsessing over inevitable annihilation into a black hole, a new theory proposes that black holes create a carbon copy hologram of anything they touch. So rest easy. Your other self will survive. In fact, you may already have numerous other selves from previous contact with black holes.

If the daily news is getting you down, you can always log on to SunnySkyz.com for regular confirmation that the better angels of human nature have not gone away. Or you can go to KurzweilAI.net to check in on the latest amazing developments at the cutting edge of technology.

There is no arguing that we are living in challenging times. The pace of change is beyond the comfort level for most humans. You may find it useful to print the quotes above by Penn Jillette and Steven Pinker and tape them to your refrigerator, and heed the advice of Lao Tzu…

“Life is a series of natural and spontaneous changes. Don’t resist them – that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like.”


Q1 ’15:   Rationalizing Lunacy

The title of this quarter’s letter is taken from an article by Andrew Bacevich, professor emeritus of International Relations and History at Boston University. “Rationalizing Lunacy: The Intellectual as Servant of the State,” reprinted below with permission, addresses the impact of policy intellectuals on our foreign policy….characterizing them as “a blight on the Republic.”

Mr. Bacevich is a prolific author on the topics of foreign policy, national security and military affairs. He is an advocate for the Army and for the professional soldier. He both graduated from and taught at West Point, and served in Vietnam, retiring from the Army with the rank of Colonel. He lost his son, who was serving as an Army officer in Iraq, in 2007.

President Obama recently concluded a tentative interim Agreement with Iran to prevent Iranian development of a nuclear weapon. Obama makes his case in an interview with Thomas Friedman, “Iran and the Obama Doctrine,” in the April 5th New York Times. The opposition to that Agreement from Israel and the U.S. war lobby is intense. See the March 26th New York Times op-ed by perma-hawk John Bolton, “To Stop Iran’s Bomb, Bomb Iran,” and a more thoughtful analysis by Henry Kissinger and George Shultz, “The Iran Deal and its Consequences” in the April 7th Wall Street Journal.

Given the high stakes involved in the negotiations with Iran and the likelihood that a war that possibly should be fought will not be because too many wars that should not have been fought have been, it is a good time to consider the historical perspective and wise counsel of Mr. Bacevich. If we are lucky we might find him occupying the office of Secretary of Defense in the next administration.

Rationalizing Lunacy
The Intellectual as Servant of the State

By Andrew J. Bacevich

Policy intellectuals — eggheads presuming to instruct the mere mortals who actually run for office — are a blight on the republic. Like some invasive species, they infest present-day Washington, where their presence strangles common sense and has brought to the verge of extinction the simple ability to perceive reality. A benign appearance — well-dressed types testifying before Congress, pontificating in print and on TV, or even filling key positions in the executive branch — belies a malign impact. They are like Asian carp let loose in the Great Lakes.

It all began innocently enough. Back in 1933, with the country in the throes of the Great Depression, President Franklin Delano Roosevelt first imported a handful of eager academics to join the ranks of his New Deal. An unprecedented economic crisis required some fresh thinking, FDR believed. Whether the contributions of this “Brains Trust“ made a positive impact or served to retard economic recovery (or ended up being a wash) remains a subject for debate even today. At the very least, however, the arrival of Adolph Berle, Raymond Moley, Rexford Tugwell, and others elevated Washington’s bourbon-and-cigars social scene. As bona fide members of the intelligentsia, they possessed a sort of cachet.

Then came World War II, followed in short order by the onset of the Cold War. These events brought to Washington a second wave of deep thinkers, their agenda now focused on “national security.” This eminently elastic concept — more properly, “national insecurity” — encompassed just about anything related to preparing for, fighting, or surviving wars, including economics, technology, weapons design, decision-making, the structure of the armed forces, and other matters said to be of vital importance to the nation’s survival. National insecurity became, and remains today, the policy world’s equivalent of the gift that just keeps on giving.

People who specialized in thinking about national insecurity came to be known as “defense intellectuals.” Pioneers in this endeavor back in the 1950s were as likely to collect their paychecks from think tanks like the prototypical RAND Corporation as from more traditional academic institutions. Their ranks included creepy figures like Herman Kahn, who took pride in “thinking about the unthinkable,” and Albert Wohlstetter, who tutored Washington in the complexities of maintaining “the delicate balance of terror.”

In this wonky world, the coin of the realm has been and remains “policy relevance.” This means devising products that convey a sense of novelty, while serving chiefly to perpetuate the ongoing enterprise. The ultimate example of a policy-relevant insight is Dr. Strangelove’s discovery of a “mineshaft gap” — successor to the “bomber gap” and the “missile gap” that, in the 1950s, had found America allegedly lagging behind the Soviets in weaponry and desperately needing to catch up. Now, with a thermonuclear exchange about to destroy the planet, the United States is once more falling behind, Strangelove claims, this time in digging underground shelters enabling some small proportion of the population to survive.

In a single, brilliant stroke, Strangelove posits a new raison d’être for the entire national insecurity apparatus, thereby ensuring that the game will continue more or less forever. A sequel to Stanley Kubrick’s movie would have shown General “Buck” Turgidson and the other brass huddled in the War Room, developing plans to close the mineshaft gap as if nothing untoward had occurred.

The Rise of the National Insecurity State

Yet only in the 1960s, right around the time that Dr. Strangelove first appeared in movie theaters, did policy intellectuals really come into their own. The press now referred to them as “action intellectuals,” suggesting energy and impatience. Action intellectuals were thinkers, but also doers, members of a “large and growing body of men who choose to leave their quiet and secure niches on the university campus and involve themselves instead in the perplexing problems that face the nation,” as LIFE Magazine put it in 1967. Among the most perplexing of those problems was what to do about Vietnam, just the sort of challenge an action intellectual could sink his teeth into.

Over the previous century-and-a-half, the United States had gone to war for many reasons, including greed, fear, panic, righteous anger, and legitimate self-defense. On various occasions, each of these, alone or in combination, had prompted Americans to fight. Vietnam marked the first time that the United States went to war, at least in considerable part, in response to a bunch of really dumb ideas floated by ostensibly smart people occupying positions of influence. More surprising still, action intellectuals persisted in waging that war well past the point where it had become self-evident, even to members of Congress, that the cause was a misbegotten one doomed to end in failure.

In his fine new book American Reckoning: The Vietnam War and Our National Identity, Christian Appy, a historian who teaches at the University of Massachusetts, reminds us of just how dumb those ideas were.

As Exhibit A, Professor Appy presents McGeorge Bundy, national security adviser first for President John F. Kennedy and then for Lyndon Johnson. Bundy was a product of Groton and Yale, who famously became the youngest-ever dean of Harvard’s Faculty of Arts and Sciences, having gained tenure there without even bothering to get a graduate degree.

For Exhibit B, there is Walt Whitman Rostow, Bundy’s successor as national security adviser. Rostow was another Yalie, earning his undergraduate degree there along with a PhD. While taking a break of sorts, he spent two years at Oxford as a Rhodes scholar. As a professor of economic history at MIT, Rostow captured JFK’s attention with his modestly subtitled 1960 book The Stages of Economic Growth: A Non-Communist Manifesto, which offered a grand theory of development with ostensibly universal applicability. Kennedy brought Rostow to Washington to test his theories of “modernization” in places like Southeast Asia.

Finally, as Exhibit C, Appy briefly discusses Professor Samuel P. Huntington’s contributions to the Vietnam War. Huntington also attended Yale, before earning his PhD at Harvard and then returning to teach there, becoming one of the most renowned political scientists of the post-World War II era.

What the three shared in common, apart from a suspect education acquired in New Haven, was an unwavering commitment to the reigning verities of the Cold War. Foremost among those verities was this: that a monolith called Communism, controlled by a small group of fanatic ideologues hidden behind the walls of the Kremlin, posed an existential threat not simply to America and its allies, but to the very idea of freedom itself. The claim came with this essential corollary: the only hope of avoiding such a cataclysmic outcome was for the United States to vigorously resist the Communist threat wherever it reared its ugly head.

Buy those twin propositions and you accept the imperative of the U.S. preventing the Democratic Republic of Vietnam, a.k.a. North Vietnam, from absorbing the Republic of Vietnam, a.k.a. South Vietnam, into a single unified country; in other words, that South Vietnam was a cause worth fighting and dying for. Bundy, Rostow, and Huntington not only bought that argument hook, line, and sinker, but then exerted themselves mightily to persuade others in Washington to buy it as well.

Yet even as he was urging the “Americanization” of the Vietnam War in 1965, Bundy already entertained doubts about whether it was winnable. But not to worry: even if the effort ended in failure, he counseled President Johnson, “the policy will be worth it.”

How so? “At a minimum,” Bundy wrote, “it will damp down the charge that we did not do all that we could have done, and this charge will be important in many countries, including our own.” If the United States ultimately lost South Vietnam, at least Americans would have died trying to prevent that result — and through some perverted logic this, in the estimation of Harvard’s youngest-ever dean, was a redeeming prospect. The essential point, Bundy believed, was to prevent others from seeing the United States as a “paper tiger.” To avoid a fight, even a losing one, was to forfeit credibility. ”Not to have it thought that when we commit ourselves we really mean no major risk” — that was the problem to be avoided at all cost.

Rostow outdid even Bundy in hawkishness. Apart from his relentless advocacy of coercive bombing to influence North Vietnamese policymakers, Rostow was a chief architect of something called the Strategic Hamlet Program. The idea was to jumpstart the Rostovian process of modernization by forcibly relocating Vietnamese peasants from their ancestral villages into armed camps where the Saigon government would provide security, education, medical care, and agricultural assistance. By winning hearts-and-minds in this manner, the defeat of the communist insurgency was sure to follow, with the people of South Vietnam vaulted into the “age of high mass consumption,” where Rostow believed all humankind was destined to end up.

That was the theory. Reality differed somewhat. Actual Strategic Hamlets were indistinguishable from concentration camps. The government in Saigon proved too weak, too incompetent, and too corrupt to hold up its end of the bargain. Rather than winning hearts-and-minds, the program induced alienation, even as it essentially destabilized peasant society. One result: an increasingly rootless rural population flooded into South Vietnam’s cities where there was little work apart from servicing the needs of the ever-growing U.S. military population — hardly the sort of activity conducive to self-sustaining development.

Yet even when the Vietnam War ended in complete and utter defeat, Rostow still claimed vindication for his theory. “We and the Southeast Asians,” he wrote, had used the war years “so well that there wasn’t the panic [when Saigon fell] that there would have been if we had failed to intervene.” Indeed, regionally Rostow spied plenty of good news, all of it attributable to the American war.

“Since 1975 there has been a general expansion of trade by the other countries of that region with Japan and the West. In Thailand we have seen the rise of a new class of entrepreneurs. Malaysia and Singapore have become countries of diverse manufactured exports. We can see the emergence of a much thicker layer of technocrats in Indonesia.”

So there you have it. If you want to know what 58,000 Americans (not to mention vastly larger numbers of Vietnamese) died for, it was to encourage entrepreneurship, exports, and the emergence of technocrats elsewhere in Southeast Asia.

Appy describes Professor Huntington as another action intellectual with an unfailing facility for seeing the upside of catastrophe. In Huntington’s view, the internal displacement of South Vietnamese caused by the excessive use of American firepower, along with the failure of Rostow’s Strategic Hamlets, was actually good news. It promised, he insisted, to give the Americans an edge over the insurgents.

The key to final victory, Huntington wrote, was “forced-draft urbanization and modernization which rapidly brings the country in question out of the phase in which a rural revolutionary movement can hope to generate sufficient strength to come to power.” By emptying out the countryside, the U.S. could win the war in the cities. “The urban slum, which seems so horrible to middle-class Americans, often becomes for the poor peasant a gateway to a new and better way of life.” The language may be a tad antiseptic, but the point is clear enough: the challenges of city life in a state of utter immiseration would miraculously transform those same peasants into go-getters more interested in making a buck than in signing up for social revolution.

Revisited decades later, claims once made with a straight face by the likes of Bundy, Rostow, and Huntington — action intellectuals of the very first rank — seem beyond preposterous. They insult our intelligence, leaving us to wonder how such judgments or the people who promoted them were ever taken seriously.

How was it that during Vietnam bad ideas exerted such a perverse influence? Why were those ideas so impervious to challenge? Why, in short, was it so difficult for Americans to recognize bullshit for what it was?

Creating a Twenty-First-Century Slow-Motion Vietnam

These questions are by no means of mere historical interest. They are no less relevant when applied to the handiwork of the twenty-first-century version of policy intellectuals, specializing in national insecurity, whose bullshit underpins policies hardly more coherent than those used to justify and prosecute the Vietnam War.

The present-day successors to Bundy, Rostow, and Huntington subscribe to their own reigning verities. Chief among them is this: that a phenomenon called terrorism or Islamic radicalism, inspired by a small group of fanatic ideologues hidden away in various quarters of the Greater Middle East, poses an existential threat not simply to America and its allies, but — yes, it’s still with us — to the very idea of freedom itself. That assertion comes with an essential corollary dusted off and imported from the Cold War: the only hope of avoiding this cataclysmic outcome is for the United States to vigorously resist the terrorist/Islamist threat wherever it rears its ugly head.

At least since September 11, 2001, and arguably for at least two decades prior to that date, U.S. policymakers have taken these propositions for granted. They have done so at least in part because few of the policy intellectuals specializing in national insecurity have bothered to question them.

Indeed, those specialists insulate the state from having to address such questions. Think of them as intellectuals devoted to averting genuine intellectual activity. More or less like Herman Kahn and Albert Wohlstetter (or Dr. Strangelove), their function is to perpetuate the ongoing enterprise.

The fact that the enterprise itself has become utterly amorphous may actually facilitate such efforts. Once widely known as the Global War on Terror, or GWOT, it has been transformed into the War with No Name. A little bit like the famous Supreme Court opinion on pornography: we can’t define it, we just know it when we see it, with ISIS the latest manifestation to capture Washington’s attention.

All that we can say for sure about this nameless undertaking is that it continues with no end in sight. It has become a sort of slow-motion Vietnam, stimulating remarkably little honest reflection regarding its course thus far or prospects for the future. If there is an actual Brains Trust at work in Washington, it operates on autopilot. Today, the second- and third-generation bastard offspring of RAND that clutter northwest Washington — the Center for this, the Institute for that — spin their wheels debating latter day equivalents of Strategic Hamlets, with nary a thought given to more fundamental concerns.

What prompts these observations is Ashton Carter’s return to the Pentagon as President Obama’s fourth secretary of defense. Carter himself is an action intellectual in the Bundy, Rostow, Huntington mold, having made a career of rotating between positions at Harvard and in “the Building.” He, too, is a Yalie and a Rhodes scholar, with a PhD. from Oxford. “Ash” — in Washington, a first-name-only identifier (“Henry,” “Zbig,” “Hillary”) signifies that you have truly arrived — is the author of books and articles galore, including one op-ed co-written with former Secretary of Defense William Perry back in 2006 calling for preventive war against North Korea. Military action “undoubtedly carries risk,” he bravely acknowledged at the time. “But the risk of continuing inaction in the face of North Korea’s race to threaten this country would be greater” — just the sort of logic periodically trotted out by the likes of Herman Kahn and Albert Wohlstetter.

As Carter has taken the Pentagon’s reins, he also has taken pains to convey the impression of being a big thinker. As one Wall Street Journal headline enthused, “Ash Carter Seeks Fresh Eyes on Global Threats.” That multiple global threats exist and that America’s defense secretary has a mandate to address each of them are, of course, givens. His predecessor Chuck Hagel (no Yale degree) was a bit of a plodder. By way of contrast, Carter has made clear his intention to shake things up.

So on his second day in office, for example, he dinedwith Kenneth Pollack, Michael O’Hanlon, and Robert Kagan, ranking national insecurity intellectuals and old Washington hands one and all. Besides all being employees of the Brookings Institution, the three share the distinction of having supported the Iraq War back in 2003 and calling for redoubling efforts against ISIS today. For assurances that the fundamental orientation of U.S. policy is sound — we just need to try harder — who better to consult than Pollack, O’Hanlon, and Kagan (any Kagan)?

Was Carter hoping to gain some fresh insight from his dinner companions? Or was he letting Washington’s clubby network of fellows, senior fellows, and distinguished fellows know that, on his watch, the prevailing verities of national insecurity would remain sacrosanct? You decide.

Soon thereafter, Carter’s first trip overseas provided another opportunity to signal his intentions. In Kuwait, he convened a war council of senior military and civilian officials to take stock of the campaign against ISIS. In a daring departure from standard practice, the new defense secretary prohibited PowerPoint briefings. One participant described the ensuing event as “a five-hour-long college seminar” — candid and freewheeling. “This is reversing the paradigm,” one awed senior Pentagon official remarked. Carter was said to be challenging his subordinates to “look at this problem differently.”

Of course, Carter might have said, “Let’s look at a different problem.” That, however, was far too radical to contemplate — the equivalent of suggesting back in the 1960s that assumptions landing the United States in Vietnam should be reexamined.

In any event — and to no one’s surprise — the different look did not produce a different conclusion. Instead of reversing the paradigm, Carter affirmed it: the existing U.S. approach to dealing with ISIS is sound, he announced. It only needs a bit of tweaking — just the result to give the Pollacks, O’Hanlons, and Kagans something to write about as they keep up the chatter that substitutes for serious debate.

Do we really need that chatter? Does it enhance the quality of U.S. policy? If policy/defense/action intellectuals fell silent would America be less secure?

Let me propose an experiment. Put them on furlough. Not permanently — just until the last of the winter snow finally melts in New England. Send them back to Yale for reeducation. Let’s see if we are able to make do without them even for a month or two.

In the meantime, invite Iraq and Afghanistan War vets to consider how best to deal with ISIS. Turn the op-ed pages of major newspapers over to high school social studies teachers. Book English majors from the Big Ten on the Sunday talk shows. Who knows what tidbits of wisdom might turn up?

Andrew J. Bacevich, a TomDispatch regular, is a professor of history and international relations emeritus at Boston University’s Pardee School of Global Studies. He is writing a military history of America’s War for the Greater Middle East. His most recent book is Breach of Trust: How Americans Failed Their Soldiers and Their Country.

Copyright 2015 Andrew Bacevich


Q4 ’14:   The Tao of Washington

On January 22nd 2015 the Bulletin of the Atomic Scientists updated the Doomsday Clock, moving it up three minutes to 11:57PM — three minutes from Armageddon — accompanied by the following statement:

“Unchecked climate change, global nuclear weapons modernizations, and outsized nuclear weapons arsenals pose extraordinary and undeniable threats to the continued existence of humanity, and world leaders have failed to act with the speed or on the scale required to protect citizens from potential catastrophe. These failures of political leadership endanger every person on Earth.”

Meanwhile, in the “thought free zone” that comprises our nation’s Capitol, the national security state continues to gather resources and momentum, responding to every potential terrorist or national security threat with “more money, more infrastructure, more private contractors, more surveillance, more weaponry, and more war.”  No thought whatsoever is given to the possibility that our actions might be contributing to the problems we face.

This letter’s title is taken from an article entitled “More and War: The Tao of Washington” by Tom Engelhardt, originally published at TomDispatch.com.  As a public service to promote some rational thought and debate about our foreign policy, this article is reprinted in its entirely with permission below.

More and War: The Tao of Washington

By Tom Engelhardt

When it comes to the national security state, our capital has become a thought-free zone. The airlessness of the place, the unwillingness of leading players in the corridors of power to explore new ways of approaching crucial problems is right there in plain sight, yet remarkably unnoticed. Consider this the Tao of Washington.

Last week, based on a heavily redacted 231-page document released by the government in response to a Freedom of Information Act lawsuit, Charlie Savage, a superb reporter for the New York Times, revealed that the FBI has become a “significant player” in the world of warrantless surveillance, previously the bailiwick of the National Security Agency. The headline on his piece was: “FBI is broadening surveillance role, report shows.”

Here’s my question: In the last 13 years, can you remember a single headline related to the national security state that went “FBI [or fill in your agency of choice] is narrowing surveillance role [or fill in your role of choice], report shows”? Of course not, because when any crisis, problem, snafu or set of uncomfortable feelings, fears, or acts arises, including those by tiny groups of disturbed people or what are now called “lone wolf” terrorists, there is only one imaginable response: more money, more infrastructure, more private contractors, more surveillance, more weaponry, and more war. On a range of subjects, our post-9/11 experience should have taught us that this — whatever it is we’re doing — is no solution to anything, but no such luck.

More tax dollars consumed, more intrusions in our lives, the further militarization of the country, the dispatching of some part of the U.S. military to yet another country, the enshrining of war or war-like actions as the option of choice — this, by now, is a way of life. These days, the only headlines out of Washington that should surprise us would have “narrowing” or “less,” not “broadening” or “more,” in them.

Thinking outside the box may seldom have been a prominent characteristic of Washington, but when it comes to innovative responses to problems, our political system seems particularly airless right now. Isn’t it strange, for instance, that being secretary of state these days means piling up bragging rights to mileage by constantly, frenetically circumnavigating the globe? The State Department website now boasts that John Kerry has traveled 682,000 miles during his time in office, just as it once boasted of Hillary Clinton’s record-breaking 956,733 miles, and yet, like the secretary of defense or the chairman of the Joint Chiefs or the CIA director or the national security advisor or the president himself, when it comes to rethinking failing policies, none of them ever seem to venture into unknown territory or entertain thoughts that might lead in unsettling directions. No piling up of the mileage there.

In a sense, there are only two operative words in twenty-first-century Washington: more and war. In this context, there really is just one well-policed party of thought in town. It matters not a whit that, under the ministrations of that “party,” the Pentagon and the rest of the national security state have grown to monstrous proportions, even though American war and security policies don’t have a significant success to their name.

Four Words That Rule Washington (and Two Words That Don’t)

Here then are four key words — security, safety, intelligence, and war — essential to present-day Washington. Add in two others, peace and bases, that for very different reasons are missing in action. Now, put together both the chatter and the silences around those six words and you can begin to grasp why our nation’s capital is such a dead zone in terms of new ideas or ways of acting in our world.

Let’s start with two words so commonplace that no serious player would bother to question them: security (as in “national”) and safety (as in “American”). On those two words alone, the new Washington has been funded and expanded endlessly in the post-9/11 era. They are the soil in which has grown just about every action that put the state intrusively in our lives, sidelined the citizenry, and emboldened a spirit of impunity in the national security bureaucracy, a sense that no one will ever be held accountable for any action, including kidnapping, torture, murder, the destruction of evidence, assassination, and perjury. Both words have an implied “from” after them, as in “from terrorism.”

And yet it has been estimated that an American’s annual fatality risk from terrorism is only one in 3.5 million. When it comes to your security and safety, in other words, don’t focus on local lone wolf jihadists; just put your car in the garage and leave it there. After all, your odds on losing your life in a traffic accident in any year are about one in 8,000.

Put another way, Americans have learned how to live with, on average, approximately 38,000 traffic deaths a year in the post-9/11 era without blinking, without investing trillions of dollars in a network of agencies to protect them from vehicles, without recruiting hundreds of thousands of private contractors to help make them safe and secure from cars, trucks, and buses. And yet when it comes to the deaths of tiny numbers of Americans, nothing is too much for our safety and security. More astonishing yet, almost all of this investment has visibly led not to the diminution of terrorism, but to its growth, to ever more terrorists and terror organizations and ever greater insecurity. This, in turn, has spurred the growth of the national security state yet more, even though it has shown little evidence of offering us significant protection.

Imagine that the government suddenly decided to build high-tech shark fences off every American beach to protect bathers from another kind of headline-inducing predator which strikes even more rarely than terrorists. Imagine as well that an enormous bureaucracy was created to construct and oversee the maintenance of those fences and the launching of armed patrols to take out the global shark population. And imagine as well that the result was a rise in the threat of shark attacks off those coasts, as well as endless claims from the officials in that bureaucracy that they were doing a completely bang-up job. Wouldn’t their word be doubted? Wouldn’t the whole program be reconsidered? Wouldn’t there be a debate in this country about what it means to be safe and secure, and about where our tax dollars were going?

Life itself is a danger zone. It’s not possible to live in total safety and security. So any system that aims to offer that, even for one phenomenon, and then feeds off the very opposite, should be open to question. Certainly, sacrificing things that have long been considered important to American life for protection from the rare and random chance that you might be injured or die is a decision that should be rethought from time to time. In this case, however, it seems that we can no longer imagine what life without a looming national security state might be like.

Now, here’s another word closely associated with the last two: intelligence. Consider it sacrosanct, representing as it does the religion of the national security state. There is only one rule when it comes to intelligence: you can’t have too much of it. Hence, our 17 ever-expanding, intertwined “intelligence” agencies, a vast, still proliferating apparatus for conducting covert ops and gathering information on everyone from presidents and chancellors to peasants in the rural backlands of the planet in every form in which anyone could possibly communicate or simply express themselves or even engage in public play.

This vast world of information overload has, in turn, been plunged into a world of secrecy in which, if it weren’t for leakers and whistleblowers, we would never have any intelligence that they didn’t want us to have. Over these last years, this system has proven intrusive in ways that even the totalitarian states of the previous century couldn’t have imagined, as well as abusive in ways degrading almost beyond imagination. It has also collected more information about all of us than can even be grasped; and yet, as far as we can tell, it has also been eternally a step behind in delivering actionable information to the government on just about any subject you want to mention.

However, whether what it does works or not, is legal or not, is useful or not, doesn’t matter in Washington. There, the American intelligence community is unassailable. It emerges from every imbroglio, including the recent one over torture, stronger, not weaker. Its leadership, having made howling mistakes from 9/11 on, is never held accountable for any of them and is always promoted and honored. Oversight of what it does is on the wane. The visibly Orwellian nature of American intelligence is now widely accepted, at least in Washington, as a necessity of our age, of our need for… you guessed it… safety and security.

As a result, its bureaucratic expansion, secret wars, global kill lists, and other activities are largely beyond challenge. In response, for instance, to the disaster of 9/11, a new post, the director of national intelligence, was created to better coordinate the “U.S. intelligence community.” The director’s “office,” which started with a staff of 11, now has an estimated 1,750 employees, the sort of growth that can be seen just about everywhere in the intelligence world.

We no longer have the slightest idea what life might be like if, instead of 17 significant intelligence outfits, we had just two of them, or even one. Or whether an intelligence agency operating purely on open-source information might not offer a more useful view of how our world works to American leaders than the vast, secretive, privatized crew of the present moment. We have no idea what our world would be like if the president no longer had his private army, the CIA (not to mention his second private army, the Joint Special Operations Command). None of this could possibly be brought up in the halls of power in Washington.

And here’s another word that’s had its way in the capital in these years: war (and related terms like intervention, counterinsurgency, surge, and raid). It has become the option of choice in situation after situation, while the Pentagon has reached monumental proportions and its elite operatives have become a massive secret military within the military. In any crisis, even essentially civilian ones such as the Ebola outbreak in Western Africa, that military is invariably called upon to ride to the rescue.

You could, in fact, think of these last 13 years in Washington as a sweeping, all-encompassing experiment in modern warfare. The denizens of that city now live in an eternal “wartime,” while from Pakistan to Libya across the Greater Middle East and now much of Africa, U.S. military personnel are eternally engaged in a range of wars, war-like activities, and preparations for future conflicts, while the skies are filled with U.S. planes and drones. At a moment when war seems to be the only go-to option (other than sanctions) in the U.S. foreign policy tool box and a high official can even talk about declaring war on scattered deranged individuals, the results of this military-first global strategy should be considered definitively in. Since 9/11, it has led to a series of well-publicized failures of the first order without a single genuine success, not one instance where anything like a goal Washington set was actually met. Yet a military-first policy remains the unquestioned, unchallenged option of choice and the military budget is largely sacrosanct even for a budget-cutting Congress.

Here, on the other hand, is a word you won’t see in Washington: peace. Once, it was part of the American political lexicon; now, it’s essentially been banished. You’d have to be a wuss to use it.

And here’s another word that’s essentially forbidden: bases. Since World War II, the U.S. has garrisoned the planet in a way achieved by no other imperial power. In the twenty-first century, when even the largest powers have only a few or no military bases outside their national territories, the U.S. still has hundreds scattered around the world. Included in the tally should be the 11 floating towns, loaded with air power — we call them aircraft carriers — that regularly cruise the high seas.

The Greater Middle East is packed to the seams with U.S. military bases and drone bases have been spreading rapidly as well. This is a living reality in much of the world. In the U.S., it goes essentially unnoticed and almost completely unmentioned. It’s so fundamental to Washington’s military-first policies that, while taken for granted, it is beyond discussion or even public acknowledgement. The very idea of beginning to dismantle this empire of bases, which would automatically change Washington’s military stance in relation to the rest of the planet, is similarly beyond consideration, discussion, or thought.

Who knows what it would mean to abolish the CIA, slash the defense budget, scale down American intelligence, dismantle that empire of bases, or return peace to its first-option status? We know nothing about this because we haven’t seen any of it tried, or even seriously discussed, in twenty-first-century Washington.

Decades of the Living Dead

In the title of his prophetic pre-9/11 book Blowback, Chalmers Johnson brought that term of CIA tradecraft out of the closet. He focused on the way covert Agency operations in distant lands carried the seeds of future retaliation on this country. Because those operations were so secret, though, ordinary Americans were incapable of making the connection between what we did and what hit us. Today, in a world filled with blowback, the connections between Washington’s acts and what follows are no longer in the shadows but regularly in plain sight. Yet they are seldom acknowledged, particularly by policymakers in Washington.

In the wake of the 2014 midterm elections, the capital is said to be a big government town being taken over by smaller government types — not, however, if you’re talking about the national security state. With the rarest of exceptions, the “small government” folks, aka Republicans, have never seen an oppressive state power they wouldn’t bow down before and champion. Hence, whatever the situation at hand — Iraq, Afghanistan, Iran, Ukraine, surveillance — Republican war hawks, now in control of Congress, will invariably demand more.

Nor should you imagine, as the 2016 campaign revs up, that any of this is likely to change in the years to come. If we end up with the much-ballyhooed dynastic contest between Hillary and Jeb (or, if you prefer, Hillary and that eternal presidential wannabe Mitt), here’s what you should already know: whichever candidate steps into the Oval Office in January 2017 will bring along a whole host of suitably retread personalities toting a jostling crowd of retread ideas.

Some of the people the new president will nominate for office or appoint as advisors will be familiar faces, since that’s the way of the world in Washington. Naturally, they will carry with them the most familiar of Washington mindsets. Just recall January 2009, when the hope candidate entered the White House bringing with him those economic retreads from the reign of the man from Hope, Larry Summers and Robert Rubin; in foreign and war policy, there was the ur-Clintonista Hillary, Bush military appointee General David Petraeus, and the director of the CIA under George H.W. Bush and secretary of defense under his son, the former cold warrior Robert Gates. Others who weren’t household names or faces from previous administrations might as well have been. In foreign, war, and economic policy, it was a cast of characters eminently suitable for (as I wrote at the time) a political zombie movie.

Similarly, none of the retreads Hillary, Jeb, or Mitt would bring with them will have a new idea or entertain a thought that wanders off the Washington reservation. And that essentially guarantees one thing: Republican or Democrat, it’ll be dead air to 2020 — and if either a Bush or a Clinton is then reelected, until 2025, by which time the U.S. would have been led by those two families for 28 of the last 36 years. Washington is, in this sense, the land of the walking policy dead and war, safety, security, and intelligence (that is, failure and disaster) are ours to the horizon.

Tom Engelhardt is a co-founder of the American Empire Project and the author of The United States of Fear as well as a history of the Cold War, The End of Victory Culture. He runs the Nation Institute’s TomDispatch.com. His new book is Shadow Government: Surveillance, Secret Wars, and a Global Security State in a Single-Superpower World (Haymarket Books).

Follow TomDispatch on Twitter and join us on Facebook. Check out the newest Dispatch Book, Rebecca Solnit’s Men Explain Things to Me, and Tom Engelhardt’s latest book, Shadow Government: Surveillance, Secret Wars, and a Global Security State in a Single-Superpower World.

Copyright 2015 Tom Engelhardt


Q3 ’14:   A Time for Downsizing

One of the big issues for conservatives in recent years has been the size of government, at least when Democrats are in power. Grover Norquist summed it up in his stated desire to “shrink government to the size where we can drown it in the bathtub.” Conservatives are not entirely wrong in their concern with the problems of big government, but the emphasis should be more on “big” and less specifically on “government.”

Organizations become large by delivering value. Without any moderating influences, however, these large entities grow to dominate their respective fields, suppressing competition, and eventually constricting change and innovation.

Conservatives who really want to do something good for America and free us from onerous government regulations would do well to target the excesses of large corporations in equal measure. Given the perverse incentives for bad behavior and lack of legal or cultural accountability for the typical large corporate executive, the regulatory function of government is often the only thing standing in the way of corporate pillaging, and the only mechanism to balance out the excesses of large corporations.

The first hopeful sign I have seen on this front is the recent FTC application of anti-trust law to slow down the wave of hospital mergers. See the article “FTC Wary of Mergers by Hospitals” by Robert Spear in the 9/17 New York Times.

Corporations themselves are beginning to recognize that size can be an impediment to their own profitability. Hewlett Packard recently announced plans to split into two companies, separating its printing and personal computer business from corporate hardware and services operations. The companies will now be known as HP Inc. and Hewlett-Packard Enterprises.

We might all benefit by some downsizing across the board.


The U.S. has been exhibiting schizophrenic behavior on the global front. On the one hand, we continue to follow an expansionist foreign policy that is generating conflict with both Russia and China by failing to acknowledge their legitimate regional concerns. On the other hand, the Obama administration has been trying to distance the U.S. from the chaos in the Middle East, much of it the direct result of previous U.S. actions in the region.

The American public is receiving a rather narrow view of the dynamics contributing to the increasing global tensions and conflicts. Russia and China, for example, have been portrayed in our media as “unprovoked aggressors.” Certainly neither nation is without fault, but the media portrayal is incomplete at best.

For those interested in an expanded perspective on the conflict with Russia, John Mearsheimer recently published an article in Foreign Affairs entitled “Why the Ukraine Crisis is the West’s Fault” relating the policies and actions by the U.S. and the European Union that precipitated the crisis in Ukraine.

And for those interested in a broader perspective of the growing conflict with China this article in Global Research by Yoichi Shimatsu helps to illuminate the historical context and complexities of territorial issues in the South China Sea.

In the Middle East the U.S. is increasingly irrelevant, waffling on its commitment to Israel and uncertain who to back in the free for all ignited by the ironically named Arab Spring. The sudden rise of ISIS has brought some temporary focus into U.S. policy in the region, but the policy response continues to be confused, dependent on an air campaign to support fragmented “moderate” Syrian rebels to fight both ISIS and Assad. Our engagement against ISIS has brought us into literal, if not formal, alliance with Iran, Syria and even Al Queda in opposing them. How’s that for irony?

All of this conflict and warfare has studiously avoided dealing with the primary source of chaos throughout the Muslim world — Salafi jihadism — sponsored by our good friends at the House of Saud. See the New York Times op-ed “Saudis Must Stop Exporting Extremism” by Ed Husain for illumination on the source of inspiration and financial support for ISIS, Al Queda, Boco Haram and global jihadi culture. Also, see this insightful and unusually clear assessment of the trajectory of political Islam, “Let’s Talk About How Islam Has Been Hijacked” by Aly Salem in the Wall Street Journal.

Obama has been trying to withdraw from Pax Americana gracefully, an historical inevitability, but like market operators who corner a market, imperial nations pay a price when they try to withdraw from their increasingly burdensome commitments. Read the rather stunning and probably prescient article, “Are We Ready for the Fall of Baghdad?” by Ron Holland at the Daily Bell predicting a replay of the fall of Saigon.

America has weakened itself with 10 years of misguided and futile military engagements in Muslim countries. This relentless warfare has fueled the fire of the Salafi movement, creating chaos from Libya to Pakistan, threatening to morph into a generational war between Islam and the West.

They say if you want to know the true source of any conflict, follow the money. At the top of the military industrial heap: Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon account for $142 billion in annual sales to the Pentagon and approximately $12 billion in annual profits. Here are the top 25 beneficiaries of endless war from Business Insider.


Ever since Ronald Reagan was successful selling voodoo economics to America, Republicans have simply been repeating the winning formula over and over…keep saying it long enough, with great certainty and righteousness, along with diversionary smears against the “liberal press” and divisive campaigns on social wedge issues, and the people will follow. Why bother doing real analysis and offering honest solutions when a con is so easy to pull off?

Rick Perlstein published an excellent piece at The Nation entitled “There Are No More Honest Conservatives, So Stop Looking For One,” expressing his frustration with liberal editors looking for honest conservatives to debate, and pleading for public recognition that 21st Century conservatism is an outright fraud…right down the line.

Meanwhile, our President makes excellent speeches, but he often seems disconnected, conflicted and confused by the real world. Despite occupying the most powerful office in the world he doesn’t seem to have much appetite for wielding power, especially when it comes to the hands-on political leadership required to advance an agenda. By abdicating his duty to lead, he has effectively given us 8 more years of the disastrous Bush era policies, and has allowed the most extreme elements both domestically and globally to control the agenda.

President Obama seems to be the embodiment of a collective American denial of the consequences of our political dysfunction. Jedidiah Purdy has published an insightful article entitled “Time Bomb” in the 7/3/14 edition of Politico Magazine, stating that America has been consumed and systematically degraded by “cultural vitriol stirred up by cynical posturing.” Purdy suggests that we may need a period of even more intense conflict to resolve the political degradation that is threatening our future. I encourage all of my readers to read this important article.

According to Nate Silver the latest polls on the mid-term election indicate that Republicans will retain control of the House, and take over the Senate.  Princeton’s Sam Wang gives calls the Senate race a toss-up and gives a slight edge to Democrats in the Gubernatorial races.

Markets & Economy

Markets have been trending over the last few months. At press time, the stock market is testing its all-time highs. Metals and commodities have been trending lower, reflecting cyclical deflation flowing from fiscal austerity and troubles in Europe. Bonds have been rallying in response to the soft economic numbers and the assumption that the Fed will continue to maintain a low interest rate environment regardless of what they say.

At the same time the real economy continues to struggle. The total number of jobs has recovered to 2008 levels, but the economic value of present day jobs lags far behind the value of 2008 jobs. A recent report from the Pew Research Center demonstrates that real wages peaked in 1973, and today’s wages have the same purchasing power as in 1979.

The employment numbers relative to the population have barely moved off the recessionary bottom. See the 9/9/14 Wall Street Examiner article posted at Yves Smith’s NakedCapitalism.

There is no question but that there will eventually be a big price to pay for all the money printing. In fact we have already been paying, but it’s more like the drip, drip, drip of a leaky faucet instead of the sudden breach of the dam that many, including this author, expected. See the Futures Magazine interview with the always insightful Jim Rogers.

The Fed learned something from Alan “keep it slow and no-one will know” Greenspan. The purchasing value of the dollar is draining away, just more slowly than one would expect, with the biggest impact cleverly offset into the future.

Paul Krugman’s assurances to the contrary notwithstanding, there will eventually be a grand finale to the dollar devaluation, but when that will be, and what it will look like, is not possible to know at this time.

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.”  John Maynard Keynes


Opportunity is scarce these days. Assets are overvalued, reflecting Fed liquidity operations; demand is generally soft, reflecting fiscal austerity and the difficulties of American consumers generally. For the most part any opportunities are narrow, one-off situations, demanding specialty knowledge. General themes will continue to be security, alternative energy, local agriculture and servicing the growing tide of boomer retirees…10,000 a day…75 million over the next 15 years.

Some are finding opportunities offshore. Eastern Europe and Southeast Asia offer strong growth and attractive opportunities, but these are far away lands for Americans. Latin America offers similar opportunities, and is much closer to home. The cost of living there is generally 1/3rd or even less than in the states. Real estate is a bargain and development is proceeding. Careful due diligence is required, however. Latin America presents a wide variety of local conditions. Panama is especially attractive for Americans due to its political stability, first world infrastructure and healthcare, and healthy dollar based economy. Soon there will likely be opportunities in Cuba. See the October 11th New York Times editorial, “End the U.S. Embargo on Cuba.”

A wealth of information regarding offshore opportunities can be found at Kathleen Peddicord’s Live and Invest Overseas website.


The world is an increasingly fragile place. Conflicts have broken out around the globe and the economic malaise is not showing any signs of lifting. The Fed dream of “escape velocity” that was supposed to be generated by quantitative easing is nowhere on the horizon, and in fact the Fed is gradually reducing its growth projections.

Meanwhile, China is flexing its geopolitical muscle, the jihadi movement that spawned Al Queda is metastasizing, and the transatlantic alliance that has for so long been the foundation of global stability and economic growth is experiencing unprecedented distress. As Henry Kissinger put it, “The concept of order that has underpinned the modern era is in crisis.” See Kissinger’s new book “World Order.”

In the global world of Realpolitik Obama is seen as a weak and indecisive leader, so I expect that both Russia and China will push hard over the next two years to maximize their advantage while he is in office, as will the growing array of our enemies in the Middle East. It is not lost on them that whomever will come after Obama will likely be more decisive.

No-one knows how this is going to play out; whether the world will settle down and re-order itself peacefully, or whether the downward spiral into increasing chaos and conflict will continue. War cycles are not encouraging…predicting increased conflict until 2020.

For the time being, capital is flowing to the U.S. and into the dollar for safety.


Q1 ’14:   A Model for Leadership

It has been a long time since America has had leadership that puts nation before partisanship. Perhaps we have forgotten what that looks like.

This quarter’s letter features the January 17, Farewell Address of Dwight Eisenhower. I would like to draw attention to Eisenhower’s emphasis on the need for balance in national affairs. Balance – the central principle of natural law – is the foundation of wisdom, and is dangerously lacking in public life today.

The Farewell address of President Dwight D. Eisenhower

“Good evening, my fellow Americans: First, I should like to express my gratitude to the radio and television networks for the opportunity they have given me over the years to bring reports and messages to our nation. My special thanks go to them for the opportunity of addressing you this evening.

Three days from now, after a half century of service of our country, I shall lay down the responsibilities of office as, in traditional and solemn ceremony, the authority of the Presidency is vested in my successor.

This evening I come to you with a message of leave-taking and farewell, and to share a few final thoughts with you, my countrymen.

Like every other citizen, I wish the new President, and all who will labor with him, Godspeed. I pray that the coming years will be blessed with peace and prosperity for all.

Our people expect their President and the Congress to find essential agreement on questions of great moment, the wise resolution of which will better shape the future of the nation.

My own relations with Congress, which began on a remote and tenuous basis when, long ago, a member of the Senate appointed me to West Point, have since ranged to the intimate during the war and immediate post-war period, and finally to the mutually interdependent during these past eight years.

In this final relationship, the Congress and the Administration have, on most vital issues, cooperated well, to serve the nation well rather than mere partisanship, and so have assured that the business of the nation should go forward. So my official relationship with Congress ends in a feeling on my part, of gratitude that we have been able to do so much together.

We now stand ten years past the midpoint of a century that has witnessed four major wars among great nations. Three of these involved our own country. Despite these holocausts America is today the strongest, the most influential and most productive nation in the world. Understandably proud of this pre-eminence, we yet realize that America’s leadership and prestige depend, not merely upon our unmatched material progress, riches and military strength, but on how we use our power in the interests of world peace and human betterment.

Throughout America’s adventure in free government, such basic purposes have been to keep the peace; to foster progress in human achievement, and to enhance liberty, dignity and integrity among peoples and among nations.

To strive for less would be unworthy of a free and religious people.

Any failure traceable to arrogance or our lack of comprehension or readiness to sacrifice would inflict upon us a grievous hurt, both at home and abroad.

Progress toward these noble goals is persistently threatened by the conflict now engulfing the world. It commands our whole attention, absorbs our very beings. We face a hostile ideology global in scope, atheistic in character, ruthless in purpose, and insidious in method. Unhappily the danger it poses promises to be of indefinite duration. To meet it successfully, there is called for, not so much the emotional and transitory sacrifices of crisis, but rather those which enable us to carry forward steadily, surely, and without complaint the burdens of a prolonged and complex struggle – with liberty the stake. Only thus shall we remain, despite every provocation, on our charted course toward permanent peace and human betterment.

Crises there will continue to be. In meeting them, whether foreign or domestic, great or small, there is a recurring temptation to feel that some spectacular and costly action could become the miraculous solution to all current difficulties. A huge increase in the newer elements of our defenses; development of unrealistic programs to cure every ill in agriculture; a dramatic expansion in basic and applied research – these and many other possibilities, each possibly promising in itself, may be suggested as the only way to the road we wish to travel.

But each proposal must be weighed in light of a broader consideration; the need to maintain balance in and among national programs – balance between the private and the public economy, balance between the cost and hoped for advantages – balance between the clearly necessary and the comfortably desirable; balance between our essential requirements as a nation and the duties imposed by the nation upon the individual; balance between the actions of the moment and the national welfare of the future. Good judgment seeks balance and progress; lack of it eventually finds imbalance and frustration.

The record of many decades stands as proof that our people and their Government have, in the main, understood these truths and have responded to them well in the face of threat and stress.

But threats, new in kind or degree, constantly arise.

Of these, I mention two only.

A vital element in keeping the peace is our military establishment. Our arms must be mighty, ready for instant action, so that no potential aggressor may be tempted to risk his own destruction.

Our military organization today bears little relation to that known by any of my predecessors in peacetime, or indeed by the fighting men of World War II or Korea.

Until the latest of our world conflicts, the United States had no armaments industry. American makers of plowshares could, with time and as required, make swords as well. But now we can no longer risk emergency improvisation of national defense; we have been compelled to create a permanent armaments industry of vast proportions. Added to this, three and a half million men and women are directly engaged in the defense establishment. We annually spend on military security more than the net income of all United States corporations.

This conjunction of an immense military establishment and a large arms industry is new in the American experience. The total influence – economic, political, even spiritual – is felt in every city, every Statehouse, every office of the Federal government. We recognize the imperative need for this development. Yet we must not fail to comprehend its grave implications. Our toil, resources and livelihood are all involved; so is the very structure of our society.

In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.

We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.

Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.

In this revolution, research has become central, it also becomes more formalized, complex, and costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal government.

Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

The prospect of domination of the nation’s scholars by Federal employment, project allocations, and the power of money is ever present – and is gravely to be regarded.

Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.

It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new and old, within the principles of our democratic system – ever aiming toward the supreme goals of our free society.

Another factor in maintaining balance involves the element of time. As we peer into society’s future, we – you and I, and our government – must avoid the impulse to live only for today, plundering for, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without asking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.

Down the long lane of the history yet to be written America knows that this world of ours, ever growing smaller, must avoid becoming a community of dreadful fear and hate, and be, instead, a proud confederation of mutual trust and respect.

Such a confederation must be one of equals. The weakest must come to the conference table with the same confidence as do we, protected as we are by our moral, economic, and military strength. That table, though scarred by many past frustrations, cannot be abandoned for the certain agony of the battlefield.

Disarmament, with mutual honor and confidence, is a continuing imperative. Together we must learn how to compose differences, not with arms, but with intellect and decent purpose. Because this need is so sharp and apparent I confess that I lay down my official responsibilities in this field with a definite sense of disappointment. As one who has witnessed the horror and the lingering sadness of war – as one who knows that another war could utterly destroy this civilization which has been so slowly and painfully built over thousands of years – I wish I could say tonight that a lasting peace is in sight.

Happily, I can say that war has been avoided. Steady progress toward our ultimate goal has been made. But, so much remains to be done. As a private citizen, I shall never cease to do what little I can to help the world advance along that road.

So – in this my last good night to you as your President – I thank you for the many opportunities you have given me for public service in war and peace. I trust that in that service you find some things worthy; as for the rest of it, I know you will find ways to improve performance in the future.

You and I – my fellow citizens – need to be strong in our faith that all nations, under God, will reach the goal of peace with justice. May we be ever unswerving in devotion to principle, confident but humble with power, diligent in pursuit of the Nations’ great goals.

To all the peoples of the world, I once more give expression to America’s prayerful and continuing aspiration:

We pray that peoples of all faiths, all races, all nations, may have their great human needs satisfied; that those now denied opportunity shall come to enjoy it to the full; that all who yearn for freedom may experience its spiritual blessings; that those who have freedom will understand, also, its heavy responsibilities; that all who are insensitive to the needs of others will learn charity; that the scourges of poverty, disease and ignorance will be made to disappear from the earth, and that, in the goodness of time, all peoples will come to live together in a peace guaranteed by the binding force of mutual respect and love.

Now, on Friday noon, I am to become a private citizen. I am proud to do so. I look forward to it.

Thank you, and good night.”


Q4 ’13:   History Repeats Itself

Karl Marx got some things right. “History repeats itself: first as tragedy, then as farce.” The spectacle emanating from Washington in recent months is nothing if not a farce.

Republican neo-Confederate nihilists pushed the limit over the debt limit in October, causing a 16 day shutdown of government services and threatening to drive the U.S. into default on its obligations if they didn’t get their way on spending issues. Threatening default, as Warren Buffet put it, is “an economic weapon of mass destruction” and should be “off the table for everyone, for good.”

The near term damage of this action has been mostly to the Republican Party, which is finally beginning to wake up to that fact and start to push back against the lunatic wing of the party. But the real damage this action has done to America will only be known over the long term. As Larry Summers put it, “future historians may well see today’s crisis as the turning point at which American democracy was shown to be dysfunctional – an example to be avoided rather than emulated.” That would be unfortunate, considering the historic contributions that American democracy has made to human dignity around the world.

Obama held the line against the insurgency. The hostage was released and the matter resolved at the 11th hour. After five years of disengaged leadership, it was bracing to see Obama acting Presidential. Regardless of policy differences, as Bill Clinton put it, the people prefer a President who is “wrong and strong to one who is right but weak.”

Obama then promptly made his own contribution to the farce, snatching political defeat from the jaws of victory with an epic display of incompetence in the rollout of the Affordable Care Act, otherwise known as Obamacare. The result was a solid month of Chicken Little hysteria that has erased the memory of malfeasance by House Republicans over the debt ceiling.

For those who would like to get a handle on the reality of Obamacare, which, for better or worse, is absolutely not going away, I would suggest two recent balanced articles: “A Realist’s Take on Obamacare” by Josh Marshall at Talking Points Memo, and “The Healthcare Reality Conservatives Ignore” by Paul Waldman at CNN.

It’s a shame that Republicans have refused to try to make health care reform actually work, instead of trying by any means to prevent any change in the indefensible status quo. In fact, it’s more than a shame; it’s a betrayal. Americans pay twice the price for an inferior health care outcome relative to every other developed nation on the planet. Republicans should be as concerned about this as Democrats are. As Warren Buffet put it, “Healthcare costs are the tapeworm of American business.” The following chart sums it up.


So far, markets seem to be treating the madness in Washington as theater, keeping a wary eye on the Fed and a steady bid under the stock market. The resolution of the debt limit hostage episode only kicked the can down the road a few months so we will probably have an attempt at a replay of some sort in January or February. But the “burn the house down” caucus will not have the support of party leadership this time, so the odds of a repeat crisis over the debt limit are not high.

The real test for the markets will probably come with the installation of the new Fed Chairman, Janet Yellen. Stocks are overdue for a good correction and regardless of the trigger, the marketplace may want to test Yellen’s commitment to QE.

It is worth noting that every change in Fed Chairmanship has been accompanied by a market correction of at least 7%, and most of them were complete in the first six months. (Data Courtesy Ned Davis Research).

Meanwhile, the recognition that the 30 year bond bull market is finished is gradually penetrating a reluctant marketplace. Selling is quickly forming above any bond rallies and with few options for spare cash, going into stocks, giving support to the Fed driven rally.

Gold and commodities continue to sell off. Fiscal austerity has extended the cyclical deflation that continues to undermine Fed efforts to re-flate.


The economic “recovery” continues to chug along, weak but persistent, and lately picking up speed. Q3 GDP was 4.1%, housing starts are back over the 1 million mark, at a five year high, and inflation remains muted at 1.2%. The lack of jobs is still the big problem. Official unemployment is down to 6.7%, but the improvement is mostly from people leaving the labor force, not new hiring. Real unemployment (U6) is almost double the official rate at 13.1%.

We can’t dismiss the possibility that our “leaders” in Washington will do something truly destructive, but the stock market is a leading indicator and it appears to be saying that something good this way comes. Stocks continue to climb the wall of worry and all major stock indexes are making new all-time highs, without the irrational exuberance normally seen at a major top.

If the stock market’s discounting function is indeed alive and well, then it is entirely possible that Republicans, who have persistently and aggressively log rolled in front of the recovery so as to undermine Obama, nation be damned, are going to be totally routed in the by election, clearing the way for fiscal stimulus in the form of funds for research and education, desperately needed infrastructure investment and jobs programs, perhaps a national service corp…the kind of things that generate real economic growth.

Policy changes are coming that will finally bring some moderation to the big banks’ untouchable status. The banks have pretty much kneecapped the much anticipated Volker rule, intended to limit the banks’ risk taking. But Elizabeth Warren is leading the charge for a revival of Glass-Steagall to separate commercial and investment banking, noting that the too big to fail banks are now 30% larger than they were in 2008…the five largest controlling half the nation’s banking assets.

In another telling sign, William Dudley, President of the Federal Reserve Bank of New York and a former Chief Economist at Goldman Sachs, delivered a speech entitled “Ending Too Big to Fail” at the Global Economic Policy Forum in November, highlighting Wall Street’s “deep seated cultural and ethical failures.” While commenting on regulatory efforts to deal with the problems of too big to fail banks, Dudley made this astonishing statement…

“Collectively, these enhancements to our current regime may not solve another important problem evident within some large financial institutions — the apparent lack of respect for law, regulation and the public trust.”

Quantitative Easing, initially necessary as triage, is also coming in for some changes. QE has become increasingly ineffective over its iterations and is widely viewed as a growing liability. For his role in QE, former Fed Governor Andrew Huszar made a public apology to the American people in a November 11th Wall Street Journal op-ed piece entitled “Confessions of a Quantitative Easer.” A must read…beginning “I can only say: I’m sorry, America.”


“Suppose you were an idiot, and suppose you were a member of Congress. But I repeat myself.”

Not much has changed in the 120 years since Mark Twain penned this observation, except that the condition seems to have spread to the other branches of government.

The political scene in America is pretty grim these days. However, lately there have been some signs that democracy is not totally dead. The growing indignation over NSA dragnet spying and demands for reform are heartening. Also, Democrats have finally overcome their cowardice long enough to put an end to the serial abuse of the filibuster by Senate Republicans. Over half of all filibusters since the founding of the republic have occurred in the past five years. Enough is enough.

While the spectacle of nihilism and incompetence in Washington is sucking up all the media oxygen, the political cutting edge has manifested in the election of liberal dark horse Bill DeBlasio as mayor of New York City on his campaign of “two New Yorks,” which is echoing across the political landscape.

There has been virtually no left wing in American politics for the last 30 years. It is now coming back to life. This is the next major trend in American politics. In this two minute video, Elizabeth Warren gives voice to the issues that will define the next era of political discourse in America.

Given the massive amounts of money and effort expended by political operatives to spin the daily news cycle, you would think that there is political gold to be mined from it. This interesting article by Ed Kilgore suggests that it’s all pretty much wasted effort, and that elections are really decided by fundamentals like incumbency, economy and demographics.


The global scene has been a tinderbox for a long time, with nascent upheavals around the world held in check by an assertive U.S. military presence. With the U.S. fiscally challenged and war weary after long, inconclusive campaigns in Iraq and Afghanistan, that stabilizing influence is in question, and the world is getting even more unstable.

Cycles analysts are pointing to long term cycles of war that indicate rising conflicts over the next decade or so. The Middle East and Asia are the most likely places for a major conflict to erupt. The Ukraine is also spiraling into civil war, and Africa has spawned one more in its seemingly endless and brutal wars, this one in Sudan.

On the Asian front, China and Japan have been increasingly in conflict over the disputed Diaoyu/Senkaku islands, which are also claimed by South Korea and Taiwan. China has recently deployed an air defense zone around the islands. In response, Japan’s Prime Minister, Shinzo Abe, has pushed through a new Secrecy Law giving his government sweeping powers to define what constitutes state secrets and impose draconian punishments on bureaucrats who leak them and journalists who publish them. This move is widely seen as providing cover for his plans to remilitarize Japan. China and Japan appear firmly on a track to war, which would be extremely disruptive to the global economy.

In the Middle East, the ironically named Arab Spring has generated chaos throughout the region. The Obama administration’s vacillating policy in the region has angered America’s Arab allies, and Israel as well. The Syrian civil war in particular continues to metastasize, poisoning the entire Middle East. Egypt appears to be on the path to civil war. Iraq is spiraling into civil war and a resurgent Al Queda is now in control of Falluja!

Iran’s quest for nuclear power is especially troublesome. While the mainstream media have played up Obama’s negotiations with Iran, many observers worry that Obama’s desire to make a deal is blinding him to the bad faith of his negotiation partners. In other words, that Obama is being played by the Iranians just as he has been played by Republicans at home.

Israel views the Iranian nuclear project as an existential crisis, and rightly so. Even worse, if Iran goes nuclear, the entire region will quickly follow, and then it will only be a matter of time until some religiously inspired lunatic presses the button and the entire region goes up in a series of mushroom clouds. Worse yet, the region is rife with militias and access to nuclear weapons by terrorist groups would become much more likely.

The U.S. military — once seen gratefully in most quarters as a global stabilizing force — has gradually become deeply resented almost everywhere. The drone wars in particular, and the endless reports of “collateral damage,” (read, dead children and other civilians) are an ongoing PR disaster for the U.S. The blatant dishonesty of Administration claims that there have been zero civilian casualties just adds insult to injury and further degrades America’s moral standing.

It is interesting to note the internal unease about the drone program. Pentagon brass floated a plan to award combat medals to drone jockeys, and it was shouted down by front line officers. The redeeming value in the soldier’s trade is in the courage of those facing death and the honor with which they execute their task. Blowing people up with a joystick from thousands of miles away just doesn’t sit right on that score.

The NSA spying scandal has further undermined America’s position in the world. Not that there is anything new about spying, but the sheer magnitude and pervasiveness of it is shocking, and the apparent lawlessness of it. Enemies and allies alike are reevaluating their relationship with the U.S., and with U.S. technology companies. Germany is especially incensed that Angela Merkel‘s cell phone was bugged, apparently since 2001, and that Obama knew about it and allowed it to continue. Israel is also angry over reports that a former Prime Minister and Defense Ministers have been tapped. Yes, it is true that all countries spy on each other and always have, but phone tapping the German Chancellor and Israeli Prime Minister goes a bit far.


The economy is generally weak, but still expanding. Private equity has been very active in the housing sector, but I think this is probably not going to work out so well for them, and especially not for their renters. If you have the resources, it seems like a good time to buy a home, but real estate as an investment is going to have issues going forward.

In this cycle, advantage is being sought primarily by investing in stocks. Gold is still selling off, but it we are approaching levels that are starting to look attractive for the long term. 50% of the move up from 2001 is $1,063 and the old high from 1980 is $800. Gold is presently hovering just above $1,200.

In the real economy there is a very strong and rapidly growing trend toward Made in America products. If the global scene erupts in conflict, then Made in America will become imperative overnight. Those companies with deep ties to Asia, especially with major investment in mainland China, are at great risk. Economic, social, political and geopolitical developments are all supporting this trend, and policy will increasingly be favoring companies that manufacture in America.


The economic recovery is gaining steam, and even though the Fed surprised with its December mini-taper, the Fed is not going anywhere and will continue to support at the first sign of weakness. The stock market is at all-time highs without any signs of irrational exuberance or other indications of a major top. In fact, sentiment is surprisingly tepid, arguing for a continuation of the rally.

At the same time, the seating of a new Fed Chairman has historically been the signal for a market correction. This would coincide with the Presidential Cycle, which also indicates a selloff into the spring, and possibly into October of 2014. The selloff could be triggered by a new round of debt limit madness in Washington, or by the eruption of military conflict in the Middle East or Asia.

All things considered, a market selloff in the first half of 2014 should be a buying opportunity, as long term indicators are all in favor of a continuation of the bull market.

Jobs continue to be the big problem economically, and that problem is not going away. Overcapacity and technology, combined with fiscal austerity will continue to undermine any substantial improvement in the employment situation for the foreseeable future.

Geopolitically, cycles of war argue for an increase in global conflicts over the coming decade, and growing economic pressure will give political leaders traditional thoughts of relieving political pressure at home by creating conflicts with external enemies. Given the delicate condition of the global economy and the dollar based monetary system, an outbreak of hostilities could quickly spiral into another major economic crisis. Caution is recommended.


Q2 ’13:   On the Bank of the Rubicon

The revelation that the U.S. government is vacuuming up, storing and data mining virtually all communications of U.S. citizens is probably not a huge surprise to anyone who has been paying attention to policy trends since 9/11. Just the same, Edward Snowden has done the country a great service by sparking a public discussion of these practices. The American people are in the process of choosing their fate. They will no longer be able to say “I didn’t know” or to blame anyone but themselves for what will come if they allow these practices to continue.

A remarkable element of the debate on this matter is how little of it dwells on the implications of pervasive government invasion of privacy.

To put these operations in perspective, McClatchy interviewed Wolfgang Schmidt, former head of the Stasi, East Germany’s secret police. “You know, for us, this would have been a dream come true,” said Schmidt. And for those who think that because they don’t have anything to hide, they have nothing to fear, Schmidt had this to say:

“It is the height of naivete to think that once collected this information won’t be used…This is the nature of secret government organizations. The only way to protect the people’s privacy is not to allow the government to collect their information in the first place.”

On August 4th the Sunday New York Times reported that other agencies are in fact “clamoring” for NSA data, and the next day Reuters reported that they are already getting it, courtesy of a “secret” DEA division that is funneling data from the NSA dragnet to other agencies, who are then systematically covering up the source of their information.

The wisdom of Benjamin Franklin comes to mind:

“Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety.”

Thus the title of this quarter’s letter. Like Caesar in 49BC, we are collectively camped on the bank of the Rubicon, debating the fate of the republic. If we do not turn away from this path and reject the paranoid principles of the surveillance state, we will soon be a republic no more. A recent Pew poll (7/26) indicates that sentiment continues to swing against the government position as information about the NSA programs proliferates. New revelations are surfacing daily in what is shaping up to be a Watergate level scandal. Glenn Greenwald at The Guardian is the go-to source for the latest information on this escalating scandal.


Since the intervention to save Long Term Capital Management in 1998, the Fed has enabled a series of asset bubbles…the dotcom bubble, the housing bubble, the gold bubble, most recently the bond bubble, presently deflating, and it appears that the bubble du jour is stocks.

The recent selloff in bonds cut through major support, signaling the formal end of the 30 year bull market in bonds and a general trend of rising rates for the foreseeable future. There has been a lot of talk on the street about the Great Rotation, out of bonds and into stocks. Who knows how far stocks will run, but they are running on the back of Fed policy. When QE is finished, the bull market will be finished. That could still be a long way away. The notion that the Fed will be able to back away from QE and then unwind it when the economy gets strong enough is a fantasy. They are all-in now and they will continue until the dollar is toast.

On June 20th, the markets demonstrated their addiction to ongoing Fed support, throwing a collective hissy fit when Fed Chairman Ben Bernanke suggested that the Fed might begin withdrawing the monthly fix stimulus at the end of the year if the economy appears strong enough. The panic was short lived, however, as one Fed governor after another stepped up to declare that the Fed is not going to abandon the market. Complacency quickly returned and stocks have rallied straight up to new all time highs. With few exceptions, market prognosticators are predicting an open field ahead.

The Bernanke mini-panic also demonstrated the futility of trying to manage risk by diversification in this age of universal correlation. Everything across the board was down sharply on June 20th. From a macro risk management perspective, we have only one market to trade these days. Our only choice is which flavor we want to work with.

Gold and commodities have been selling off. Gold has been especially hard hit, as long liquidation has taken hold of this market. After an 11 year bull market, gold is finally correcting its 700% advance in earnest. 50% of the entire move up from 2001 is $1061. My point and figure downside target is $1050. Most professional traders remain long term bullish on gold. Jim Rogers, a buyer at $1200, gives his thoughts on gold in this interview at Hard Asset Investor.


The June 15th Sunday New York Times featured this front page article…”Even Pessimists Feel Optimistic About the American Economy,” citing the near unanimity of economists over the improving prospects for the economy. As a natural contrarian, I find this article a prompt for caution. Economists have a dismal track record at prediction, highlighted by John Mauldin in his recent newsletter “Economists Are (still) Clueless,” coincidentally also published on June 15th.

If you want a hint of where the problems are going to come from to upset the prevailing rosy view, read this July 21st New York Magazine article by Jonathan Chait, entitled “Anarchists of the House” on the nihilistic agenda of House Republicans. Also, see this insightful July 27th Guardian article by John Naughton on the consequences of the NSA revelations for the free and open flow of information on the Internet and for American technology corporations.

Employment numbers have been gradually sloping upwards, but at the slowest pace since the ‘30’s. The following chart tells the story…posted as “The Scariest Jobs Chart Ever” at Business Insider.

Of course that chart only tells you the story on the number of jobs being created. The following chart gives you some color on the quality of the jobs being created.

On the plus side, housing appears to have made an important bottom. Housing starts this year have been steadily creeping back toward the 1 million annual rate, before dropping sharply in June primarily in response to the uptick in mortgage rates, demonstrating the headwinds that housing will face as, and if, the economy continues to grow and rates climb.

A bigger problem in the housing sector is the large presence of private equity groups such as Blackrock who have been buying up huge swaths of depressed housing for rentals. Private equity sometimes performs a great service, especially when a languishing business or sector is ripe for revamping and renewal. But private equity can also be predatory, and this venture into housing is purely about maximizing rent extraction while the banks are not lending. Predictably, rents are soaring to record highs even as home ownership is hitting 18 year lows. These rental units will also remain as overhanging stock, limiting future gains.

China has become a very big part of the interconnected global economy, and has in fact been the big driver of economic growth for some time. But no market goes up in a straight line forever, and China has accumulated an enormous amount of dead wood. Could we be entering the long awaited consolidation of the massive growth China has seen over recent decades?

Martin Wolf puts China’s situation in perspective:

“The new Chinese government is, in effect, now engaged in the task of redesigning the jumbo jet, as it comes into land, with half of the engines working poorly. The market is most unlikely to deliver such a huge change smoothly…”


“An enlightened citizenry is indispensable for the proper functioning of a republic. Self-government is not possible unless the citizens are educated sufficiently to enable them to exercise oversight. It is therefore imperative that the nation see to it that a suitable education be provided for all its citizens.”
Thomas Jefferson

Self-governance is a noble ideal, difficult enough to realize under the best of conditions; impossible to when half of the political establishment is committed to undermining government and dividing and confusing the citizens with a strategy of deliberate distortions and misinformation, and the other half is too corrupt and cowardly to oppose them on principle.

Der Speigel reports that on July 16th President Jimmy Carter told an audience in Atlanta that “America does not at the moment have a functioning democracy.” That’s a pretty shocking statement coming from a former President, and it’s a rather telling statement on the condition of the U.S. media that the American people have to learn what a former U.S. President thinks about the current state of affairs in America from a German publication.

Our representatives spend most of their time fundraising and tending to the needs and wishes of their financiers, and the balance posturing for their constituents. Remarkably, despite the lowest approval ratings on record, the Congressional Management Foundation reports that members of Congress think they are doing a great job! How checked out can you possibly be?

We are like the addict who refuses to come clean. We elect…and re-elect…and re-elect these people, and we are getting the government that we deserve.

A group called No Labels has been doing heroic work in Washington on a virtual No Budget, sponsoring a variety of initiatives to try to bridge the partisan divide and promote good process. They call their primary initiative the Problem Solvers. This is a very positive effort from a group of very capable people, but unless and until the system is released from the death grip of its financiers, I doubt that much of real substance that will come of No Labels’ laudable efforts.

Most of us are distracted by the propaganda and misinformation that is rained down on us daily by our news media. However, if you take the time to dig, you can find thoughtful commentators, such as Max Frankel who published a good editorial in the June 26th New York Times entitled “Where Did Our Inalienable Rights Go?” Frankel illustrates well enough where they went, and where they are headed, and makes sensible suggestions as to how to fend off the threat we face.


The U.S. role globally is on the wane, and will soon become a full scale retreat. The next financial crisis will usher in many changes. There will be a few outposts of influence, such as the Middle East, where the flow of oil and our deeply rooted relationship with Israel will likely keep us in place for decades.

China’s dominance in the Far East will soon be undeniable, and once North Korea has rejoined the family of nations via Chinese influence, South Korea will ask us to leave. Okinawa and the Philippines have been chaffing at our presence for a long time and will be happy to see us leave. Japan will re-militarize, which is a scary proposition, but inevitable, given the rise of China. In fact it has already begun.

It’s amazing how quickly it is happening. The invasion of Iraq, followed by Abu Ghraib and Guantanamo, destroyed America’s moral standing in the world and set in motion a downward spiral in U.S. influence. And now the NSA spying debacle. Witness the public humiliation of the President of the United States over the Snowden Affair, and the pathetic spectacle of the U.S. abandoning its embassies in response to a threat from al-Queda, a rag-tag foe that we have spent 12 years and trillions of dollars pursuing.

In the other major development in the Middle East, the Egyptian military has lowered the boom on Mohamed Morsi and the Muslim Brotherhood, and their efforts to hijack the fledgling Egyptian democracy and turn Egypt into an infinitely more dangerous version of Gaza. Egypt is the intellectual birthplace of the global Islamic jihadi movement. Events there should be closely monitored. This could be the beginning of the end for the jihadi movement, or it could be the beginning of a total conflagration in the Islamic world. One thing both sides agree on is that they hate America.


Technology is coming of age on Main Street. There is something of a feeding frenzy going on in the retail sector that is reminiscent of the dot-com craze. Investors are hot for new “disruptive” technology in retail, and merchants are adopting new technology at a blistering pace. Technology is enabling retailers to connect with their customers and promote their products in very targeted ways. Omni-channel marketing is the latest buzzword in retail.

In general, real opportunity is hard to come by these days. Since the election of Ronald Reagan, we have been in an Ayn Rand economy. The combined influences of policy and technology have promoted the flow of the fruit of economy increasingly to the top and away from the general population…a reverse redistribution of wealth. The disparity in wealth and income is reaching crisis levels, as the American dream is fading into history. This chart from the Cleveland Fed puts the situation in perspective.


We are in the midst of a phase transition in our global economy. Persistent central bank intervention has disrupted the natural cycles, so it’s hard to get a solid feel for where we are in the transition, or how it is going to unfold going forward…only that we are in the middle of it somewhere. There will eventually be a reset, a new order, and eventually…new organic growth. But there is still a lot of dead wood to be cleared.

The world has become such a complex and interconnected place. We need an elevation of our political process and public ethics to equal the elevation in our technological capabilities. Otherwise, the story just is not going to end well.

Most importantly we need to accept the inadequacy of the existing paradigm going forward and the damage that has been done, and start addressing that reality. Unfortunately, Republican insurgency and the appalling corruption of our political process is making it difficult to see any substantive measures being taken without another crisis to force action. It’s difficult to find a solution if you can’t even have an honest discussion about the problem. Even given another crisis, how bad will it have to get to force meaningful action? In 2008 we had a truly world class crisis, but nothing has been done to address the underlying causes of that crisis or to hold those responsible accountable. In fact, those underlying problems are even worse. The “too big to fail” banks are even bigger, the derivative bonfire is piled even higher, the rating agencies are still being hired by issuers, swarms of lobbyists are unleashed to defeat any effort at meaningful reform, and regulators are still revolving from government to industry.

Perhaps the ensuing consequences of these combined dislocations will eventually give way to a higher order and a more equitable society. We can only pray for a good outcome. Reason and honor seem to have lost out for the time being.


Q1 ’13:   The Mother of all Bubbles

Global central banks have been flooding the world with liquidity in an attempt to fend off debt deflation and re-inflate the global economy…a collective action that is creating the Mother of All Bubbles. On the macro level we are presently experiencing deflationary pressure due to continuing fallout from 2008, and government attempts to reign in deficit spending. But as sure as night follows day, this cycle will run its course, politicians facing re-election will lose their enthusiasm for austerity, and then we will begin to reap the fruit of the relentless central bank money/credit creation. See the February Pimco Investment Outlook by Bill Gross entitled “Credit Supernova. ” Also, David Stockman’s March 30th New York Times op-ed, “Sundown in America.”

Our financial authorities express confidence that they will be able to withdraw the stimulus as the economy strengthens (assuming that it will), and thus generate “controlled” inflation. We should all hope that their confidence is warranted. Destructive as it is, controlled inflation is far preferable to uncontrolled inflation or all-out debt deflation. The lessons of history, however, are not encouraging.

As a reminder of the consequences of unrestrained central bank money creation, I have taped above my computer screen a 100 trillion dollar banknote issued by the Central Bank of Zimbabwe in 2008. This currency was first issued in 1970 as the Rhodesian dollar at approximately par to the U.S. dollar. Inflation in Zimbabwe in 2008 was 89.7 sextillion percent. That’s 89,700,000,000,000,000,000,000%. Zimbabwe is not even the worst case. That distinction goes to Hungary in 1946, with an annual number that I can’t even put a name to, but which peaked at over 200% daily inflation. Weimer Germany is in fifth place at a mere 29,500%. Readers can access a Comprehensive List of Hyperinflations at the Cato Institute.

We’re not likely to see Zimbabwe-like inflation globally, but even at vastly lower levels, global hyperinflation is something unprecedented, and something that is sure to bring a tectonic change in the global order.

Currency wars have been brewing for years, with skirmishes in the form of a steady pace of round robin minor devaluations and interventions. The U.S. set the stage for open warfare with the adoption of QE to infinity last year. Japan took the next step in announcing its own QE to infinity this year. Others will soon follow.

Looking for honest and intelligent commentary on our economic dilemma is a frustrating exercise. The public “debate” around this critical issue consists primarily of propaganda from ideologues who favor continued printing and ideologues who favor cold turkey austerity. Like almost all debate on matters of public policy these days, both camps refuse to acknowledge any value in the opposition, their own contribution to the state of affairs, or the consequences and real suffering that will result from their own prescriptions.

If it sounds like we’re stuck between a rock and a hard place, it’s because we are. If we had taken the hit in 2008, we would be through the worst by now, reset and ready for growth. Instead, we are treated to endless posturing and polarized propaganda, while we continue to impoverish our heirs and the banksters continue to fatten up on taxpayer money.

I recently discovered an author, Charles Hugh Smith, who is generating a comprehensive and important body of work focused on our economic dilemma. I would like to encourage my readers to visit his website, Of Two Minds. In particular I can recommend his book, “An Unconventional Guide to Investing in Troubled Times” for a comprehensive review of the forces generating our economic problems, and an array of insightful ideas for a better way forward.

Below is a recent blog post by Mr. Smith entitled “The Global Economic Disease in 8 Points and the Cure in 4 Points,” reprinted with permission in its entirety (bolds are the author’s).

The Global Economic Disease in 8 Points and the Cure in 4 Points (January 24, 2013) by Charles Hugh Smith.

A mere dozen points describe both the global financial illness and the cure.

The global economy is ill, and everyone who is not mired in denial or a paid shill knows it. Saying it’s healthy doesn’t make it so.

Is it possible to usefully generalize the illness and outline a cure in a few points? Maybe not, but let’s try anyway.

1. Creating and selling credit and leverage became far more profitable than generating goods and services. Financialization—expanding highly profitable credit by leveraging assets and income to the hilt—began in earnest in the early 1980s.

Description: http://www.oftwominds.com/photos2013/fin-profits1-13.png

Creating credit is equally easy in fractional reserve systems like the U.S. and command economies like China. Creating leveraged instruments is as easy as writing and selling derivatives, which not coincidentally have risen (in notional value) 700% since the mid-1990s.

We can understand financialization with just two charts: Here is real GDP, up 50%:

Description: http://www.oftwominds.com/photos2013/GDP1-13.png

Here is total credit market debt owed, up 200%:

Description: http://www.oftwominds.com/photos2013/total-credit1-13.png

Though solid data is hard to come by, financialization is not just more profitable in nominally capitalist America—it is also true in nominally communist China. Real estate speculation is simply the expansion of credit via building phantom assets.

2. The financial sector captured the regulatory and political mechanisms of the Central State. This capture is both direct (buying political relief from regulation, etc.) and indirect: once the market becomes dependent on financial profits, then any threat to those profits threatens the market and thus the wider economy.

Politicians, capitalist, socialist and communist alike, all cave in as soon as economic growth is at risk.

The capture was also ideological. In the West, neoliberal policies (loosening regulatory controls, reducing the size of the State, enabling free flow of capital, etc.) produced huge gains in growth in the initial low-hanging-fruit stage. This gave the ideology real-world credence.

In China, the “to get rich is glorious” slogan embodied an entire ideology of a State-managed market economy that was as dependent on financialization as the West. (In China, financialization is hidden in land deals and loans made by local government and private wealth-management credit/leverage that is off the books.)

3. Financialization incentivized speculative credit bubbles. Speculation reaps huge rewards as the bubble expands, and the economy becomes increasingly dependent on ever-expanding debt for its growth, income, profits and taxes.

When the bubbles burst, they devastate not just the financial sector but the entire economy, which has become heavily dependent on speculative bubbles and continuous expansion of debt and leverage for its growth.

4. The only “cure” that doesn’t cause political pain is to lower interest rates and flood the economy with liquidity, i.e. cheap money, to reinflate a new credit bubble in another asset class. If there are no other asset classes available, then the Central State and Bank will try to reflate the existing bubble (for example, real estate in China).

5. Speculative credit bubbles (neoliberal or command-economy) led to systemic mal-investment and mis-allocation of capital. Suddenly selling autos for a loss to reap the financing fees made sense, as did building McMansions in the middle of nowhere and building more steel mills in China, even though the sector is already plagued with monumental over-capacity.

6. The Central State and Bank responded to the popped speculative credit bubbles by recapitalizing insolvent banks with taxpayer money (or claims on future taxpayers, i.e. bonds) and legitimizing phantom collateral/assets. It is absolutely critical to understand that the political Status Quo will “buy” growth at any price, and as a result the State is blind to the consequences of massive mis-allocation of scarce real capital in mal-investment.

In other words, the State and Central Bank will continue to do more of what has failed spectacularly until they can no longer do so.

The ultimate counterfeited collateral/asset is a sovereign bond. Here is the basis of the claimed legitimacy: “We can always pay the interest on this bond because we have the unlimited power to tax our citizenry, and we will always return your capital because we have the unlimited power to create money.”

Yet if we follow the consequences of these two unlimited powers, we find nations taxed into poverty and currency debauched to a shadow of its former value. How exactly does ruining the economy and currency create legitimate collateral?

The State also legitimizes phantom capital by manipulating stocks and bonds higher and allowing real estate to be marked-to-fantasy or kept off the market. Only a transparent, open market can discover the price of an asset and thus its value as collateral for debt, and destroying or limiting the market’s ability to price assets undermines the legitimacy of all assets and collateral.

7. The Central State and Bank attempted to repair the speculative credit bubble machine by diverting income from the productive “real” private economy to the parasitic financial sector and politically powerful but grossly inefficient cartels and State fiefdoms.

8. The demographics of an aging population and shrinking workforce cannot support the promised entitlements and other State spending. This has been covered in depth in many places, including this blog—for just one example of dozens: Demographics and the End of the Savior State (May 17, 2010).

That’s the core of the disease in 8 points. Here is the 4-point cure:

1. Re-take the regulatory and political machinery of the State from the control of the financial sector. As long as the State and Central Bank’s actions are primarily aimed at sustaining debt bubbles and spreading the losses generated by the financial sector to the rest of the economy, the State and the economy are doomed to implosion: Is the Central State Too Big to Fail or Too Big to Survive? (January 22, 2013)

2. Mark every marketable asset held by every financial institution and corporation to market at the close of each day, including mortgage-backed securities and real estate. This will reveal the “too big to fail” banks around the world as insolvent.

3. Liquidate the insolvent banks in an orderly fashion by auctioning off all of their assets on the open market. This will eliminate the shadow inventory of housing and expose phantom collateral.

4. Relieve the State of all obligations other than being an impartial enforcer of transparent markets, open competition and common-sense regulation to protect the common good and public commons. As I explained in The Grand Tradeoff of Risk/Innovation/Growth and Financial Security (January 21, 2013), the security of State guarantees and promises is illusory: the State can only sustainably spend the surplus generated by the private sector.

As the private sector crumbles under the dead weight of a parasitic financial Aristocracy, the debt-serfdom of financialization and corrupt, inefficient State fiefdoms, the economy can no longer support expanding State obligations and debt.

The citizenry will have to accept that promises issued on the basis of delusional, unrealistic projections of endless growth and debt expansion must be renounced, just as debt based on phantom collateral must be renounced.

Were these four points implemented, the re-set would be difficult but brief, as truth, trust and resilience would be restored to the political and financial systems. Once political and financial resilience has been restored, fixing all the other problems we face enters the realm of the possible. Without these 4 fixes, the system remains brittle, fragile and doomed to implosion.

Collapse of Complex Systems II: Marginal Returns Trigger Implosion
(February 24, 2009)

When Escape from a Previously Successful Model Is Impossible
(November 29, 2012)

Why Expansionist Central States Inevitably Implode
(January 15, 2013)


Q3 ’12:   Elections and De-Leveraging

The marathon 2012 presidential election campaign is almost finished. Polling has been volatile, but at press time with just a few days to go, Nate Silver’s FiveThirtyEight blog gives Obama an 84% probability of electoral college victory. Intrade has Obama at 67%.

This campaign gets the prize for banality. With almost $6 billion spent on this election according to OpenSecrets.org, one-third of that by the presidential candidates, nothing of substance has even been addressed let alone settled. The entire campaign has been a demolition derby highlighted by the presidential candidates posturing, attacking each other, dancing around the issues and blowing a lot of smoke about how they are going to create jobs and lead us to economic revival.

Ostensibly, the proposals on the table are: (1) major reductions in government spending on social programs (increases for the military) with simultaneous tax cuts for the upper tier and de-regulation that will magically create growth and jobs so the spending cuts won’t be painful and the tax cuts won’t increase the deficit (Romney), or (2) a long, slow, debt financed collective slog into the future and a grand bargain on the deficits that will be enabled because after the election Republicans will see the light and stop obstructing any solutions to the problems their policies created (Obama). We get to choose between fraud and delusion.

Campaign rhetoric notwithstanding, there is not likely to be any substantial change in fiscal policy after the election, and neither candidate is talking much about what they actually plan to do. For some insight into what they are really planning, see Jonathan Chait’s excellent article in New York Magazine entitled “November 7th” laying out the long term agendas of the contestants.

Behind all the spin and obfuscation, and the fairy tales about creating jobs, the reality is that we are in the contracting, dis-inflationary phase of the debt super-cycle and this election is ultimately about how and to whom the inevitable pain from that contraction is going to be allocated going forward. For a clear perspective on where we stand in the debt supercyle, see the BCA Research Special Report “An Update On the U.S. Debt Supercycle: Where Are We Now?

With all the attention the presidential election is getting, the fate of the Senate is flying under the radar. Nate Silver is presently handicapping control of the Senate for the Democrats at 91%. Silver doesn’t handicap the House, but most commentators expect the House to remain in Republican hands, although with a smaller and somewhat moderated majority.

Wild cards — several late developments that could have major impact:

  • Hurricane Sandy has given Obama a high profile opportunity to look benefic and presidential, and highlighted Romney’s previous statements that FEMA should be disbanded.
  • Multiple statements by Republican candidates rejecting access to abortion for rape victims, including Indiana Republican Senate candidate Richard Mourdock’s statement that pregnancies resulting from rape are “something God intended to happen.”
  • The Romney campaign’s blatantly dishonest ads in Ohio claiming that the auto bailout is being used to send jobs to China, drawing public rebukes from both GM and Chrysler.

Noteworthy in this election cycle is the Republican campaign of voter suppression. In what The Economist calls a “Betrayal of Democracy,” Republican dominated state legislatures have passed dozens of laws limiting voting rights, in every case targeting Democrat leaning groups…youth, minorities and the elderly.


The Fed went all-in for QE at their September meeting with a surprising 11-1 vote to print as much as needed for as long as needed. Judging by this action, we can only conclude that things are considerably worse than they have seemed, which is not good in any case. Noteworthy is the statement from the lone dissenter, Jeffrey Lacker, President of the Federal Reserve Bank of Richmond:

“I dissented because I opposed additional asset purchases at this time. Further monetary stimulus now is unlikely to result in a discernible improvement in growth, but if it does, it’s also likely to cause an unwanted increase in inflation.”

Will there be jobs? Probably not many. The global economy is slowing, and de-leveraging in the advanced economies will keep a lid on growth for quite some time. At the same time, technology continues to steadily displace humans in our economy. Robotics is the big issue that is still flying under the radar. More and more technology….fewer and fewer humans needed. The first all robot factories are being constructed. This trend will continue the concentration of wealth in fewer and fewer hands.

The big philosophical and political battles ahead will be over this issue of wealth distribution in the age of advanced technology. The Tea Party, Ron Paul and Occupy Wall Street are early manifestations of this debate. We are in dire need of a coherent vision that transcends the outmoded 20th century paradigm of Socialism vs Capitalism.


Financial markets across the board have stopped responding to economic fundamentals and are keyed on government policy. Traders are transfixed by each next meeting of economic ministers, responding euphorically to each announcement of another round of money printing as if it were the announcement of global salvation. But QE can’t hold the markets up forever. See PIMCO CEO Mohamed El-Erian’s recent post, “Central Banks Can’t Inflate the Markets Forever.”

The stock market has been the primary beneficiary of QE. The S&P500 is up 12% on the year at press time; the Dow up 7%. Fed bond buying has kept bonds up, rates low. But the marketplace has become a hollowed out battlefield dominated by front-running trader-bots and giant hedge funds operating arcane, Phd created models designed to undermine other market participants. Market makers and genuine investors are scarce.


The global uprising of anti-American protests in Muslim countries should not have taken anyone by surprise. The U.S. has been meddling in the affairs of the oil producing Muslim countries for decades. The Arab Spring opened up a Pandora’s Box of long suppressed resentment that is going to take years, perhaps decades, to process and normalize. Obama’s handling of this volatile upheaval has so far been admirable.

Iran is a subset of the Islamic problem that is especially difficult. The prospect of a nuclear Iran is sobering and the U.S. has publicly committed itself to preventing that outcome. Israel, understandably, is concerned that the U.S. guarantee is not hard and is pressing for a red line on Iran’s nuclear development. Relations between the U.S. and Israel are solid, but things are rather frosty between Netanyahu and Obama. Obama refused a meeting with Netanyahu on the latter’s most recent trip to the U.S. Much has been made of this by hardliners but I sense that Netanyahu overstepped his bounds by pressing Obama publicly during the election and was justly rebuked. Notably, Obama also refused a meeting with Egypt’s new President, Mohamed Morsi.

China and Japan are ramping up their dispute over the upopulated but oil rich Senkaku Islands (Japan), or Diaoyu Islands (China). This is a traditional outlet for economic frustrations. When things get difficult at home, then one must look outward for an enemy to galvanize and unify the nation. This was Condolezza Rice’s contribution to George Bush’s foreign policy. “We need a common enemy to unite us.” We can only hope that this flare up dissipates quickly. The last thing the world needs is a re-militarized Japan.


Finding opportunity in the context of a de-leveraging economy is difficult. Basic needs such as food, farming, and alternative health care offer general themes of opportunity in both the short and long term. Inflation assets for the long haul…not housing.

If you have a business that can utilize debt and you can convince a bank to lend to you, this is a great time. But any such strategy needs to have a quick exit built in. When the sovereign debt crisis comes to America, rates will rise precipitously. Until that day, it’s a good time to utilize debt. If you can gain control of good quality cash flowing assets and lock in long term financing at these rates, then you are golden.


It seems like planet earth is under a cosmic microwave. This is what deleveraging feels like. The flow of ever expanding credit is like an economic endorphin…it feels good and makes everything seem ok, even if it’s not. When the endorphins are flowing, things that irritate, irritate less. Frustrations are swept away with the next wave of opportunity. But take away those feel good generators and the opposite happens. Normal frustrations build on one another and become unbearable burdens. Minor infractions become crimes and betrayals. This holds for nations as well as individuals. This is a volatile situation.

Ray Dalio, CEO of Bridgewater, the world’s largest hedge fund, gave a rare interview recently in which he voiced his concern that another economic downturn could generate a class war and the type of conditions that spawned the Third Reich.

All in all, the outlook is not sunny. We have to weather the consequences of past indiscretions. This is economic law and it will not be pleasant. If we choose to do it equitably, we can make something good out of it. If we choose divisive policies with a few big winners and many losers, then the fabric of society is going to be rent. We will have social unrest and great destruction and suffering. We need some real leadership to get through this with a good outcome, but ultimately it’s up to us.