Friday, June 29, 2007

The Changing Tone

The Bloomberg story below is nothing new to those of us following the slow-motion calamity that is the mortgage-backed securities market. What I find interesting is the shift in tone (hat tip to Calculated Risk for pointing it out).

Note, there are no weasel words such as "S&P, Moody's may be Hiding Rising Risk..." - they just come flat out and say it. This tone is kept up in the lead paragraph (the most important paragraph in an article) and the punches continue throughout the story.

Are several someones getting nervous out there? Is this another small sign of the changing mood, from delusional optimism to a more realistic anger at the continuing, unfolding ugliness that is the mortgage industry? Or did the author, Mr. Pittman, just not have enough coffee this morning?

S&P, Moody's Hiding Rising Risk on $200 Billion of Mortgage Bonds
by Mark Pittman, Bloomberg

June 29 (Bloomberg) -- Standard & Poor's, Moody's Investors Service and Fitch Ratings are masking burgeoning losses in the market for subprime mortgage bonds by failing to cut the credit ratings on about $200 billion of securities backed by home loans.

The highest default rates on home loans in a decade have reduced prices of some bonds backed by mortgages to people with poor or limited credit by more than 50 cents on the dollar and forced New York-based Bear Stearns Cos. to offer $3.2 billion to bail out a money-losing hedge fund. Almost 65 percent of the bonds in indexes that track subprime mortgage debt don't meet the ratings criteria in place when they were sold, according to data compiled by Bloomberg.

That may just be the beginning. Downgrades by S&P, Moody's and Fitch would force hundreds of investors to sell holdings, roiling the $800 billion market for securities backed by subprime mortgages and $1 trillion of collateralized debt obligations, the fastest growing part of the financial markets.


I just hope it is only $200 billion...

O Canada!

For my Canadian readers (you know who you are), here's a pre-Canada Day celebration for you:



Hell, makes me almost want to emigrate...

Thursday, June 28, 2007

An Elliott Wave Top for Nuclear Power?

Hat tip to Eric over at NEI Nuclear Notes (a fantastic clearing house for issues relating to the nuclear industry) for posting on BP's new Energy Charting Tool. Being a chart guy, I scoped out North American nuclear power consumption for the lifetime of that young industry:

While I am no Elliott Wave expert, that, unfortunately looks like a five-wave advance. In my industry, we are talking constantly about a "Renaissance" in nuclear power and the bright future ahead for this low-carbon way of generating massive amounts of baseload electricity.

If my interpretation of this chart is correct, what we are really seeing is a top. Per Elliott Wave Theory, we should next expect an A-B-C "correction" in nuclear power usage (a serious, sustained drop in utilization of nuclear power), to be followed, who knows when, by the next major advance.

I would expect such a scenario to unfold something along these lines:

  1. Social mood turns negative with a vengeance, plunging the economy into a housing-collapse-led recession
  2. The money and talent being spent getting ready for new power plant buildouts goes mostly to waste as a recession turns into a serious depression, cutting off the liquidity needed to finance such huge projects
  3. 61.8% of existing plants are closed or placed in warm standby over the next ten years due to a huge drop in demand and due to violent threats against these facilities. A few new ones are built, mostly in the U.S. Southeast, but overall, the industry just tries to hang on as the worst economic slump in history plays out
  4. This negativity towards things nuclear continues after nuclear warheads are exploded in conflicts over Kashmir and the Middle East. China and Russia get into a dust-up as well. The United States enters an intensely isolationist phase, though the temptation to join in the nuclear exchanges occuring in the Middle East will be strong
  5. At the bottom of the depression, economic progress itself is blamed for all of society's ills, Peak Oil is the big bogeyman and we are all headed back to a subsistence farming existence - the potential for new, large energy projects looks dim
  6. The worst of the storm passes, mood become a bit more positive and the next generation lays plans for a new builout of nuclear facilities based on the thorium cycle and utilizing fast reactors as breeders and as burners for "waste"

Should be an interesting time to be a nuclear engineer. Here's hoping that I'm way off base...

Wednesday, June 27, 2007

Thanks Warren

Earlier today I posted an interview from the Socionomics Institute dealing with how the rich will be perceived in the coming years.

This evening, I come home to find that Warren Buffett is apparently a Futurejacked reader...

Buffett talks tax reform with Sen. Clinton
Berkshire Hathaway chairman suggests greater taxes for private equity firm managers and super rich to presidential hopeful.
NEW YORK (CNNMoney.com) -- Presidential hopeful Hillary Rodham Clinton was all ears at a fundraiser Tuesday evening when famed billionaire investor Warren Buffett suggested ramping up the tax code on big businesses and the super rich.

The Berkshire Hathaway chairman touched on a variety of issues in a question and answer session with Clinton, including his disdain for private equity firm power brokers.

"The people that earn their living doing that should be subject to taxes that reflect their labors," he said in the gathering at a hotel in midtown Manhattan.

Thank you Mr. Buffett for your living embodiment of the coming shift in mass mood.

Hey Buddy, Can You Spare a Match?

This story from Iran set off all kinds of alarm bells in my tiny skull:





Photo by Behrouz Mehri/AFP-Getty Images, from IraqSlogger

Iranians Outraged by Sudden Gas Rationing
World's Second-Biggest Exporter of Oil Imports 40% of its Gasoline

Tehran, IRAN: Iranians block a highway by setting fire in front of a petrol station today in the northwest of Tehran, after the government announced it was going to begin rationing fuel. Since the announcement of the rationing plan yesterday, which allows for only 100 liters (26 gallons) of petrol per month for private cars, long queues started appearing at fuel pumps not only in Tehran but also in the countryside.

Will this unrest cause Bush 43 to assume that now is the time to strike Iran?

When gasoline rationing comes (back) to the U.S., will we react this way? Or more violently?

All that oil "wealth" - yet without the complex refineries required to crack it, distill it and refine it, they are left without enough gasoline for their people. Which is great for the world market, because if Iranian demand was allowed to rise at a high rate, that would cut deeply into exports in an already supply-constrained world.

Wow. Talk about ratcheting up tensions in an already violent and paranoid region of the world...

The Wealth Gap

"We are in uncharted territory..."

At lunch, take nine minutes and listen to this interview with Alan Hall. These guys lay out some coming themes of rich vs. poor, the politics of taxation and where it fits in as part of what I view as a huge bubble across a wide swath of the economy and society.

The Criminal Rich and the Foolish Rich
That’s how Teddy Roosevelt referred to the wealthy one hundred years ago at the end of the Gilded Age. Franklin Roosevelt then raised taxes on the wealthy during the Depression that reached rates as high as 90% and lasted into the 1960’s. Will the current wealth gap result in similar changes in the coming years?

Well worth your time. Especially the end, where Alan points out some things to keep as eye on as the media treatment of the wealthy turns towards a darker, "Eat the Rich!" attitude.

Tuesday, June 26, 2007

Remain Calm, All Is Well (Part Fifteen)

Remember, Peak Oil is a myth. There is nothing to see here fnord. Bet your life on an energy intensive lifestyle.

Pemex Says May Oil Output Falls 6.6% From Year Ago

Do not prepare for any change in consumption patterns or scale back your lifestyle.

Housing to "Plummet into Abyss"

Buy more from Wal-Mart fnord. Don't save. Debt is good.

Help Needed - Send Cash

Playing video games instead of learning a skill is better.

Remain calm, all is well.

Monday, June 25, 2007

Added a Few More Sites

For those that like their trading analysis with a big dose of history, intelligent commentary and charts, check out Prudens Speculari under the Finance, Economics and the Great Bear Market blogroll.

And, for those that want a look at the absolute worst-case scenario in the horror show world, post-Peak Oil, check out the grandaddy of doom sites, Die Off - A Population Crash Resource Page under Random And Useful.

Iran WarWatch (Part Twelve)

Tick, tick, tick...

A third US carrier, the nuclear-powered USS Enterprise Strike Group is speeding towards the Persian Gulf
from DEBKAfile
...The USS Enterprise CVN 65-Big E Strike Group will join the USS Stennis and the USS Nimitz carriers, building up the largest sea, air, marine concentration the United States has ever deployed opposite Iran. This goes towards making good on the assurances of four carriers US Vice President Dick Cheney offered the Gulf and Middle East nations during his May tour of the region...


Nothing much else to say other than keep your eyes open and be ready for the possibility that war with Iran may really happen.

Saturday, June 23, 2007

You Can't Make This Stuff Up

First off - thanks to everyone for the great response to the release of Catastrophic Abundance. I really appreciate those of you who have purchased a copy and also appreciate the feedback - both the positive comments and the constructive criticism.

Now, on to the absurdity that is the modern-day United States.

Future generations will look back upon this time and assume we were all smoking crack, every day:

Realtors attend worship service to pray for better market
by Keri Holt, Florida Freedom Newspapers

DESTIN — More than 300 people with a keen interest in the Emerald Coast’s real estate market gathered Wednesday at Destiny Worship Center to ask for God’s blessing.

The Real Estate Prayer Luncheon was organized in hopes of breathing life and positive thinking into the area’s slumping housing market.

It was the first of what the organizers — co-owner of Crye Leike Coastal Realty Wanda Duke, former Destin City Councilman Mel Ponder and Destiny Worship Center Pastor Steve Vaggalis — hope will become a regular, uplifting event.

“The heartbeat of today’s economic community is on the backs of the real estate community,” Ponder told the crowd.

The event was an hour and a half of fellowship over lunch, scripture readings, prayer and testimonials. Those gathered had one goal — “changing the climate in the area.”

“We need to think positively and get everyone on the same page,” Duke said.

“Positive things that come out of your mouth will end with positive results. If we lose hope, we lose everything.”

Amazing.

And if you are not on the same page? What then - tar and feathers? Stocks in the town square? A scarlet letter sown onto your cheap suit?

Please note, there is no mention of "we need to encourage our fellow citizens to save money and live within their means so that when they do invest in a home, they are building real wealth and able to afford the many responsibilities that go with home ownership."

There is no mention of the jet fuel that kept the recent high-flying prices inflated: toxic ARMs sold to the unwary, liar's loans, rampant speculation using borrowed money, etc. And you want the Almighty to bless that?

Socionomics strikes once again - the hypothesis states that as you enter into a downturn in mood, folks turn from rational thought to "magical thinking".

Those folks in Destin weren't invoking the aid and blessing of Deity before embarking on an important task, they were begging for juju from the dark gods of Voodoo...

Thursday, June 21, 2007

Catastrophic Abundance

Time for you to get a leg up on the changes sweeping our world.

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Get your copy of Catastrophic Abundance today and then get ready for the coming days of change and upheaval, ready to succeed where others fail.

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Thanks again for the great responses so far.

Fear Reality

I don't know what's more amazing about this quote off the Bloomberg on this whole Bear Stearns CDO trainwreck - that a financial reporter actually wrote it or that it almost certainly reflects the reality in the marketplace:

Bear Stearns Fund Collapse Sends Shockwave Through CDO Market
by Mark Pittman, Bloomberg

"June 21 (Bloomberg) -- Merrill Lynch & Co.'s threat to sell $800 million of mortgage securities seized from Bear Stearns Cos. hedge funds is sending shudders across Wall Street.

A sale would give banks, brokerages and investors the one thing they want to avoid: a real price on the bonds in the fund that could serve as a benchmark. The securities are known as collateralized debt obligations, which exceed $1 trillion and comprise the fastest-growing part of the bond market.

Because there is little trading in the securities, prices may not reflect the highest rate of mortgage delinquencies in 13 years. An auction that confirms concerns that CDOs are overvalued may spark a chain reaction of writedowns that causes billions of dollars in losses for everyone from hedge funds to pension funds to foreign banks. Bear Stearns, the second-biggest mortgage bond underwriter, also is the biggest broker to hedge funds..."

In other words, everything would be fine if we all just lied about the true value of the underlying property on these CDOs. When this thing begins to unravel, it is going to get fugly. I've talked about "social mood" here quite a bit, but the delusional optimism necessary to do some of the deals we saw in 2006 and even earlier this year in the CDO market is off the charts.

Wednesday, June 20, 2007

Black Gold and News Resources

I'm going to be very busy for the next few days, so posting will be spotty. The following sites should keep your brain humming until then:

Lies, Damned Lies and BP Statistics
A posting at the Oil Drum on Saudi Reserves

The Daily Reckoning
Worth reading every day

UrbanSurvival
George Ure brings his own unique slant to world events

And, of course, check out the blogroll on your right. Great resources for thought and action.

Tuesday, June 19, 2007

Using Socionomics in the Real World

I've struggled a lot with using socionomics on a short-to-medium time scale. I'm not always sure if what I am using as an indicator is valid or not.

Socionomics began from observations of stock market patterns and has evolved into a very useful tool to study culture at large. When studying culture at large, stock indices would seem to be a nice tool to use, but more indicators are necessary if we are to analyze events properly. To default to my engineering roots - we need a variety of sensors, such as temperature, pressure, velocity and intensity.

Looks like the bright minds over at the Socionomics Institute have had similar thoughts:

Sociometers Other Than The Stock Market - there are a number of sociometers other than the stock market that can be useful in confirming the current trend in social mood. The more sociometers that point in the same direction, the more confident one can be in his or her view. Mark Galasiewski explains a series of additional sociometers to Dan Gough.

24/7 Workplace Exhaustion - There are people who believe that exhaustion is the modern malady. If email, Blackberries, and cell phones won't let you disconnect and take a break, you need to ask the question why that is the case. Socionomics has the answer and explains when there might be a change in store.

The Grid

If you close your eyes tight enough, maybe the monster under the bed won't eat you...

That's the level of thought put into the infrastructure that provides the United States with electricity. Thank you Baby Boomers.

Strain on U.S. grid to make blackouts common
by Timothy Gardner

NEW YORK (Reuters) - Most people in the United States only think about where electricity comes from when the lights go out suddenly.

But unless the antiquated transmission grid is fixed, expensive blackouts that bring modern life to a grinding halt will become ever more common, according to "Lights Out", a new book by Jason Makansi.

Nothing much else to say. If we in the U.S. don't address this, we won't need global guerrillas to take down our infrastructure. Criminal negligence will have taken care of it.

Sunday, June 17, 2007

...Purchased In Unusual Transactions...

Reality is here.

Facing huge debts, investors ponder next steps
by Chris Bagley
...As of June 4, nearly 1,050 lender-owned properties were listed for sale in Riverside County, up from less than a half-dozen in June 2006, according to ZipRealty, an Emeryville, Calif.-based real estate brokerage.
Realization is still far away...

Bill Lind, Prophet

Please take ten minutes and compare the following:

Boomerang - an article by William Lind, 4GW proponent and big-brain guy, written in early December of 2006.

and...

Gangs in the Military: How much do we know? - an article from Stars and Stripes from early 2007.

Think about the kinds of jobs and kind of economy today's vets will be coming home to. Think about the sacrifice's they've made at the service of an idiotic (in my opinion), Wilsonian foreign policy. They've been given an impossible task, yet do their best, every day to make it work. These, the best and bravest of a generation, are just the kind of able, hard-working people you do NOT want to alienate if you are among the ruling elites. Think about the tactics and skills in urban warfare and low-intensity conflict (4GW) these vets are picking up in the meat grinder of Iraq.

I've often talked about mood here quite a bit. It matters. And it is only a matter of time before we find out just how much it matters.

Where There's Smoke, There's Panic?

Access to credit is becoming restricted through higher interest rates and tougher lending standards. This puts a brake on demand, in the face of a huge supply of homes - especially second homes.

Please tell me how this ends well. Unless you have a development with good homes at a fair price and a way to provide cheap credit to your buyers, this is a recipe for disaster.

Second-Home Housing Glut;Real-Estate Bubble Losing Air
by Robin Goldwyn Blumenthal, Barron's
It would seem to have it all: four bedrooms, a guest house, a pool and a rock waterfall. But the vacation home in Naples, Fla., hasn't been drawing much interest from buyers, so the seller recently threw in that most modern of amenities: the $1 million price cut. That's brought the asking price down a full 25%. "If you want to sell, you've got to go back to '04 prices," says Chip Harris of Coldwell Banker Previews International, which is handling the property...

If we take Chip's advice - what does this do to cash-out refis?

Now, many homeowners out there were very smart. They've owned their homes for a lot of years. They refinanced when rates went to 5.5% and locked in a great rate. They haven't used their house as an ATM, but built up real equity.

The problem - the chunk of the market that did try to game the system. Remember, your house's value is based largely on comp sales. When the dipshits have to begin selling out at firesale prices in the face of declining demand, that is where the pain comes in.

Friday, June 15, 2007

Ron Paul Again

The man keeps on trucking.



Send the man a few bucks. He's at least a voice for debating issues, not personality.

Those Darn Canadians

Those wily Canadians, up to no good as usual

I missed this story when it first appeared a few weeks ago, but this is a glaring example of the kinds of problems centralized security systems are going to have in the 21st century:


by Nanowerk News

An odd-looking Canadian coin with a bright red flower was the culprit behind a U.S. Defense Department false espionage warning earlier this year about mysterious coin-like objects with radio frequency transmitters, The Associated Press has learned.

The harmless "poppy coin" was so unfamiliar to suspicious U.S. Army contractors traveling in Canada that they filed confidential espionage accounts about them. The worried contractors described the coins as "anomalous" and "filled with something man-made that looked like nano-technology," according to once-classified U.S. government reports and e-mails obtained by the AP...

Where to begin.

Here we have some well-meaning .mil types who thought they were really helping out when they spotted something that "looked like nano-technology" - whatever the hell that means. This resulted in an embarassing espionage alert and who knows what kinds of stories the circulated (and probably still circulate) through the military contractor grapevine.

From the perspective of 4GW or global guerrilla "war" this kind of episode will be food for thought and something like it will go in whatever Standard Operating Procedures such groups adhere to in the future.

Think about it - the Western security services think they must be omnipotent. This omnipotence must come from centralized control over, and monitoring of, what they deem "sensitive" information. They must be able to monitor every sparrow that falls from the sky and will increasingly rely on civilian informants to help out, especially if/when another major terrorist event happens. Law enforcement and security agencies have always had to deal with false tips, but here we have a scenario where insurgent groups could leverage the security system against the state they are hollowing out.

All a group has to do is create a scenario that, on the face of it, could be plausible - like the crazy Canadian coin above. Spread the right kind of rumor (easier to do in this day of anonymous tip lines and extensive communications nets) and you could tie up valuable intel and analytical resources on a high-tech snipe hunt. Time it just right and you could help create a localized info-storm that could blind the COIN folks at critical moments. Plus, if you get the security services in a panic mode, they could do something really destabilizing like shut down all cell phone towers in an area, restrict the use of PDAs, declare certain technologies as forbidden, etc. - just because it may "look like" dangerous tech.

Maybe I'm taking it a bit far, but as we march further into the 21st century, absurdity by the ruling elites seems to be the order of the day. Just check out how the cloak-and-dagger folks classified the report they produced:

Some of the U.S. documents the AP obtained were classified "Secret/Noforn," meaning they were never supposed to be viewed by foreigners, even America's closest allies. The government censored parts of the files, citing national security reasons, before turning over copies under the U.S. Freedom of Information Act.

Thursday, June 14, 2007

Peak Oil Precursor

It seems like a small thing - setting quality standards for the petroleum delivered under futures contracts, but it shows how stressed the petroleum supply is becoming. As the crudes available become more sour and heavier (more sulfur and a lower API gravity), this will cause problems all through the supply chain - from pricing to refining.

Platts pricing changes spark uproar on oil market
by Randy Fabi, Reuters

...Under Platts' new criteria, Forties will only be considered as one of the four North Sea benchmark grades if it has a minimum API gravity of 37 degrees and a maximum sulphur content of 0.6 percent.

On average, the blend has an API gravity of 41.8 degrees and a sulphur content of 0.49 percent, according to Forties operator BP.

Traders believed the sulphur content of Forties could rise above the 0.6 percent threshold as early as August because of seasonal maintenance. The quality of the grade has declined after the addition of oil from the new Buzzard field began in January...

Wednesday, June 13, 2007

Iran WarWatch (Part Eleven)

Well, we just had the "smoking gun" announcement about how Iran is supplying the Taliban with guns, EFP's and other assorted nastiness.

Here's another aspect of the rapidly rising tensions:

Iran Adding Attack Boats in Persian Gulf, U.S. Says
by Tony Capaccio, Bloomberg

June 6 (Bloomberg) -- Iran is increasing its fleet of small attack boats capable of challenging warships and disrupting oil traffic in the Strait of Hormuz, the sea route for two-fifths of the world's daily supply of crude oil, the U.S. Navy says.

Iran's Revolutionary Guard Corps already has more than 1,000 of the speedboats ``and continues to add boats armed with anti- ship cruise missiles,'' said Robert Althage, spokesman for the U.S. Office of Naval Intelligence.

``Iran still states that the Iranian Revolutionary Guard Corps will employ swarming tactics in a conflict,'' Althage said in an e-mail. Naval intelligence, in its latest report on threats, said an attack against U.S. forces and commercial tankers ``could include over 100 boats in coordinated groups of 20 to 30 approaching simultaneously from multiple axes.''

Do me a favor on this Wednesday morning. Think about what it would be like to wake up tomorrow and learn that U.S. forces have begun bombing targets in Iran. Oil traffic through the Straits of Hormuz has been jeapordized and word is just coming in that supply convoys all through Iraq are being bombed and shot to pieces.

Then, do a quick, back-of-the-envelope Gambler's Analysis of what would happen to your personal life if:


  • Oil goes to $150 per barrel
  • Gasoline supplies are rationed to 20 gallons per vehicle, per week
  • Nuclear Weapons are used by U.S. forces, leading to economic sanctions from our major trading partners such as China and, possibly, given their history, Japan
  • Food prices spike 100% due to transportation problems
  • And... any other issues that you think might arise from such an attack

Tuesday, June 12, 2007

TANSTAAFL

Heinlein's TANSTAAFL principle strikes again...

Insurers against rate volatility get caught short
by Bill Barnhart, Chicago Tribune

Last week's sudden sell-off in Treasury securities likely will form a more anxious backdrop for global financial trading for days, maybe weeks, to come.

Markets appeared to settle down Friday and Monday. But the fallout from the selling on Wednesday and Thursday hasn't been fully realized or explained.

Investors might assume that those hurt most by a sudden drop in prices of securities would be those who had been buyers -- in this case, those who had paid money to own Treasury bills, notes and bonds.Last week, however, much of the damage centered on sellers -- not sellers of Treasury securities but sellers of options intended to insure against volatility in the Treasury market...

Iran WarWatch (Part Ten)

And the beat goes on...

U.S.: Iran sending weapons to Taliban
by Jamey Keaton, AP
PARIS -- A senior U.S. diplomat accused Iran on Tuesday of transferring weapons to Taliban insurgents in Afghanistan - the most direct comments yet on the issue by a ranking American official.

Undersecretary of State Nicholas Burns, speaking to reporters in Paris, said Iran was funding insurrections across the Middle East - and "Iran is now even transferring arms to the Taliban in Afghanistan."

It's a country that's trying to flex its muscles, but in a way that's injurious to the interests of just about everybody else in the world," he said. "I think it's a major miscalculation."

In Afghanistan last week, U.S. Defense Secretary Robert Gates said Iranian weapons were falling into the hands of Taliban fighters, but stopped short of blaming the government itself.

Speaking of "major miscalculations" - Iran helped the U.S. topple the Taliban back in 2002. How times change.

The Elliott Wave Principle

I often refer to socionomics in my postings, trying to use that hypothesis to help gauge current and potential future events.

Socionomics is itself based on a market theory known as the "Elliott Wave Theory". Many, if not most, of you may not be familiar with this tool used by stock and commodity market analysts around the world.

To remedy that, the following article is provided (with permission from the author):

The Elliott Wave Principle

In the 1930s, Ralph Nelson Elliott, a corporate accountant by profession, studied price movements in the financial markets and observed that certain patterns repeat themselves. He offered proof of his discovery by making astonishingly accurate stock market forecasts. What appears random and unrelated, Elliott said, will actually trace out a recognizable pattern once you learn what to look for. Elliott called his discovery "The Elliott Wave Principle," and its implications were huge. He had identified the common link that drives the trends in human affairs, from financial markets to fashion, from politics to popular culture.

Robert Prechter, Jr., president of Elliott Wave International, resurrected the Wave Principle from near obscurity in 1976 when he discovered the complete body of R.N. Elliott's work in the New York Library. Robert Prechter, Jr. and A.J. Frost published Elliott Wave Principle in 1978. The book received enthusiastic reviews and became a Wall Street bestseller. In Elliott Wave Principle, Prechter and Frost's forecast called for a roaring bull market in the 1980s, to be followed by a record bear market. Needless to say, knowledge of the Wave Principle among private and professional investors grew dramatically in the 1980s.

When investors and traders first discover the Elliott Wave Principle, there are several reactions:

  • Disbelief – that markets are patterned and largely predictable by technical analysis alone
  • Joyous “irrational exuberance” – at having found a “crystal ball” to foretell the future
  • And finally the correct, and useful response – “Wow, here is a valuable new tool I should learn to use.”

Just like any system or structure found in nature, the closer you look at wave patterns, the more structured complexity you see. It is structured, because nature’s patterns build on themselves, creating similar forms at progressively larger sizes. You can see these fractal patterns in botany, geography, physiology, and the things humans create, like roads, residential subdivisions… and – as recent discoveries have confirmed – in market prices.

Natural systems, including Elliott wave patterns in market charts, “grow” through time, and their forms are defined by interruptions to that growth.

Here's what is meant by that. When your hands formed in the womb, they first looked like round paddles growing equally in all directions. Then, in the places between your fingers, cells ceased growing or died, and growth was directed to the five digits. This structured progress and regress is essential to all forms of growth. That this “punctuated growth” appears in market data is only natural – as Robert Prechter, Jr., the world's foremost Elliott wave expert and president of Elliott Wave International, says, “Everything that thrives must have setbacks.”

The first step in Elliott wave analysis is identifying patterns in market prices. At their core, wave patterns are simple; there are only two of them: “impulse waves,” and “corrective waves.”

Photo Sharing and Video Hosting at Photobucket

Impulse waves are composed of five sub-waves and move in the same direction as the trend of the next larger size (labeled as 1, 2, 3, 4, 5). Impulse waves are called so because they powerfully impel the market.

A corrective wave follows, composed of three sub-waves, and it moves against the trend of the next larger size (labeled as a, b, c). Corrective waves accomplish only a partial retracement, or "correction," of the progress achieved by any preceding impulse wave.

As the figure in the image shows, one complete Elliott wave consists of eight waves and two phases: five-wave impulse phase, whose sub-waves are denoted by numbers, and the three-wave corrective phase, whose sub-waves are denoted by letters.

What R.N. Elliott set out to describe using the Elliott Wave Principle was how the market actually behaves. There are a number of specific variations on the underlying theme, which Elliott meticulously described and illustrated. He also noted the important fact that each pattern has identifiable requirements as well as tendencies. From these observations, he was able to formulate numerous rules and guidelines for proper wave identification. A thorough knowledge of such details is necessary to understand what the markets can do, and at least as important, what it does not do.

You have only just begun to learn the power and complexity of the Elliott Wave Principle. So, don't let your Elliott wave education end here. Join Elliott Wave International's free Club EWI and access the Basic Tutorial: 10 lessons on The Elliott Wave Principle and learn how to use this valuable tool in your own trading and investing.

Monday, June 11, 2007

Our Friend, Vitamin R


Another story showing that the effects of radiation on plants and animals is far more complex than the kindergarden-level, fear mongering "explanations" given in most media reports:

Contaminated Zone Near Chernobyl Nuclear Plant Becomes Wildlife Haven, Intriguing Biologists
Douglas Birch, AP for The Daily Herald
PARISHEV, Ukraine -- Two decades after an explosion and fire at the Chernobyl nuclear power plant sent clouds of radioactive particles drifting over the fields near her home, Maria Urupa says the wilderness is encroaching.

Packs of wolves have eaten two of her dogs, the 73-year-old says, and wild boar trample through her cornfield. And she says fox, rabbits and snakes infest the meadows near her tumbledown cottage.

"I've seen a lot of wild animals here," says Urupa, one of about 300 mostly elderly residents who insist on living in Chernobyl's contaminated evacuation zone.

The return of wildlife to the region near the world's worst nuclear power accident is an apparent paradox that biologists are trying to measure and understand.

Many assumed the 1986 meltdown of one reactor, and the release of hundreds of tons of radioactive material, would turn much of the 1,100-square-mile evacuated area around Chernobyl into a nuclear dead zone.

It certainly doesn't look like one today.

Dense forests have reclaimed farm fields and apartment house courtyards. Residents, visitors and some biologists report seeing wildlife -- including moose and lynx -- rarely sighted in the rest of Europe. Birds even nest inside the cracked concrete sarcophagus shielding the shattered remains of the reactor.

Wildlife has returned despite radiation levels in much of the evacuated zone that remain 10 to 100 times higher than background levels, according to a 2005 U.N. report -- though they have fallen significantly since the accident, due to radioactive decay.

Now, I will say that high levels of radiation absorbed in a short amount of time will injure or kill you. Period.

However, as the article shows, there is a vibrant and sometimes vicious debate going on about the effects of low levels of radiation on health and life.

This is one of those issues where the vehemance of eco-nuts will actually help the cause of facts and science. The idiotic assertions by various eco-nutters, post-Chernobyl was that a vast area would turn into a desert. This obviously has not happened. The fact is that life and Mother Nature is tougher and far more complex than many wish to acknowledge. As years pass and the predicted disaster does not occur, reason begins to replace panic (for most) and this opens a door that allows for real science to be done.

Check out the BELLE group for more information on this fascinating and controversial topic.

Sunday, June 10, 2007

Iran WarWatch (Part Nine)


It has been awhile since my last Iran WarWatch piece - and that one was to yawn casually about what I took to be the reality behind the hype of Iran's centrifuge program. With equity markets surging higher in the face of horrible news in the U.S. housing market, it's been my recent operating assumption that, using this socionomic clue, war with Iran was not probable in the near term. The U.S. has had the beginnings of official talks with Iran, a first in more than two decades, also the two navies have worked reasonably well together in avoiding an accident in the Persian Gulf. Good news all over the place.

With the recent whipsaws in the DJIA and NASDAQ, with recent news of countries abandoning the U.S. Federal Reserve Note as a reserve currency (or at least reducing its weighting as part of their reserves) and with more and more bad news coming from the housing sector, I figure the big, bad, nebulous ghost in the socionomic machine, social mood, could be rolling over.

So let's do a little news stringing and see what we get:

U.S. Senator Urges Military Strike on Iran
from Guy Dinmore, MSNBC

..."I think we've got to be prepared to take aggressive military action against the Iranians to stop them from killing Americans in Iraq," Mr Lieberman told CBS. "And to me that would include a strike over the border into Iran, where we have good evidence that they have a base at which they are training these people to kill our soldiers..."
Losing Iraq, Nuking Iran
commentary by Paul Craig Roberts

...Even the neoconservative warmongers, who deceived Americans with the promise of a "cakewalk war" that would be over in six weeks, believe that the war is lost. But they have not given up. They have a last desperate plan: Bomb Iran. Vice President Dick Cheney is spear-heading the neocon plan, and Norman Podhoretz is the plan's leading propagandist with his numerous pleas published in the Wall Street Journal and Commentary to bomb Iran. Podhoretz, like every neoconservative, is a total Islamophobe. Podhoretz has written that Islam must be deracinated and the religion destroyed, a genocide for the Muslim people...
Israel Seeking New Deadline on Iran Bomb
Wants Tehran To Change Behavior by Year's End or Risk 'Next Level'
by Eli Lake, New York Sun

...Channel 2 News in Israel reported that (Deputy Prime Minister of Israel) Mr.(Shaul) Mofaz said Israel would take military action if Iran did not cease its uranium enrichment by year's end. However, a source familiar with yesterday's discussions disputed the Channel 2 report. Mr. Mofaz only alluded to such action in the meeting, the source said, saying, "All options are on the table" if the diplomacy with Iran does not work...
So we have all of that going for us, which is nice.

Most probable scenario: More standard issue saber rattling.

Worst case scenario: Bush 43 authorises air strikes against Iran. These air strikes include hits by nuclear warheads on places like Natanz and Arak.

What would tell us that the worst case could come to pass: Signs of desparation out of the Beltway elites due to economic problems in the U.S., market reversal, another kidnaping of U.S. soldiers or, worse, having an outpost overrun and more than 20 soldiers or Marines killed in one incident, etc.

What (literal and figurative) post-attack fallout worries us here at FutureJacked headquarters?

  1. That the civilians who would authorize a strike on Iran don't understand just how vulnerable the U.S. supply line from Kuwait to Baghdad would be if the Shia in the South rose up and began hitting every single convoy that rolled north. Logistics, logistics, logistics. Maybe military commanders have a super-secret plan to miracle supplies up from Kuwait. The alternate supply route, out of Turkey, is looking doubtful as well as border tensions continue to escalate between Turkey and the 51st U.S. state - Kurdistan. Imagine the bravest and best soldiers of our Generation (that's the Gen X generation - you know the one that will have to clean up the mess made by you sorry-ass Baby Boomers, as your insipid policies walk us into this abyss) defending their base camps as supplies of bullets begin to run low...
  2. That the civilian elites inside the Beltway don't understand that nuclear weapons are not some magical device that will ensure victory. They got that reputation because the Nipponese were looking for a way out of World War II, but were locked into their positions due to their adherence to the code of Bushido. The new "superweapons" gave them an excuse to do the smart thing. If the U.S. drops a few nukes on Iran to "make sure we get all of their deeply buried installations" then the U.S. (and/or Israel depending on who does the job) will have pissed away what remains of any international legitimacy, will face economic sanctions and will not do ANYTHING to help out the war effort except to stoke the hatred of our enemies and empower their recruiting. Nukes are just big bombs that make a big mess. That's it. Nothing more, nothing less. They don't automatically win wars and they certainly can't take the place of concepts such as strategy and intelligent diplomacy.
  3. What happens when the war goes horribly wrong and Bush 43 continues his path of delusion and denial? When will the Generals make their move? Is that why the Navy is getting all the hot-shit appointments these days? Because Bush 43 knows the Army is hurting beyond belief and that he needs "reliable" people in the big cushy chairs in the Pentagon?

Yes, point three is extreme, but is it really as unimagineable as it sounds? I leave it out there as a provocation to think about the worst and hope for the best.

The Iran WarWatch has been moved back to the front burner. Let's keep an eye out, shall we?

Friday, June 8, 2007

Hitting That Crack Pipe Hard, Case Study One


Residential real estate is tanking in many parts of the United States. Even the National Association of Realtors(R) has begun to sober up and recognize the facts.

The liquidity that fueled this boom is drying up as subprime and Alt-A lenders shrivel up and blow away like a fart in the wind (at least 82 in the past 7 months), taking their easy loans with them.

Foreclosures are skyrocketing.

The overhang of supply on the market is incredible.

And yet, many home "owners" are still so stoned on the crack cocaine of delusional optimism they can't focus enough to read the writing on the wall. They feel "their" house is "worth" more than the market will bear. Most are still unable to face the truth - that an ugly new day has dawned in the U.S. - a long, gloomy day of declining asset prices and "investors" who are upside-down in their mortgages.

From washingtonpost.com's Real Estate Live chat from this week:
Ashburn, Va.: I'm so mad at my neighbor. I bought my new home here in Ashburn last summer and plan to sell it next year (after holding two years to avoid taxes) to make a nice return on my investment. The problem is my neighbor is trying to sell his house (very similar to mine) right now and he keeps lowering his asking price. Each time he lowers his price, I see my potential profits next year getting squashed. Doesn't he realize he's hurting the comps for all of his neighbors by doing this? I don't think he is acting very "neighborly" by doing this. I want to say something to him and tell him he should stop putting his interests ahead of his neighbors. Its people like him who are ruining the market for the rest of us. If he would just refuse to lower his price, we could maintain our comps and everyone would benefit. What can I do to stop him?

Kirstin Downey: Wow. Interesting question. There's nothing you can do. It's his house, of course. It's frustrating, to be sure. One word of advice: Don't resort to
violence
.

Seriously, he may just be desperate to sell. Perhaps he has an adjustable rate mortgage that is rising, or maybe an option ARM that is resetting to a much higher monthly payment. Maybe he's getting a divorce or has lost his job and doesn't want to talk about it. Or maybe he wants to move to Tahiti. (I do sometimes, don't you?)

I hear from many, many buyers and sellers each month, and many sellers are finding the only way to sell a home amid this growing inventory is to cut the price. Perhaps last year's prices were just illusory after all.

It's sad when a delusional state disintegrates under the hard rain of reality. I find it interesting that Ms. Downey immediately told Ashburn, VA to not resort to violence. I think Ms. Downey has a good feel for how freaked out many home "owners" are becoming. I think she knows how close we really are to this collapse in pricing to be reflected in an angry social mood and all the negativity associated with it.

Thursday, June 7, 2007

Future News Headlines


What's the use of subscribing to services like Stratfor or Elliott Wave International and reading news analysis sites like UrbanSurvival or Sociotimes if you can't use that data to try and forecast events?

We all forecast events, even when we are not conscious of it. The "buy and hold" strategy of investing is nothing more than a forecast that, over a long time line, equity prices will be higher than they are today? Or when building a house, you are forecasting that there will be no major earthquakes or hurricanes to destroy your investment and that the community will thrive enough to provide you with a secure place to live. Contrast the attitudes of folks building homes in Detroit one hundred years ago, with the situation there today and you can see that the timeline of your forecast is important.

So, here are some headlines I expect to see over the coming years. These are some of the assumptions I'm making when I make choices in my career path and in my personal life.

"Chinese Contagion" Spreads to US Shores, DJIA Down 23% in Two Weeks
August, 2007
The collapse in Shanghai and Hong Kong equity markets continues to spread to US and European markets. Four hedge funds have folded in the last few days as they were forced to "mark to market" a large number of collateralized debt obligations. Fed Chief Ben Bernanke continues to reassure investors that "all is well, the Fed continues to work with our associates in the finance industry to make liquidity available in the quantities needed." Rioting in Shanghai continued for a fifth straight day as investors who lost everything stormed the local communist party headquarters...

Basra Becomes New Dien Bien Phu
September 2007
Negotiations continue between British commanders and local representatives of the Mahdi Army, along with organized crime leaders and militia chieftans who have besieged British forces at a number of bases. The situation is tense but calm after weeks of fighting that erupted after a botched raid by British forces on a Mahdi Army command post. Shiite sympathizers have cut supply routes all through Southern Iraq and two British outposts were overrun, with the loss of thirty-two soldiers.

U.S. forces are tied down in heavy fighting in Sadr City and have been unable to come to the aid of their Coalition partners, except for two Stryker Brigades, which are fighting their way south. Airstrikes continue to pummel insurgent bases, while videos of dead civilians are poured out onto the internet. The bodies of two Iranian Revolutionary Guards officers were displayed by U.S. officers...

"Squatters Rights" Movement Gains Strength in Colorado
November 2007
Fed up with the slow pace of government action against predatory lenders, groups of victimized homeowners have banded together to prevent local authorities from forcing families from homes that have entered foreclosure. One such group, Citizens Against Repossession of Property, have prevented sherriff's deputies from evicting homeowners in two subdivisions of Denver in the last week.

Says Orlando Cabrera, local leader of CARP, "We will fight for our rights to hold on to the American Dream against the bankers and the corporations." The governor's office has been petitioned by lending groups to send in National Guard troops to end what they call "this illegal seizure of properties that were legally foreclosed on." The governor will announce his decision tomorrow...

Saudi Officials Continue to Deny that Major Oil Field has "Collapsed"
November 2007
Officials in Riyadh issued an angry condemnation of ARAMCO whistleblowers and oil industry analysts whom they referred to as "fearmongers, liars and idiots" in a statement issued on Saturday.

A report in the Washington Times in late October, claiming that the water cut had spiked to 85% at the Ghawar oil field, the largest oil field ever discovered, has sparked a flood of reports out of the Kingdom that oil production is in complete collapse.

Local imams have issued a fatwa against Mr. Matthew Simmons, an investment banker who's book "Twilight in the Desert" first brought attention to the potential that the huge Saudi oil fields might be nearing their "peak" production and that the world could soon be facing an actual decline in worldwide supply of petroleum for the first time in history. This fatwa calls for muslims to kill Mr. Simmons because his "false teachings have led to lies and panic being spread in the holy Kingdom of Saudi Arabia, endangering the lives of the faithful."

Privately, officials from the U.S. Department of Energy worry that Saudi Arabia could be facing the chaos and collapse in revenue that has been so prevalent in Mexico over the past six months. The main Mexican oil field, Cantarell, continues its steep decline in production, and has led to a serious drop in revenues, as well as in supply to U.S. refineries that count on Mexican oil.

Arms and military trainers are being rushed to Riyadh for...

Layoffs Continue, State Offices Still Shut Down in Florida
December 2007
It will be a cold Christmas in 35,000 more households this year as Motorola, Pfizer, IndyMac, Wells Fargo and Countrywide all announced new rounds of layoffs. And the jobs crash continues to spread to the public sector as tax revenues plunge across the U.S.

Florida entered its second week without state government services as the governor and legistlators continued their fight over what programs to cut and what taxes to raise as they face a shortfall of 17% below the projected tax revenue. New York, California and Illinois are all facing similar crises...

Hate Rock - The Newest Big Thing in Music
January 2008
Drillhead, a hot new band out of St. Louis continues to dominate the world of music downloads. Their lead singer, a former Marine who served two tours in Iraq, sums up their artistic aims in a recent interview with Kurt Loder for MTV.com.

Says Jeremiah Stone, "Drillhead is our way of spreading the hate, anger and rage that we lived with every day in Iraq. All these suburban kids in their new cars and clean clothes - we want to sh*t in their brains, so they will wake up and see that life is pain..."

Markets "Should Stabilize This Spring" Says New Fed Chief
February 2008
U.S. stock markets posted their first monthly gain since May of 2007, with the DJIA up 2% to 4,853. This has investors heaving a sigh of relief that the worst of the storm may be over.

"We all kind of freaked out when they shut the NASDAQ down in December," says Bear Stearns trader Joe Cagliostro. "But after getting a solid month of gains behind us, we think 2008 will be the year of recovery. We are advising our clients to be fully invested to catch the big recovery boom we expect to see this year."

Michael Milken, President Bush's new pick for Federal Reserve Chief, says that "markets should stabilize this spring...

Aztlan Liberation Army Strikes Again
March 2008
Another police station was bombed in southern Texas this week, killing four police officers and wounding ten others in El Paso.

The Aztlan Liberation Army claimed credit for this new bombing in a statement uploaded to YouTube, in which a masked spokesman stated "This is only the beginning. We will massacre the invaders and occupiers as they massacred our ancestors. We will not rest until every Anglo has been killed or forced out of the occupied lands of Aztlan."

Aztlan is a mythical name for a huge swath of the Southwest United States. While there have been movements and protests in the past, this wave of violence and gang activity is unprecedented on U.S. soil...


I look forward to looking back on these thoughts and hopefully laughing about it in a year.

Tuesday, June 5, 2007

You Say You Want Some Devolution...


With the information technology available today, the potential for success for alternative currency schemes like this would seem to be greatly increased. Easy access to high-quality printing (for those that want bank notes) or secure and simple online purchasing agreements will help lower the barriers to entry for alternative currencies. When transaction costs drop for currencies that compete with centrally controlled sources of bank notes and credit, we can expect to see more of them, especially if those centrally controlled sources of bank notes follows a path that destroys the value of that official currency.


Town poised for its own currency
from the BBC
A south Devon town has taken a step towards having its own currency after a month-long experiment.

Three hundred Totnes pounds were printed in March for circulation only in local outlets.

Eighteen shops joined Transition Town Totnes (TTT), a new group campaigning for a more self-sufficient community.

We can expect amusement by the authorities at first, probably followed by panic and draconian laws prohibiting such currencies in the future if the national currencies fail to hold value in the face of massive Welfare State obligations.

Another sign that smaller and smaller groups are looking to provide for themselves.

How to Plunge a State Into Failure


A comment from reader Subadei on a post entitled "These Guys Also Get It" has had me thinking about why some states are easier to hollow out or push into failure than others.

I had made a sweeping comment about one of the bridge bombings in Iraq as being a precursor to the types of events that can put a nation state into failure. Subadei had this perceptive repsonse to my take:

I'm a bit skeptical. You refer to these actions as "putting a nation state into failure."

Not quite from my perspective.

Maintaining a failed state, yes. There's a pretty big divide between collapsing attempts to realize a state and collapsing a state.

(Emphasis mine)

I've been thinking about this comment and realize that Subadei has hit on a key point that will help drive history in the future (in my opinion). As the normal operating procedures for economics and international relations that most were used to from the 1960's through the 1990's begin to fail at increasing rates, (driven by globalization, the rise of China and India, major budget problems in the Western Welfare states, etc.) some states will be able to hold it together and maintain stability and prosperity, even if that prosperity gets dented a bit. Other states will become versions of Lebanon, Somalia, Iraq and Afghanistan. The current experiments being performed in the laboratory of Iraq seem to indicate that just sending in the troops won't hold back this tide. The question becomes, which politial entities have the best chances for stability and which are looking at violence and possible collapse?

For instance, a campaign of bombings and violence by the Irish Republican Army from 1969 to the late 1990's never once threatened to plunge the United Kingdom into failure. The campaign of bombings and violence in Iraq following the U.S. invasion has either kept that state in failure (if you accept the U.S. caused the state to "fail" in 2003) or the bombings, killings and kidnappings found fertile soil to take a once-stable state and rapidly cause it to fail.

Looking at it, initially I am reminded of the criteria laid out in Edward Luttwak's seminal work Coup d'Etat: A Practical Handbook of the conditions he regarded as necessary for a coup to be successful. One could apply these principles as a starting point (from Chapter 2 - When Is A Coup Possible?):

  1. "The social and economic conditions of the target country must be such as to confine political participation to a small fraction of the population."
  2. "The target state must be substantially independent and the influence of foreign powers in its internal political life must be relatively limited."
  3. "The target state must have a political centre. If there are several centres these must be identifiable and they must be politically, rather than ethnically, structured. If the state is controlled by a non-politically organized unit, the coup can only be carried out with its consent or neutrality."

Now one might say a coup and the efforts of global guerrillas to plunge a state into failure are opposite goals. You would be correct in one sense, but they both feed off of the susceptibility of the life of a state to be radically altered by small groups.

In a coup, a clique hopes to take over the mechanisms of control inherent in the modern state.

In a global guerrilla style insurgency there are multiple groups seeking to destroy the reality of that control, while often leaving the facade of those mechanisms intact (criminals and mafias make money while the Western-educated boys and girls in their suits take the blame at international conferences for the drug smuggling, gun running, IED service industries, etc. that are rampant in the geographic space their "country" supposedly "controls"). Now, some of the insurgent groups in a failed state may be trying to gather enough power to pull off a coup and build up the power of the state, but they are in competition with others who thrive and prosper when state control is weak or non-existent, but the point is that there are a lot of players on the field, most with competing goals and all with the ability to keep the functions of a modern state beaten down.

Failed states will almost always meet criteria #1 before the failure begins. Criteria #3 is also important. Obviously, the laboratory of Iraq shows that criteria #2 is not necessary for a failed state to remain in failure - a key lesson that will influence the future use of military power.

What is the tipping point? When will a once-stable state pass that final mile-marker and enter the land of failed states?

I don't think it is "just" violence - many U.S. cities are engaged in a low-grade war against gangs on a consistent basis. Granted, these U.S. gangs have not ratcheted up the violence to levels seen in places like Sao Paulo, but right now, most Westerners have much more to gain by supporting the authorities than by turning to gangs for protection and profit. At the moment, at least...

I don't think it is "just" lack of political representation. Places like Egypt, Myanmar and Saudi Arabia lack the complete democratic structures found in most Western countries. For that matter, most Western countries had very restrictive criteria for political participation for centuries and this did not automatically lead to endemic violence against the state, though it helped stoke some conflicts.

I don't think it is "just" an economic problem. Despite what the world-improvers say, poverty can be very stable. It may be very unpleasant, but it can be stable. One thing to watch, though is when a population moves from a state of wealth or at least comfort down to a state of poverty. This might provide a seed for the growth of a "stabbed in the back" type of philosophy that could help in the initial days of getting a state wrestled into failure.

I don't think it is "just" foreign intervention / assistance / interference. Hezbollah has profited enormously from its relationship to Iran, not the least in material and training. That said, the vacuum already existed in Lebanon when Hezbollah was formed. Various "Somali" groups have kept that "state" in complete failure for quite a long time without the need for significant outside assistance.

What combination of the above is the critical mass? When I turn to history, I can't find clear answers (though I may be looking in the wrong places).

Why didn't Germany become a failed state after World War II? The ability to strike at vulnerable infrastructure was certainly there. Foreign troops were everywhere and wide open to attack. Former Reichswehr and SS soldiers were everywhere and munitions littered the countryside. There was a radical ideology available to power fanatic resistance to the "mongrel" races that occupied the Fatherland. Instead of turning to an insurgency and chaos, Germany focused on economic development and thrived.

There is much to wonder about there. I have often invoked that ghost in the machine, social mood, to try and explain the why's and wherefor's of how groups act and react, but that is unsatisfying (until we get a better statistical basis for the socionomic hypothesis).

If we can't find the "why" just yet, we can at least look out for the "who". Here is a draft list of critieria needed before a state enters into failure:


  • The state should be ethnically diverse, preferably with no one ethnic group comprising over 60% of the population. This is based on anecdotal evidence from the former Yugoslavia, post-colonial Africa and Iraq.
  • There should be one major political center that is the source of control and legitimacy in the state. Regional governing bodies should have minimal real power, though propaganda could be used to pretend the local governments have a lot of influence. That way, when you create chaos in this power center, you are getting a lot of bang for your buck.
  • Pathways to economic success should be very limited. This can be through economic collapse (major recession, collapse of a vital sector of the economy, etc.), stupid laws that restrict economic activity, or through direct economic discrimination against certain ethnic groups. The stupid laws are a big help to global guerrillas as this helps to economically strengthen the local gangs, tongs, mafias, etc. A failed economy also helps to create a market for contractors and services related to outsourced violence. You and your brother may not be a formal member of a gang, but if you have a car that is retrofitted to drop IEDs out the bottom or if you hire yourselves out for a few hundred bucks to act as a gunman on a raid because you can't get a job doing anything else, this can help with state failure. Note that this can be a chicken-and-the-egg problem - as violence can be used to restrain economic opportunities such as bombing lines of police recruits or attacking marketplaces.
  • A corrolary to the economic issue is that corruption needs to be an accepted practice. When you can buy off the state or infiltrate the security services, you are destroying the moral authority of the state. When your gang can operate mostly without fear of reprisal, you become the real power in the eyes of the locals. They come to you when they want things done. Again, by itself this criteria can't fail a state, but once it spreads from a few places to cover the entire country, the respect for a state declines and with a lack of respect, it is easier to ramp up the other activities that can lead to failure such as corruption and violence.
  • An ideology that helps legitimize violence is an optional piece to the bloody puzzle, as it can inspire suicide bombers and other extreme forms of attack.
  • Foreign influences also are an important, though optional criteria, in my opinion. Having occupation troops to practice against and to blame for problems helps to strengthen the respect for locals who are there to help you and to delegitimize the far-away authority of the country's government, who can be seen as boot-lickers of the occupiers.
  • And... I am still looking for that final criteria. There is a "something else" out there that takes a large group of people who have long supported a government and its laws, not matter how stupid or counterproductive those laws might be, and turns those people into enemies of the state. What combination of factors causes this? What catalyst?

A few final thoughts before this overly-long post wraps up.

I think we will see two types of failed states in the future. The classic failed state that we see in Somalia or Iraq will get all the headlines. There will be violence, interventions, lot's of television coverage, lot's of talk shows where ex-military officers tell the stupid civilians the way things should be handled.

Then there will be the other failed state. It will be quieter. The state mechanisms will be more intact. Most citizens won't think they are living in a failed state. But behind the scenes various gangs, criminals groups, mafias and individual "non-state actors" will have thoroughly corrupted every level of government. These groups will use factions of state power to act against other groups. They will run drugs, hire expensive lawyers to disrupt what's left of the legal process, they will launder vast sums of money through "legitimate" banks and other institutions and make vast sums of money for themselves and their co-conspirators - buying off or assassinating those that stand in their way. The mechanisms of the state, such as the army and national guards, will not be used to benefit the long-term health of the state, but to benefit various cliques and war industries. It won't be until the economic problems that occur in every country hit the population hard that the citizens will find out that "their" government has been hijacked. Then we will either see an acceptance of the new order, if the various factions decide to use the state to buy off the masses with bread and circuses or we will see these "quiet" failed states enter into the violent phase.

Please feel free to comment and pick apart this draft analysis. I'm still trying to get my head wrapped around this idea.

Monday, June 4, 2007

More Coming Soon

Sorry for the delays in posting. I have a piece coming up on the nebulous issue of how you plunge a state into failure versus the easier to accomplish task of keeping a failed state broken. Also, there'll be a review of the economic situation and some thoughts on asymmetric changes in climate.