Tuesday, December 30, 2008

Socionomic Trendspotting for 2009

As you know, we here at FutureJacked regard the theory of Socionomics as a useful tool to assist in making sense of the swirl of "news" and emotion that entangles us all and drives the major trends in politics, economics, war and religion.

Below are some major socionomic themes that, from my personal interpretation of socionomics, should dominate 2009:

A Continued Surge in Magical Thinking

Socionomics posits that during waves of positive social mood, "practical thinking" is dominant over "magical thinking," and a belief in science and reason dominates. During waves of negative social mood the magical thinking, with its distrust (if not hatred of) reason and science rises to a dominant position in the mass social "mind."

My personal interpretation of this is that magical thinking actually begins to manifest during the fifth wave of a postive mood surge - where faith and hope outstrips a reasoned evaluation of the economic "fundamentals" and continues into the waves of negative mood. Either way, we can expect a lot of anti-science and anti-rationality types of behavior to explode in politics and in university settings. Hopefully it won't go as negative as it did in Kampuchea, but we are dealing with a downturn of historic proportions, so keep in mind that herds of humans are capable of staying irrational for very, very long periods of time.

This article that was recently posted on MSNBC sums up a gentler aspect of this coming trend:

Business booming for psychics - The slumping economy has cost many people their jobs. But there appears to be at least one profession that's actually cashing in on the nation's economic woes. Skepticism often plagues the business of fortune telling, but in these tough economic times, many are putting apprehension aside in the hopes of seeing what's in the cards for their economic futures...

Amazing. People who have lost their jobs due to an irrational explosion of credit and insane optimism are now turning to a different breed of irrationality to help them out instead of facing up to facts and doing the hard work of rebuilding their balance sheets.

Expect this trend to reinforce others negative mood trends such as the coming explosions of violence, of anger, of the desire to break down instead of build up. This type of "thought" is the grease in the gears of the machine that will grind up the system of finance and governance we've become used to over the past few decades.

This is one trend that you absolutely must be aware of and, even if you are forced to pay lip service to it, you need to stay out of the trap and guide your own ship under the star of reason and hard work, even if that star becomes obscured by clouds of foolish and dangerous magical thinking.

Expect a Wave of Independence Movements

I thought this would be a more dominant theme during 2008 than it turned out to be, with only Kosovo shearing off from Serbia and, at the very end of the year, the Ruthenians declaring independence in Ukraine. As Abkhazia and Ossetia were already de facto independent from Georgia, I won't count them. I doubt 2009 will be as calm.

Socionomics holds that during times of negative mood factionialism increases and the various "tribes" that make up a country turn towards their subgroup and away from the idea of an inclusive and tolerant society. This is the stuff of independence movements, of civil wars, of hollow states and of a return to primary loyalties.

This tendency towards separation will also be aided by the innovations and growth in technologies that empower of small groups and non-state actors. Electronics, cheap communications, the internet and the coming surge in cheap biological engineering technologies should help take this trend to new heights of destructiveness. We may see a lot more applications to the UN in the coming years, not to mention thousands of sub-national and non-state groups that could care less about the trappings of sovereignty and governance.

My candidates for serious breakdown: Pakistan, Iran, Iraq (again, as the three regions duke it out to finalize their spheres of influence) and Bolivia. There should be a huge surge in non-state actors as well - groups or gangs that will carve out space for themselves, be that space only a few city blocks or chunks of the countryside. Good luck policing it.

I'm not quite as bearish on the U.S. as a political entity as Igor Panarin, who expects the U.S. to shatter into roughly 6 pieces by mid-2010, but if things get bad enough, if enough bad decisions continue to be made by The Powers That Be, if the negative mood gets bad enough, then all bets are off...

Anger, Violence and Oppression - Coming to a Town Near You

As mood becomes more and more negative, the news will reflect this more and more. I strongly expect this anger to manifest itself in a variety of ways:

  • Random criminal violence will explode around us. This will take the form of both bizarre and more "common" acts of violence. Robbery, thuggery and murder will sweep through various communities like a virus. Expect local law enforcement, which will be hampered by local budget crises, to appear impotent at times and expect local groups to respond with vigilante actions.
  • Attempts to crush dissent will proliferate. As violence and economic turmoil escalate, expect governments to clamp down on newspapers, cell phone texting, blogs, internet sites and other means of expression. No one wants to look stupid and as more and more stupid decisions are made by business "leaders," by government officials and by other socially relevant figures such as local clergy, efforts to whitewash the effects of their stupidity will proliferate. Enjoy the open internet now while you have it.
  • President-Elect Obama is walking into a buzz-saw. The man, through no fault of his own, is in a no-win situation. His honeymoon will be short and the problems he faces immense. I wish him the best of luck, but my best guess is he will go down as a perceived failure.
  • War will continue to erupt. Look to Iran, to Israel to Pakistan and India, to Mexico and to the continent of Africa as participants in or battlegrounds for war and civil war.

Wild Cards

In times of negative mood, it will seem like we will be getting more than our fair share of natural disasters, epidemics, famine and social chaos. I personally think it that the collective ability to respond to such disasters will be degraded, making them worse than they should be, but that won't matter much.

Expect a series of "unexpected" natural disasters to cause out-sized problems. Look for the localized famines (caused by bad decisions, magical thinking, as well as environmental factors), for epidemics (and the follow-on effects of reduced ability to transport goods and the use of the crisis by the Man to increase controls over the People).

Frankly, I plan to view of 2009 as the Year of the Worst-Case Scenario. If it can go wrong, I think it will.

That said, I also think that the wave structure shows the potential for a huge rally. My guess is that the Obama inauguration will be used as an excuse for a major improvement in mood and a sharp spike upwards in stock prices. It won't last, but it will probably be a fun ride up for a few months.


Here are some memes I think will be important as 2009 rumbles along:

Peak Oil is Wrong! - As I and Charles Hugh Smith have both suggested, I think these low oil prices are the last great head fake - another example of 2009 being the Year of the Worst Case Scenario. Just when you need strong prices to support a major build-out in petroleum and natural gas infranstructure, you are going to get a huge glut and low prices. It will eviscerate the market and destroy the future supply chain, but for the coming year, most will say that Peak Oil was a fraud and that oil will always be massively abundant. Short term, they will appear to be correct.

Long term, I still view Peak Oil as the perfect socionomic meme for an era of negative mood - it is a catastrophic theory, it focuses on limitations to growth and on breaking down the complex structures of industrial society. It is Malthusian and apocalyptic in its "strongest" form and provides a coherent framework to help explain the collapse of a society and an economic system.

Return to the Land! - The same technology that allows for small groups to leverage violence and communications in service of their factional desires will also help small groups who will begin to "drop out" of society and make a go of returning to the land. Small farms run by families and co-ops will spring up in rural areas and urban areas will find vacant lots reclaimed (legally or otherwise) as people search for not just food, but a meaningful life not tied to a corporate, consumerist economy. Farming is freaking hard, though, so we'll see how it works out, but as a meme, I expect it to fluorish, especially as layoffs increase.

Bandos Unite! - All those empty homes. A huge wave of coming homeless. You do the math. I expect a mythology to grow up quickly around this theme. Families taking over vacant houses, just to survive. Cops and deputies sent in, maybe rent-a-cops as well. Expect a defining battle - probably a literal battle, some time this coming year that will serve as the movement's "Alamo."

Let the Show Trials Commence! - Expect to see a cottage industry erupt focusing on tearing down the lives and fortunes of the operators of Wall Street "Greed Machine." Finance execs, bankers, big defense contractors and corrupt politicians will be paraded before Congressional and State Investigators and it will all play out on TV. Wealthy families will probably be targeted as well, fueled by conspiracy theorists and by the anger of the many have-nots towards the few remaining "haves."

Music and Art in the Service of Destruction - I think Mr. Robert Prechter coined the term "hate rock" in his seminal work "At the Crest of the Tidal Wave" when postulating what the world of music might deteriorate to in an era of negative social mood. Be writing that horror movie script now, folks, it will probably find a buyer all too soon. Art, movies and music are about to get even more dark and discordant than they are now.

Shrug it. - Considering the costs of operating a small business formally (high rent, high taxes, crazy government fees, government red tape that can stymie a project at the whim of a bureaucrat, theft by employees and the thousand other headaches involved in running a business) will get too high, especially in the face of a crushed credit system and a population more bent on saving than consumerist excess and huge numbers of small businesses will fail. But the men and women who run these businesses are not quitters or failures. Look for them to enter the gray economy. These are the doers and the hard workers. They don't have to carry the rest of us along on their backs. They can make it on their own without the taxes and employees. They will soon have plenty of incentives to shrug off this huge burden - especially as local and state governments ratchet up taxes and fees to try and stay solvent. When they move into the informal economy and stop employing the locals then municipalities around the U.S. will begain to fail at a catastrophic rate.

Action Items

Nothing new to suggest. None of us know exactly how this collapse will play out. Be flexible in mind, read about courageous men and women and how they handled hard times, be ready for economic disappointment. Be conservative with your assets. Pay down debt. Save.

Get ready to get local in a hurry. Grow a garden. Throw a potluck dinner for the neighborhood. Reconnect with family.

2009 will be tough. Be as prepared as you can.

Happy New Year!

I hope that your Christmas or other holidays you may be celebrating were enjoyable and I wish you all a safe and happy New Year. Best of luck to you all, keep your head about you and take what good that you can from a year that I believe will be incredibly challenging for the Republic and her citizens.

Monday, December 22, 2008

A Break

Okay, I still owe you several posts. That said, things are just too hectic right now. FutureJacked is going dark until after Christmas. We'll have a year in review posting, some predictions for 2009 and get back in the swing of things after the holidays.

While I believe the coming year will be one of the most challenging years ever faced by the Republic, always remember that chance favors the prepared mind, that you can help stack the odds in your own favor by choosing productive behaviors over self-destructive actions and, in the end, the strategies that will help us all work through this mess are timeless and serve as the foundation for a happy life - strong family ties, productive work and engagement in the community.

Merry Christmas, Happy Channukah, and may you all have a Happy and Safe New Year.

Friday, December 19, 2008

Polluting the Legal System

No comment:

Insurance loophole claimed in fire deaths
by Mary Flood, Houston Chronicle

An insurance company with a potential $25 million liability from a 2007 Houston office fire is claiming smoke that killed three people was "pollution" and surviving families shouldn't be compensated for their losses since the deaths were not caused directly by the actual flames.

Great American Insurance Company is arguing in a Houston federal court that the section of the insurance policy that excludes payments for pollution — like discharges or seepage that require cleanup — would also exclude payouts for damages, including deaths, caused by smoke, or pollution, that results from a fire...

Thursday, December 18, 2008

Natural Gas and a Cold U.K.

An interesting two-part study on natural gas production and consumption in the U.K. is up over at the Oil Drum. Worth reading. It is time to start thinking about how supply, demand and availability of energy supplies could affect you and your family.

Will the UK Face a Natural Gas Crisis this Winter? (Part 1 of 2)

Will the UK Face a Natural Gas Crisis this Winter? (Part 2 of 2)

Wednesday, December 17, 2008

Ripples from Madoff

I am still working on a post on oil, the Peak Oil meme and this long dark twilight of negative mood that we are entering. In the meantime, I ran across an article on the Madoff Scandal that just reinforces my belief that when the dust settles on this crash, the "investment industry" will be a bare chemical trace of what they are today. The trust in these "geniuses" built up over generations will be wiped out as the few people left with significant capital learn more and more about the arcane rules that the Wall Street - Beltway Kleptocracy is and will use to siphon off unearned wealth from producers.

Case in point:

Madoff fraud could burn those who pulled out early
By Jason Szep - Analysis
BOSTON (Reuters) - Disgraced money manager Bernard Madoff's suspected $50 billion fraud scheme looks set to burn even those who pulled their investments out long before the scandal rippled into the global financial system.

Such investors may have counted themselves fortunate, withdrawing their money years ago to buy a house or to pay for a daughter's education, and may have even sighed with relief because they ended ties with Madoff long before the scandal erupted late last week.

But they, too, could face trouble, lawyers say. Because of a legal concept known as "fraudulent conveyance," they could be forced to return their profits and even some of their initial investments to help offset losses incurred by others entangled in the long-running Ponzi scheme...

..."I'm sure it will be a surprise to those who had no idea about his position but wanted to buy a house, and took the money out," said Tamar Frankel, who teaches securities law, corporate governance and legal ethics at Boston University...

I'm sure it will. And I'm sure that these folks will never trust an investment advisor ever again.

Monday, December 15, 2008

The Gray Myopia of Narrow, Dull Minds

The functionaries hot on the Lampoon Case are probably very proud of themselves. They probably dotted every "i" and crossed every "t" on the forms and computer spreadsheets. Their bosses will congratulate themselves on a big win for the SEC. They'll ride the Metro home, chests puffed out in pride.

SEC sues National Lampoon for stock manipulation
WASHINGTON (Reuters) - National Lampoon Inc.,the humor company that purchased the brand name of the producer of "Animal House" and other hit movies, got some unfunny news on Monday, when federal regulators charged it with participating in a wide-ranging stock manipulation scheme.

Representatives of National Lampoon, a Los Angeles provider of comedy films, books and online content, were not immediately available for comment.

The U.S. Securities and Exchange Commission said Daniel Laikin, National Lampoon's chief executive, and a company consultant paid kickbacks of about $68,000 for the purchase of National Lampoon stock in order to inflate the stock price...

SEC Enforcement Dude: Nabbed ourselves some scumbags on a $68,000 scam! Yeah baby! Mojitos on me down at Chilis!

SEC Enforcement Dudette: Oh Chip, you are the Man!

And Bernie Madlow bilked charities, widows, and close friends out of billions. SEC enforcement didn't even have a freaking clue.

Shock waves spread from Madoff scandal
By Martha Graybow and Douwe Miedema
NEW YORK/LONDON (Reuters) - Shock waves from Bernard Madoff's alleged fraud spread globally on Monday, as charities, wealthy individuals and banks disclosed losses from the prominent Wall Street trader's investment management business.

Britain's HSBC Holdings Plc was the latest bank to join the growing list, saying it had exposure of around $1 billion, making it one of the biggest victims of the alleged $50 billion fraud...

The stunning juxtaposition of these cases says much about modern governance in the U.S. Hyperactive attention to detail and execution on cases that, in the big scheme of things, are of little import. Blind inattention and dereliction of duty when the stakes are huge.


Chillin' in Gaza

Another negative socionomic alarm is ringing in the Middle East. Socionomic theory indicates that in times of positive social mood "uppers" such as caffeine and energy drinks should dominate as drugs of choice. In times of negative social mood, "downers" should rise to dominance.

In Gaza, they are choosing downers:

Hooked on chill pills in war-torn Gaza
from the AP via MSNBC
GAZA CITY, Gaza Strip - The new drug overtaking the Gaza Strip doesn't stimulate hallucinations or give endurance at the dance club. It merely chills you out, which is exactly what many Gazans say they need.

Ruled by Islamic hard-liners from Hamas and locked in by Israel, Gazans can't travel outside the strip, have few places to go for fun, and are faced with a failing economy. Thus the boom in the popularity of tramadol, a painkiller known here by a common brand name, "Tramal."

Growing numbers of Gazans have begun using the drug over the past year and a half to take the edge off life in the impoverished seaside strip, pharmacists and residents say...

Some of you may think I'm reaching here. "After all, it is Gaza, one of the worst hell-holes on earth. You'd almost have to self-medicate to handle living in such a place!" you may be thinking.

I would agree on the sentiment but would then ask - why now? Why not five or ten years ago? Gaza sucked then, just as it sucks now. I posit that this is just another alarm bell ringing in the night, confirming that this is a world-wide bear we are facing.

Food for thought, if nothing else. For those of you buying into the whole "we are making a bottom" thesis, this should give pause.

Friday, December 12, 2008

Will They Shrug?

Here's something to watch for - small business owners closing up shop, stepping back away from the System and falling back on their own resources to work in the gray market economy and junking the fees, hassles with employees, taxes and stress of running a business.

End of Work, End of Affluence V: Government--Reinvention or Insolvency
by Charles Hugh Smith
...At some point, the pressures on the people carrying much of the responsibility--be they Army captains, division managers, or entrepreneurs--reach a point where the person realizes, "This isn't worth it." That is, the sacrifices made to sustain The System (U.S. Army, the business, the division, billings, etc.) are not being compensated by either the inner rewards (sense of purpose, sense of being appreciated, prestige or respect factors, etc.) or the tangible rewards (financial compensation, security, etc.)

Employees of small business can also fail to grasp the knife-edge the owner/ entrepreneur lives on. When my partner and I were building dozens of houses a year (22-25 years ago), we had a standard answer whenever an employee would "crack wise" about how much money we were making (actually, we were losing money): we would hand them the keys to the office and say, "Payday's on Friday."

That would bring them up short, because we were exhausted and therefore serious. Go ahead, here's the keys--you figure out how to make payroll. (Many times we had to take cash advances on our personal credit cards to make payroll.)

Contrast this soul-draining burden with the complaints typical of government offices: somebody's playing their radio too loud, somebody didn't kick into the birthday kitty for the supervisor, etc. etc...

When those people shrug, the System will crash. Socionomically that would indicate to me that this sector - the hardworking entrepreneurs and dreamers who take ideas and turn them into businesses that support families and government burdens - will have shifted to pessimism, to anger, to a realization that they are being fed upon and the rewards are either too small or non-existent for the sacrifices they are asked to endure.

When your hardest working entrepreneurs turn to sole proprietorships, cash-only businesses and say to hell with high-rent office space and employees, then you will know the engine of growth and hope has broken down.

What to watch for?

Since the BLS figures for small business "Birth/Death" are a joke for the most part, I'm not sure what statistics are available. You might plug into your local Chamber of Commerce and keep a tab on how businesses in your area are doing. Go by a flea market or farmer's market and get to know some of the entrepreneurs behind the stall. I bet they will have interesting stories to tell...

What to do?

And if a significant number of entrepreneurs "check out" from the system? I suggest getting to know them, doing business with them, learning from them. These doers and creative types will be the nodes around which the new economic networks will build up as we work our way out of the ashes of this ongoing collapse.

What Now?

When I made the short post Trillions for Finance! Not One Cent for Manufacturing! - it was meant to be tongue in cheek. I had assumed that for a mere $25 billion or so, Congress would throw Detroit enough of a lifeline to make it through Christmas.

I was wrong:

Failure Is an Option as Senate Kills Auto Bailout
LEGISLATION TO PROVIDE $14 BILLION in short-term loans to the U.S. automobile industry failed in the Senate late Thursday, setting the stage for a possible default by one or more car makers and sending global stocks into a nosedive.
"It's over with," said Senate Majority Leader Harry Reid after the bill was effectively killed on a procedural vote Thursday night. "I dread looking at Wall Street tomorrow. It's not going to be a pleasant sight..."

This was coming, I just didn't expect it so soon.

Now what?

Over the past few years, here at FutureJacked, we covered what we thought was a dysfunctional economic and political system, critiquing it, lampooning it and forecasting its demise. Some of the postings have been wrong, some of my takes a bit on the extreme side, but overall, it has been a good exercise in trying to worry through the end days of an insane system of croney finance capitalism harnessed to a warfare state apparatus run by third-rate apparatchiks who couldn't operate a McDonald's franchise profitably, but because they went to the right schools and knew the right people, they rose to heights of power and influence that have allowed them to guide the United States of America over a cliff.

"It" is happening now. The Great Collapse is here. It is sickening to watch.

What to do for yourself and family?

We will try to figure out some options going forward as we shift from critiquing the system to trying to find ways of building up something new from the ashes.

One thing to keep in mind - do your best not to get swept up in the great waves of emotion that are swirling around us. Keep your head clear. That is one of the great benefits of socionomics - it is a model that allows you some level of understanding of the forces propelling these events in politics and economics. Socionomics will allow you to avoid bad situations and gives you the perspective you need to catch the rebounds in mood and markets and, most importantly, it helps prevent you from identifying too deeply with whatever trend is in place. This will be important as I think in 2009 you will have huge numbers of shell-shocked suburbanites and chic city dwellers who will be unable to cope in a world where requirements for survival include growing much of your own food and squatting in a foreclosed home or commercial building. Think I'm exaggerating again? How many people are three paychecks away from losing "their" home? How many are one paycheck away? What do they do when the ripple effects from the collapse of the Detroit Three rolls through America?

We don't have a lot of answers right now, but we will at least try to find the right questions to ask.

Wednesday, December 10, 2008

Prechter Speaking to Georgia Legislature

FYI, Robert Prechter is delivering a 30-minute address the Joint House and Senate Economic Committee of Georgia during the 9 a.m. EST hour this morning.


Words of Wisdom

Here's quote that needs to be burned into the minds of every American:

I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

- Thomas Jefferson, Letter to the Secretary of the Treasury Albert Gallatin (1802)

Tuesday, December 9, 2008

News Stringing

Sorry. Overwhelmed at work. Much to talk about. No time to do it right now.

Check out Matt Savinar's Breaking News Page from today for a nice assortment of what's coming our way.

That stench you smell is the sh*t that hit the fan in October and the reek is now infecting everything in sight.

2009 will be ungodly horrible.

Be prepared, my friends.

Monday, December 8, 2008

A Resilient Suburbia (Part Four)

Jeff Vail wraps up his ongoing series that investigates the potential suburbia has to survive and possibly thrive on the far side of Hubbert's Peak and in a post-Credit Crash world.

A Resilient Suburbia 4: Accounting for the Value of Decentralization
This series has been considering the role of suburbia in a post-peak future. One necessary, though generally ignored, element of any analysis of suburbia is a consideration of the value of decentralization per se. The decentralized mode of suburbia presents problems (greater energy requirements for transportation), and advantages (greater potential for individual self-sufficiency), but what about the economics and politics of decentralization itself?

Sunday, December 7, 2008

Pakistan Continues to Burn

As we discussed in Pakistan on the Verge, "...America will suffer from a war [in Pakistan]. Our efforts in Afghanistan will go down the toilet as the supply routes up through Pakistan are cut..."

Today we get this:

Supply trucks hit in brazen attack in Pakistan
by Laura King, Reporting from Islamabad, Pakistan for the L.A. Times
In one of the biggest and most brazen attacks of its kind to date, suspected Taliban insurgents with heavy weapons attacked two truck stops in northwest Pakistan early today, destroying more than 150 vehicles carrying supplies bound for U.S.-led troops in Afghanistan.

The predawn attack on the outskirts of the city of Peshawar left the grounds of the truck terminals littered with the burned-out shells of Humvees and other military vehicles. At least one guard was reported killed.

This is not good, friends. I have no other advice than to keep an eye on Pakistan. The blowback from a collapse of the State there could reach deep into Afghanistan, India and possibly Iran. The blow to U.S. prestige - at a time of massive financial uncertainty and chaos, spells nothing but trouble.

Wednesday, December 3, 2008

No Bids

Not much new analysis for you today or probably the rest of the week. Had to fly to D.C. for meetings that start way too early tomorrow.

Some must-reads for you in the meantime:

Port Authority Gets No Bids for Taxable Bond Offering - Dec. 3 (Bloomberg) -- The Port Authority of New York and New Jersey attracted no bids from investment banks interested in underwriting a $300 million taxable note offering in another sign that the seizure in credit markets persists...

Comment - Holy crap! If you want to know what the real finance playerz think of the credit markets ignore the stock market and watch what is happening in agency, government and corporate bonds. What those signals are saying is "Great Depression"

America speaks, and Washington is forced to listen - ...now that this essential part of the U.S. manufacturing base is on the brink of oblivion, the real story is finally being told, and the untenable realities and ramifications of a collapse of the domestic automobile industry are being put in stark terms that even our leaders in Washington can understand...

Comment - De Lorenzo is at it again, screaming into the night about just how bad things could get if the automakers go under.

Deer gets revenge after hunter shoots him - A hunter bagged a big buck on the second day of firearms season, but the kill caused him a lot of pain. Randy Goodman, 49, said he thought two well-placed shots with his .270-caliber rifle had killed the buck on Nov. 19. Goodman said the deer looked dead to him, but seconds later the nine-point, 240-pound animal came to life. The buck rose up, knocked Goodman down and attacked him with his antlers in what the veteran hunter called "15 seconds of hell." The deer ran a short distance and went down, and died after Goodman fired two more shots...

Comment - Why you should always have your pistol ready when out hunting with your longarm.

Please continue to watch as the pot boils between Pakistan and India. We'll talk oil next week once I get back and plow through the PEMEX numbers. What I'm seeing looks horrible, but until then, stay alert and be ready - for anything.

Tuesday, December 2, 2008

Pakistan on the Verge

Nuclear-armed Pakistan looks to be opting for an internal war rather than a fight with India:

Pakistan: Choosing Civil Strife Over War With India
from Stratfor
Pakistan is relaying messages to India and the United States that it is prepared to take action against elements involved in the Mumbai attacks to stave off a potential war with India. Regardless of whether it means what it says, it is highly unlikely that Pakistan can engage in such unprecedented action without creating major problems on its home front...

This article shows why such a move may wind up crashing the Pakistani State:

by Steve Coll for the New Yorker "Think Tank"
...One question that will certainly arise as the Mumbai investigations proceed is what the United States should insist the government of Pakistan do about Jamat and Lashkar. Even for a relative hawk on the subject of Pakistan’s support for Islamist militias, it’s a difficult question—comparable to the difficult question of managing Hezbollah’s place in the fragile Lebanese political system. To some extent, Pakistan’s policy of banning Lashkar and tolerating Jamat has helpfully reinforced Lashkar’s tendency toward nonviolent social work and proseltyzing. In the long run, this work is a threat to the secular character of Pakistan, but it is certainly preferable to revolutionary violence and upheaval right now. On the other hand, there is little doubt that the Army and I.S.I. continue to use Jamat’s legitimate front as a vehicle for prosecution of a long-running “double game” with the United States, in which Pakistan pledges fealty to American counterterrorism goals while at the same time facilitating guerrilla violence against India, particularly over the strategic territory of Kashmir, which Pakistan regards as vital to its national interests...

Why Do We Care?

Why care about problems between India and Pakistan?

  • The real threat of a nuclear exchange between the countries. I don't worry about this for the same reason as most. Most say it would be horrible, that it would kill millions, that such a war would spread fallout all across Asia. All true. What scares the piss out of me, though is that once the handwringing is over, various countries will look at it the results and see that the world didn't end. A lot of people died, it was a big mess, but the weapons were used and the sun rose the next day. The taboo on using them will have been broken and some lessons may be learned that we don't want - such as they can be used and used successfully for certain types of warfare. Especially if the use of nukes prevents Pakistan from being overrun...
  • Even without a nuclear exchange, the potential to disrupt trade, to drag in China (which is a Pakistani ally and is nervous about losing access to African and Middle Eastern oil) and to totally disrupt capital flows throughout the world.
  • America will suffer from a war there. Our efforts in Afghanistan will go down the toilet as the supply routes up through Pakistan are cut. Our influence in the region will be minimal and the obvious impotence of our power in this region will make us look even weaker in the eyes of the world.

Keep an eye out and your powder dry, friends.

California DeathWatch (Part Seven)

California is too easy to pick on these days, which is why the California DeathWatch has not become a running item. It is so obvious that California is headed for bankruptcy and receivership, why dwell on it?

But we might as well document the fall of the Golden State with a few stories of the ongoing collapse. It is a microcosm of what the U.S. is facing as a whole:

Schwarzenegger Calls Fiscal Emergency in California - Dec. 1 (Bloomberg) -- California Governor Arnold Schwarzenegger, saying his state is going broke, declared a fiscal emergency and ordered the incoming class of lawmakers into a special session to fix a widening $11 billion deficit...

Heedless votes for bonds dig hole deeper - If you think this year's state budget struggles have been long running and difficult, with plenty of sacrifices in store for almost all Californians, just wait until next year, which begins in about a month.

For however bad the situation was before the November election, it is now at least $1 billion worse. That's not $1 billion in optional spending, not $1 billion in lost revenue, but $1 billion the state will have to pay next year and every subsequent year for the next three full decades...

I would suggest, as an action item, reviewing what, if any, state benefits you receive - either in payments, salary, police protection, etc. and ask yourself how your life is going to change when your state follows California into the abyss.

Monday, December 1, 2008

The Man Gets His

My oh my. The Powers That Be - which in my model are those various factions of elites that run, or think they run, the organizations that set the cultural trends, own political figures via donations, run the courts, move massive amounts of money around, run the banks, run the large corporations and own massive amounts of property the world over - are watching their assets go up in flames. Now, one of their favorite vehicles for growing their assets (the hedge fund) is sticking it to them.

Hedge funds hit by fresh wave of withdrawals
By James Mackintosh
Hedge funds have been hit by a fresh wave of withdrawals as investors search for cash, prompting more funds to impose emergency measures to block repayments.

London Diversified Fund Management, one of Britain’s best-known fixed- income managers, on Friday suspended both its hedge funds as trading conditions in the derivatives markets created valuation difficulties ahead of redemptions...

...Morgan Stanley said there has been a sharp rise in redemption requests by hedge fund investors as the year-end repayment date approaches. The bank, the biggest prime broker, estimates year-end redemptions for funds that require 45 days’ notice for withdrawals of money, are running at 18 per cent, against 9 per cent for funds which required 90 days’ notice...
(h/t Mish)

This kind of thing is supposed to only happen to the little people, the chumps investing in mutual funds and bank savings accounts. Only now, "they" are getting a dose of bitter medicine. How will these big playerz react when they can't get "their" money out? Will they go to the courts? The guvmint? Ask for a bailout?

As more and more issues like this crop up, pitting the finance playerz against the old money big-shots, the big-time judges, and the top echelons of the rentier class, the pissing matches should get fierce. I wonder how this will shake out when the various factions start fighting one another over how best to save the system of finance and intrusive government that has made them so powerful and wealthy over the last six decades?

Grab some popcorn. Should be one hell of a show in 2009.

Mumbai Blowback

I mentioned in an earlier post that I was not as worried as some analysts about the immediate financial impact of the attacks on Mumbai. I was (and still am) going off the recent impact (or lack thereof) of Naxalite attacks, various smaller terrorist bombings and the fact that India has held up quite well in the face of a lot of events that should be very bad for business.

Matt Savinar has a different take. I thought I'd post it here so you can get another view on this story:

Editor's Note, Point #1: The Real Effect of the Mumbai Attacks, It's Not Body Counts, It's the Cost of Capital, Interest Rates, and the Delivery of "Just In Time" Money That Count to the Fortune 500 and the Dow 30

Scanning the posts to the LATOC Forum and the emails I've gotten regarding the alert I put out last week regarding the Mumbai attacks (See LATOC Red Alert posted Friday, November 28th) it seems a good number of people don't understand the context of the attacks. Whoever pulled off the attack is thinking in terms of financial warfare those of you thinking "oh this is much a do about nothing" are still thinking in terms of conventional warfare. But body counts are pretty much meaningless in the context of global financial warfare as the Fortune 500 are far more concerned about their interest rates than they are a loss of 200 or so human lives. This is why, as Mike Ruppert wrote last week, every world leader with an IQ over 70 is shaking in their boots right now. Reason being the effects of the attacks on the Fortune 500 and Dow 30 will be, at the very least, as follows:

A) the cost of insuring their outsourced operations goes through the ceiling

B) the cost of providing security goes through the ceiling

C) the cost of capital (interest rate) for any projects outsourced to India and elsewhere just went through the ceiling

With so many companies as highly leveraged as they are, it doesn't take much to push
them over the edge. Jack up their interest rates, jack up their insurance premiums while drastically escalating the amount of money they need to spend on security and a whole bunch of them will be plunged right into insolvency.

Point #2: "But won't they just move their operations back U.S. soil, thereby creating more jobs for us Americans?"

Again, this would only serves to raise their operating costs and therefore raise their interest rates. In a different era, where things weren't so mind-bogginly leveraged, a company might be able to absorb these increased costs. But modern Fortune 500 companies rely on "Just in Time" (JIT) financing the same way Safeway and Shell rely on JIT delivery food and fuel. As you already know, it only takes a brief (2-5 day) or small (1-3%) disruption in the JIT delivery of food and fuel to totally shoot the whole system to hell. It's the same with the JIT delivery of money. The companies most affected by these attacks have structured their operations for maximum financial "efficiency".* Maximum efficiency is great for a company's bottom line when times are good and the flow of capital is reliable. But when things get dicey, maximum efficiency means just a small increase in costs, be it in labor, in capital, in insurance rates, in the cost of security, etc. can blow your entire balance sheet to hell.

Key point: the big banks have loaned money to the Fortune 500 under the assumption that the project of globalization will continue, more or less, unfettered. An attack like this therefore detonates one of the basic assumptions undergirding the finances of pretty much every multinational corporation on the planet.

So the answer to the question of "will they be moving their operations back to U.S. soil" is "no, they won't be as the loans they've been getting from the Big Banks are based on the assumption of ultra-cheap outsourced labor. Without these artificially cheap loans, many of them will simply go out of business as their entire business model was predicated on low-cost loans, the issuance of which was predicated on unfettered access ultra-cheap outsourced labor."

Point #3: The Fortune 500 Do Not Have Their Finances Arranged the Way You Have Your Finances Arranged

I don't lame people for failing to understand the context of the attacks as it is only natural for a "normal" person to contemplate the financial situations of the Fortune 500 the way they think about their own personal financial economy. If, for instance, Joe the LATOCer is making $100,000 a year and paying 7% interest rate on his credit cards, then a pay cut to $97,500 coupled with an increased interest rate to 8.5% is not likely to make very much of an impact on his personal balance sheet. Heck, he might even fail to notice if he isn't totally on top of things. But that's not the way it works with Fortune 500 companies as they've already sheered everything to the bone for, as explained previously, "maximum financial efficiency." So people hear what sounds like small numbers and, thinking the finances of the Fortune 500 are structured the same way their own personal finances are structured, they fail to understand how such small numbers can wreak such huge havoc on such powerful companies.

Bottom Line:

The point of all this is that if you want to understand current events, you need to start thinking more in terms of financial warfare. When something like these attacks happen, the Fortune 500 only bother themselves with questions like "how many people were killed?" to whatever degree is deemed necessary by their public relations departments. Behind closed doors, what they are really concerned about are questions like "what is this going to do to our interest rates?" As the answer is "raise them drastically", an attack like this has them completely freaked out.

Best of luck,


*For more on this point see the article "How Efficiency Maximizes Catastrophe"

Bombs vs. Pianos

While I get caught up, I'll let Spengler take up the "long term consequences" of the "consumer society" that was built up in the U.S. over the last 60 years.

China’s six-to-one advantage over the US
By Spengler
"...Chinese parents urge their children to excel at instrumental music with the same ferocity that American parents [urge] theirs to perform well in soccer or Little League,” wrote Jennifer Lin in the Philadelphia Inquirer June 8 in an article entitled China's 'piano fever'.

The world’s largest country is well along the way to forming an intellectual elite on a scale that the world has never seen, and against which nothing in today’s world - surely not the inbred products of the Ivy League puppy mills - can compete. Few of its piano students will earn a living at the keyboard, to be sure, but many of the 36 million will become much better scientists, engineers, physicians, businessmen and military officers...

China has plenty of her own problems, don't get me wrong. And the U.S. has an immense, though latent, potential to excel again, once the horrible task of flushing out the debts and malinvestments we are burdened with is done. China is rising, though, and you need to be prepared. The Middle Kingdom may fracture before she gets wealthy, but this intellectual elite that is being built up will be a force to reckon with on the world stage for generations to come.

The elites of a country matter. That should send a shudder down your spine for my readers in the U.S.