Monday, December 1, 2008

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,

Matt

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

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