Surprising numbers, startling proportions

I have yet to fact check these numbers, but they do seem more than plausible...

As my friend TG (who shared the link) said, "Frightening!"

I could not agree more.
-- David M Gordon / The Deipnosophist

Germany's Role in Europe and the European Debt Crisis - StratFor

The matter of European debt in general, and the PIIGS countries in particular, provides a constant source of perturbations for global markets; one moment all sweetness and light, the next moment, all darkness and sulfurous fumes.

I mentioned previously my thesis why these talks dither on, but StratFor offers a different perspective via an in-depth look at one country's motivations to solve/resolve another country's debt woes. George Friedman, the article's author, limns of an unhealthy relationship...

"There were two causes. The first was that Greek democracy, like many democracies, demands benefits for the people from the state, and politicians wishing to be elected must grant these benefits. There is accordingly an inherent pressure on the system to spend excessively. The second cause relates to Germany's status as the world's second-largest exporter. About 40 percent of German gross domestic product comes from exports, much of them to the European Union. For all their discussion of fiscal prudence and care, the Germans have an interest in facilitating consumption and demand for their exports across Europe. Without these exports, Germany would plunge into depression."

In essence, the producing nations of the EU, notably Germany, lent money to the consuming nations of the EU (and elsewhere), notably the PIIGS nations, and specifically Greece (for the purposes of this essay), so they could buy and consume their products. Now, the EU - and, by extension, Germany - lend money to those same nations to repay the debt agglomerated during their consumption feast, but not more consumption. For the new loans to repay the old loans, Germany suggests the nations must give up their sovereignty.

Fascinating. Read the entire article (below) for more insights.
-- David M Gordon / The Deipnosophist

Germany's Role in Europe and the European Debt Crisis
By George Friedman
31 January 2012

The German government proposed last week that a European commissioner be appointed to supplant the Greek government. While phrasing the German proposal this way might seem extreme, it is not unreasonable. Under the German proposal, this commissioner would hold power over the Greek national budget and taxation. Since the European Central Bank already controls the Greek currency, the euro, this would effectively transfer control of the Greek government to the European Union, since whoever controls a country's government expenditures, tax rates and monetary policy effectively controls that country. The German proposal therefore would suspend Greek sovereignty and the democratic process as the price of financial aid to Greece.

Though the European Commission rejected the proposal, the concept is far from dead, as it flows directly from the logic of the situation. The Greeks are in the midst of a financial crisis that has made Greece unable to repay money Athens borrowed. Their options are to default on the debt or to negotiate a settlement with their creditors. The International Monetary Fund (IMF) and European Union are managing these negotiations.

Any settlement will have three parts. The first is an agreement by creditors to forego repayment on part of the debt. The second is financial help from the IMF and the European Union to help pay back the remaining debt. The third is an agreement by the Greek government to curtail government spending and increase taxes so that it can avoid future sovereign debt crises and repay at least part of the debt.

Bankruptcy and the Nation State

The Germans don't trust the Greeks to keep any bargain, which is not unreasonable given that the Greeks haven't been willing to enforce past agreements. Given this lack of trust, Germany proposed suspending Greek sovereignty by transferring it to a European receiver. This would be a fairly normal process if Greece were a corporation or an individual. In such cases, someone is appointed after bankruptcy or debt restructuring to ensure that a corporation or individual will behave prudently in the future.

A nation state is different. It rests on two assumptions. The first is that the nation represents a uniquely legitimate community whose members share a range of interests and values. The second is that the state arises in some way from the popular will and that only that popular will has the right to determine the state's actions. There is no question that for Europe, the principle of national self-determination is a fundamental moral value. There is no question that Greece is a nation and that its government, according to this principle, is representative of and responsible to the Greek people.

The Germans thus are proposing that Greece, a sovereign country, transfer its right to national self-determination to an overseer. The Germans argue that given the failure of the Greek state, and by extension the Greek public, creditors have the power and moral right to suspend the principle of national self-determination. Given that this argument is being made in Europe, this is a profoundly radical concept. It is important to understand how we got here.

Germany's Part in the Debt Crisis

There were two causes. The first was that Greek democracy, like many democracies, demands benefits for the people from the state, and politicians wishing to be elected must grant these benefits. There is accordingly an inherent pressure on the system to spend excessively. The second cause relates to Germany's status as the world's second-largest exporter. About 40 percent of German gross domestic product comes from exports, much of them to the European Union. For all their discussion of fiscal prudence and care, the Germans have an interest in facilitating consumption and demand for their exports across Europe. Without these exports, Germany would plunge into depression.

Therefore, the Germans have used the institutions and practices of the European Union to maintain demand for their products. Through the currency union, Germany has enabled other eurozone states to access credit at rates their economies didn't merit in their own right. In this sense, Germany encouraged demand for its exports by facilitating irresponsible lending practices across Europe. The degree to which German actions encouraged such imprudent practices -- since German industrial production vastly outstrips its domestic market, making sustained consumption in markets outside Germany critical to German economic prosperity -- is not fully realized.

True austerity within the European Union would have been disastrous for the German economy, since declines in consumption would have come at the expense of German exports. While demand from Greece is only a small portion of these exports, Greece is part of the larger system -- and the proper functioning of that system is very much in Germany's strategic interests. The Germans claim the Greeks deceived their creditors and the European Union. A more comprehensive explanation would include the fact that the Germans willingly turned a blind eye. Though Greece is an extreme case, Germany's overall interest has been to maintain European demand -- and thus avoid prudent austerity -- as long as possible.

Germany certainly was complicit in the lending practices that led to Greece's predicament. It is possible that the Greeks kept the whole truth about the Greek economy from their creditors, but even so, the German demand for suspension of Greek national self-determination is particularly striking.

In a sense, the German proposal merely makes very public what has always been the reality. For Greece to have its debt restructured, it must impose significant austerity measures, which Athens has agreed to. The Germans now want a commissioner appointed to ensure the Greek government fulfills its promise. In the process, the debt crisis will profoundly circumscribe Greek democracy by transferring fundamental elements of Greek sovereignty into the hands of commissioners whose primary interest is the repayment of debt, not Greek national interests.

The Judgment of Athens

The Greeks have two choices. First, they can accept responsibility for the debts on the terms negotiated and accede to the constraints on their budget and tax discretion whether imposed by a commissioner or by a less formal structure. Second, they can default on all debts. As we have learned from corporate behavior, bankruptcy has become a respectable strategic option. Therefore, the Greeks must consider the consequences of simply defaulting.

Default might see them frozen out of world financial markets. But even if they don't default, they will be present in those markets only under the most constrained circumstances, and to the primary benefit of creditors at that. Moreover, as many corporations have found, borrowing becomes more attractive after default, as it clears the way to new post-default debt. It is not clear that no one would lend to Greece after a default. In fact, Greece has defaulted on its debt several times and managed to regain access to international lending.

More significantly, defaulting would allow Greece to avoid fueling its internal political crisis by forfeiting its national sovereignty. Much of the political crisis inside of Greece stems from the Greek public's antipathy to austerity. But another part, which would come to the fore under the German proposal, is that the Greeks do not want to lose national sovereignty. In their long history, the Greeks have lost their sovereignty to invaders such as the Romans, the Ottomans and, most recently, the Nazis. The brutal German occupation still lives in Greek memories. The concept of national self-determination is thus not an abstract concept to the Greeks. Its loss plus austerity imposed by foreign powers would create a domestic crisis in which the Greek state would be seen as an economic and political enemy of Greek national interests along with the commissioner or some other mechanism. The political result could be explosive.

It is unclear if the Greeks will opt not to default. The certain price of default -- being forced to use their national currency instead of the euro -- actually would increase national sovereignty. There will be economic pain if the Greeks continue with the euro, and there will be economic pain if the Greeks leave the euro; the political consequences of losing sovereignty in the face of such pain could easily be overwhelming. Default, while painful to Greece, might well be less painful than the alternative.

The German Dilemma

The Germans are caught in a dilemma. On the one hand, Germany is the last country in Europe that could afford general austerity in troubled states and the resulting decline in demand. On the other hand, it cannot simply tolerate Greek-style indifference to fiscal prudence. Germany must have a structured solution that to some degree maintains demand in countries such as Spain or Italy; Germans must show there are consequences to not complying with the orderly handling of debt without default. Above all, the Germans must preserve the European Union so they can enjoy a European free-trade zone. There is thus an inherent tension between preserving the system and imposing discipline.

Germany has decided to make an example of the Greeks. The German public largely has bought into Berlin's narrative of Greek duplicity and German innocence. German Chancellor Angela Merkel has needed to frame the discussion this way, and she has succeeded. The degree to which the German public is aware of the complexities or the consequences of a generalized austerity for Germany is less clear. Merkel must now satisfy a German public that questions bailouts and sees Greece as simply irresponsible. Capitulation from Greece is necessary for her as a matter of domestic politics.

The German move into questions of sovereignty has raised the stakes in the debt crisis dramatically. Even if the Germans simply back off this demand, the Greek public has been reminded that Greek democracy is effectively at stake. While Greece may have borrowed irresponsibly, if the price of that behavior is yielding sovereignty to an unelected commissioner, that price not only would challenge Greek principles, it would bring Europe to a new crisis.

That crisis would be political, as the ongoing crisis always has been. In the new crisis, sovereign debt issues turn into threats to national independence and sovereignty. If you owe too much money and your creditors distrust you, you lose the right to national self-determination on the most important matters. Given that Germany was the historical nightmare for most of Europe, and it is Germany that is pushing this doctrine, the outcome could well be explosive. It could also be the opposite of what Germany needs.

Germany must have a free-trade zone in Europe. Germany also needs robust demand in Europe. Germany also wants prudence in borrowing practices. And Germany must not see a return to the anti-German feeling of previous epochs. Those are several needs, and some of them are mutually exclusive. In one way, the issue is Greece. But more and more, it is the Germans that are the question mark. How far are they willing to go, and do they fully understand their national interests? Increasingly, this crisis is ceasing to be a Greek or Italian crisis. It is a crisis of the role Germany will play in Europe in the future. The Germans hold many cards, and that's their problem: With so many options, they must make hard decisions -- and that does not come easily for postwar Germany.

(Global) Geography Quiz

And not an easy quiz, at that. For example...

4. This continent's highest mountain is named for a hero of the American Revolution - who happened to be from Poland. Which continent? Bonus points if you can name the mountain.
33. Six countries use the rupee as their currency. How many can you name? We'll spot you India.

Answers included at the bottom of the page. No fair peeking!
-- David M Gordon / The Deipnosophist

Ron Paul: Looking for Love

In which Jon Stewart, host of The Daily Show, skewers the media for ignoring altogether Ron Paul's candidacy for President...

Now you might agree or disagree with Ron Paul's political notions and positions, you might even wonder abut Paul's seemingly perpetual candidacy for President, but, and as Stewart shows perfectly clearly, Ron Paul deserves the same respect the media accords the other candidates. Factor in his excellent polling results, and the media appears purposefully to ignore Ron Paul. And looks downright foolish (read: childish) in the process.

What do you think?
-- David M Gordon / The Deipnosophist

US$: A hard row to hoe

The € over the past many weeks and months has collapsed utterly in price and value against every currency but the US$. This non-collapse likely means that the US$ is weaker even than the €, which says something ugly about the US$ and, by extension, the USA.

But what precisely? No question the USA pursues a never-articulated but nonetheless damning policy of debasing its currency - pretty much from Day 1, when politicians learned it is much easier to foist our problems off on international holders. Even so, the USA as a political entity does not circle the drain as the EU seemingly does. And yet international currency investors and traders continue to shun the US$.

I get that it is easier for American companies to sell more product abroad, if our currency is cheaper (an item's price in dollars is cheaper). Such a policy calls into question our values, even our morals: If this is how we treat (value) our currency, what other crucial items do we debase and/or devalue? And I sure would like to see American company executives compete on a level playing field, one in which international buyers buy for reasons other than cheap(er) price.

Conversely, you and I feel the pain of the US$'s cheapening value each time we visit another country, where any transaction requires even more dollars to facilitate. "One can of Coca-Cola is $6...? You must be joking!"

Our national policy ushers in - arguably, even creates - our coming Era of Diminished Expectations, and our national Day of Reckoning.

Sad. It did not have to be like this.
-- David M Gordon / The Deipnosophist

Japan: three months after the quake

Many startling, if not eye-popping, photos that reveal the truly Herculean task* the Japanese clean-up crews faced... and deal with.

The side-by-side (then and now) photos are inspiring!
-- David M Gordon / The Deipnosophist

*Akin to Hercules' cleaning of the Augean stables, in my fanciful interpretation.

A meme, sure, but still way cool

Statistics come to life when Swedish academic superstar, Hans Rosling, graphically illustrates global development over the last 200 years in a brief (fewer than 5 minutes) video...



Gosh, I love Hans's use and combination of Cartesian coordinates with scatterplotting to offer almost, although not quite, the z-axis I often suggest. Still a gorgeous visual display. Enjoy!

Happy Holidays!
-- David M Gordon / The Deipnosophist

Terrorism, Vigilance, and the Limits of the War on Terror

I am about to depart for a holiday in Europe, so of course my ears perked up when the alarum sounded on Sunday. Stratfor's essay below helps make sense of it all.
-- David M Gordon / The Deipnosophist



Terrorism, Vigilance, and the Limits of the War on Terror
By George Friedman

The U.S. government issued a warning Oct. 3 advising Americans traveling to Europe to be “vigilant.” U.S. intelligence apparently has acquired information indicating that al Qaeda is planning to carry out attacks in European cities similar to those carried out in Mumbai, India, in November 2008. In Mumbai, attackers armed with firearms, grenades and small, timed explosive devices targeted hotels frequented by Western tourists and other buildings in an attack that took three days to put down.

European security forces are far better trained and prepared than their Indian counterparts, and such an attack would be unlikely to last for hours, much less days, in a European country. Still, armed assaults conducted by suicide operatives could be expected to cause many casualties and certainly create a dramatic disruption to economic and social life.

The first question to ask about the Oct. 3 warning, which lacked specific and actionable intelligence, is how someone can be vigilant against such an attack. There are some specific steps that people can and should take to practice good situational awareness, as well as some common-sense travel-security precautions. But if you find yourself sleeping in a hotel room, as gunmen attack the building, rush to your floor and start entering rooms, a government warning simply to be vigilant would have very little meaning.

The world is awash in intelligence about terrorism. Most of it is meaningless speculation, a conversation intercepted between two Arabs about how they’d love to blow up London Bridge. The problem, of course, is how to distinguish between idle chatter and actual attack planning. There is no science involved in this, but there are obvious guidelines. Are the people known to be associated with radical Islamists? Do they have the intent and capability to conduct such an attack? Were any specific details mentioned in the conversation that can be vetted? Is there other intelligence to support the plot discussed in the conversation?

The problem is that what appears quite obvious in the telling is much more ambiguous in reality. At any given point, the government could reasonably raise the alert level if it wished. That it doesn’t raise it more frequently is tied to three things. First, the intelligence is frequently too ambiguous to act on. Second, raising the alert level warns people without really giving them any sense of what to do about it. Third, it can compromise the sources of its intelligence.

The current warning is a perfect example of the problem. We do not know what intelligence the U.S. government received that prompted the warning, and I suspect that the public descriptions of the intelligence do not reveal everything that the government knows. We do know that a German citizen was arrested in Afghanistan in July and has allegedly provided information regarding this threat, but there are likely other sources contributing to the warning, since the U.S. government considered the intelligence sufficient to cause concern. The Obama administration leaked on Saturday that it might issue the warning, and indeed it did.

The government did not recommend that Americans not travel to Europe. That would have affected the economy and infuriated Europeans. Leaving tourism aside, since tourism season is largely over, a lot of business is transacted by Americans in Europe. The government simply suggested vigilance. Short of barring travel, there was nothing effective the government could do. So it shifted the burden to travelers. If no attack occurs, nothing is lost. If an attack occurs, the government can point to the warning and the advice. Those hurt or killed would not have been vigilant.

I do not mean to belittle the U.S. government on this. Having picked up the intelligence it can warn the public or not. The public has a right to know, and the government is bound by law and executive order to provide threat information. But the reason that its advice is so vague is that there is no better advice to give. The government is not so much washing its hands of the situation as acknowledging that there is not much that anyone can do aside from the security measures travelers should already be practicing.

The alert serves another purpose beyond alerting the public. It communicates to the attackers that their attack has been detected if not penetrated, and that the risks of the attack have pyramided. Since these are most likely suicide attackers not expecting to live through the attack, the danger is not in death. It is that the Americans or the Europeans might have sufficient intelligence available to thwart the attack. From theterrorist point of view, losing attackers to death or capture while failing to inflict damage is the worst of all possible scenarios. Trained operatives are scarce, and like any strategic weapon they must be husbanded and, when used, cause maximum damage. When the attackers do not know what Western intelligence knows, their risk of failure is increased along with the incentive to cancel the attack. A government warning, therefore, can prevent an attack.

In addition, a public warning can set off a hunt for the leak within al Qaeda. Communications might be shut down while the weakness is examined. Members of the organization might be brought under suspicion. The warning can generate intense uncertainty within al Qaeda as to how much Western intelligence knows. The warning, if it correlates with an active plot, indicates a breach of security, and a breach of security can lead to a witch-hunt that can paralyze an organization.

Therefore, the warning might well have served a purpose, but the purpose was not necessarily to empower citizens to protect themselves from terrorists. Indeed, there might have been two purposes. One might have been to disrupt the attack and the attackers. The other might have been to cover the government if an attack came.

In either case, it has to be recognized that this sort of warning breeds cynicism among the public. If the warning is intended to empower citizens, it engenders a sense of helplessness, and if no attack occurs, it can also lead to alert fatigue. What the government is saying to its citizenry is that, in the end, it cannot guarantee that there won’t be an attack and therefore its citizens are on their own. The problem with that statement is not that the government isn’t doing its job but that the job cannot be done. The government can reduce the threat of terrorism. It cannot eliminate it.

This brings us to the strategic point. The defeat of jihadist terror cells cannot be accomplished defensively. Homeland security can mitigate the threat, but it can never eliminate it. The only way to eliminate it is to destroy all jihadist cells and prevent the formation of new cells by other movements or by individuals forming new movements, and this requires not just destroying existing organizations but also the radical ideology that underlies them. To achieve this, the United States and its allies would have to completely penetrate a population of about 1.3 billion people and detect every meeting of four or five people planning to create a terrorist cell. And this impossible task would not even address the problem of lone-wolf terrorists. It is simply impossible to completely dominate and police the entire world, and any effort to do so would undoubtedly induce even more people to turn to terrorism in opposition to the global police state.

Will Rogers was asked what he might do to deal with the German U-boat threat in World War I. He said he would boil away the Atlantic, revealing the location of the U-boats that could then be destroyed. Asked how he would do this, he answered that that was a technical question and he was a policymaker.

The idea of suppressing jihadist terrorism through direct military action in the Islamic world would be an idea Will Rogers would have appreciated. It is a superb plan from a policymaking perspective. It suffers only from the problem of technical implementation. Even native Muslim governments motivated to suppress Islamic terrorism, like those in Egypt, Saudi Arabia, Algeria or Yemen, can’t achieve this goal absolutely. The idea that American troops, outnumbered and not speaking the language or understanding the culture, can do this is simply not grounded in reality.

The United States and Europe are going to be attacked by jihadist terrorists from time to time, and innocent people are going to be killed, perhaps in the thousands again. The United States and its allies can minimize the threat through covert actions and strong defenses, but they cannot eliminate it. The hapless warning to be vigilant that was issued this past weekend is the implicit admission of this fact.

This is not a failure of will or governance. The United States can’t conceivably mount the force needed to occupy the Islamic world, let alone pacify it to the point where it can’t be a base for terrorists. Given that the United States can’t do this in Afghanistan, the idea that it might spread this war throughout the Islamic world is unsupportable.

The United States and Europe are therefore dealing with a threat that cannot be stopped by their actions. The only conceivably effective actions would be those taken by Muslim governments, and even those are unlikely to be effective. There is a deeply embedded element within a small segment of the Islamic world that is prepared to conduct terror attacks, and this element will occasionally be successful.

All people hate to feel helpless, and this trait is particularly strong among Americans. There is a belief that America can do anything and that something can and should be done to eliminate terrorism and not just mitigate it. Some Americans believe sufficiently ruthless military action can do it. Others believe that reaching out in friendship might do it. In the end, the terrorist element will not be moved by either approach, and no amount of vigilance (or new bureaucracies) will stop them.

It would follow then that the West will have to live with the terrorist threat for the foreseeable future. This does not mean that military, intelligence, diplomatic, law-enforcement or financial action should be stopped. Causing most terrorist attempts to end in failure is an obviously desirable end. It not only blocks the particular action but also discourages others. But the West will have to accept that there are no measures that will eliminate the threat entirely. The danger will persist.

Effort must be made to suppress it, but the level of effort has to be proportional not to the moral insult of the terrorist act but to considerations of other interests beyond counterterrorism. The United States has an interest in suppressing terrorism. Beyond a certain level of effort, it will reach a point of diminishing returns. Worse, by becoming narrowly focused on counterterrorism and over-committing resources to it, the United States will leave other situations unattended as it focuses excessively on a situation it cannot improve.

The request that Americans be vigilant in Europe represents the limits of power on the question of terrorism. There is nothing else that can be done and what can be done is being done. It also drives home the fact that the United States and the West in general cannot focus all of its power on solving a problem that is beyond its power to solve. The long war against terrorism will not be the only war fought in the coming years. The threat of jihadism must be put in perspective and the effort aligned with what is effective. The world is a dangerous place, as they say, and jihadism is only one of the dangers.

Terrorism, Vigilance and the Limits of the War on Terror is republished with permission of STRATFOR.

9/11 and the 9-Year War - Stratfor

Very fascinating essay, and on many levels, by George Friedman, founder and President of Stratfor.

Recommended.
-- David M Gordon / The Deipnosophist

9/11 and the 9-Year War
By George Friedman

It has now been nine years since al Qaeda attacked the United States. It has been nine years in which the primary focus of the United States has been on the Islamic world. In addition to a massive investment in homeland security, the United States has engaged in two multi-year, multi-divisional wars in Iraq and Afghanistan, inserted forces in other countries in smaller operations and conducted a global covert campaign against al Qaeda and other radical jihadist groups.

In order to understand the last nine years you must understand the first 24 hours of the war — and recall your own feelings in those 24 hours. First, the attack was a shock, its audaciousness frightening. Second, we did not know what was coming next. The attack had destroyed the right to complacent assumptions. Were there other cells standing by in the United States? Did they have capabilities even more substantial than what they showed on Sept. 11? Could they be detected and stopped? Any American not frightened on Sept. 12 was not in touch with reality. Many who are now claiming that the United States overreacted are forgetting their own sense of panic. We are all calm and collected nine years after.

At the root of all of this was a profound lack of understanding of al Qaeda, particularly its capabilities and intentions. Since we did not know what was possible, our only prudent course was to prepare for the worst. That is what the Bush administration did. Nothing symbolized this more than the fear that al Qaeda had acquired nuclear weapons and that they would use them against the United States. The evidence was minimal, but the consequences would be overwhelming. Bush crafted a strategy based on the worst-case scenario.

Bush was the victim of a decade of failure in the intelligence community to understand what al Qaeda was and wasn’t. I am not merely talking about the failure to predict the 9/11 attack. Regardless of assertions afterwards, the intelligence community provided only vague warnings that lacked the kind of specificity that makes for actionable intelligence. To a certain degree, this is understandable. Al Qaeda learned from Soviet, Saudi, Pakistani and American intelligence during the Soviet occupation of Afghanistan and knew how to launch attacks without tipping off the target. The greatest failure of American intelligence was not the lack of a clear warning about 9/11 but the lack, on Sept. 12, of a clear picture of al Qaeda’s global structure, capabilities, weaknesses and intentions. Without such information, implementing U.S. policy was like piloting an airplane with faulty instruments in a snowstorm at night.

The president had to do three things: First, he had to assure the public that he knew what he was doing. Second, he had to do something that appeared decisive. Third, he had to gear up an intelligence and security apparatus to tell him what the threats actually were and what he ought to do. American policy became ready, fire, aim.

In looking back at the past nine years, two conclusions can be drawn: There were no more large-scale attacks on the United States by militant Islamists, and the United States was left with the legacy of responses that took place in the first two years after 9/11. This legacy is no longer useful, if it ever was, to the primary mission of defeating al Qaeda, and it represents an effort that is retrospectively out of proportion to the threat.

If I had been told on Sept.12, 2001, that the attack the day before would be the last major attack for at least nine years, I would not have believed it. In looking at the complexity of the security and execution of the 9/11 attack, I would have assumed that an organization capable of acting once in such a way could act again even more effectively. My assumption was wrong. Al Qaeda did not have the resources to mount other operations, and the U.S. response, in many ways clumsy and misguided and in other ways clever and targeted, disrupted any preparations in which al Qaeda might have been engaged to conduct follow-on attacks.

Knowing that about al Qaeda in 2001 was impossible. Knowing which operations were helpful in the effort to block them was impossible, in the context of what Americans knew in the first years after the war began. Therefore, Washington wound up in the contradictory situation in which American military and covert operations surged while new attacks failed to materialize. This created a massive political problem. Rather than appearing to be the cause for the lack of attacks, U.S. military operations were perceived by many as being unnecessary or actually increasing the threat of attack. Even in hindsight, aligning U.S. actions with the apparent outcome is difficult and controversial. But still we know two things: It has been nine years since Sept. 11, 2001, and the war goes on.

What happened was that an act of terrorism was allowed to redefine U.S. grand strategy. The United States operates with a grand strategy derived from the British strategy in Europe — maintaining the balance of power. For the United Kingdom, maintaining the balance of power in Europe protected any one power from emerging that could unite Europe and build a fleet to invade the United Kingdom or block its access to its empire. British strategy was to help create coalitions to block emerging hegemons such as Spain, France or Germany. Using overt and covert means, the United Kingdom aimed to ensure that no hegemonic power could emerge.

The Americans inherited that grand strategy from the British but elevated it to a global rather than regional level. Having blocked the Soviet Union from hegemony over Europe and Asia, the United States proceeded with a strategy whose goal, like that of the United Kingdom, was to nip potential regional hegemons in the bud. The U.S. war with Iraq in 1990-91 and the war with Serbia/Yugoslavia in 1999 were examples of this strategy. It involved coalition warfare, shifting America’s weight from side to side and using minimal force to disrupt the plans of regional aspirants to gain power. This U.S. strategy also was cloaked in the ideology of global liberalism and human rights.

The key to this strategy was its global nature. The emergence of a hegemonic contender that could challenge the United States globally, as the Soviet Union had done, was the worst-case scenario. Therefore, the containment of emerging powers wherever they might emerge was the centerpiece of American balance-of-power strategy.

The most significant effect of 9/11 was that it knocked the United States off its strategy. Rather than adapting its standing global strategy to better address the counterterrorism issue, the United States became obsessed with a single region, the area between the Mediterranean and the Hindu Kush. Within that region, the United States operated with a balance-of-power strategy. It played off all of the nations in the region against each other. It did the same with ethnic and religious groups throughout the region and particularly within Iraq and Afghanistan, the main theaters of the war. In both cases, the United States sought to take advantage of internal divisions, shifting its support in various directions to create a balance of power. That, in the end, was what the surge strategy was all about.

The American obsession with this region in the wake of 9/11 is understandable. Nine years later, with no clear end in sight, the question is whether this continued focus is strategically rational for the United States. Given the uncertainties of the first few years, obsession and uncertainty are understandable, but as a long-term U.S. strategy — the long war that the U.S. Department of Defense is preparing for — it leaves the rest of the world uncovered.

Consider that the Russians have used the American absorption in this region as a window of opportunity to work to reconstruct their geopolitical position. When Russia went to war with Georgia in 2008, an American ally, the United States did not have the forces with which to make a prudent intervention. Similarly, the Chinese have had a degree of freedom of action they could not have expected to enjoy prior to 9/11. The single most important result of 9/11 was that it shifted the United States from a global stance to a regional one, allowing other powers to take advantage of this focus to create significant potential challenges to the United States.

One can make the case, as I have, that whatever the origin of the Iraq war, remaining in Iraq to contain Iran is necessary. It is difficult to make a similar case for Afghanistan. Its strategic interest to the United States is minimal. The only justification for the war is that al Qaeda launched its attacks on the United States from Afghanistan. But that justification is no longer valid. Al Qaeda can launch attacks from Yemen or other countries. The fact that Afghanistan was the base from which the attacks were launched does not mean that al Qaeda depends on Afghanistan to launch attacks. And given that the apex leadership of al Qaeda has not launched attacks in a while, the question is whether al Qaeda is capable of launching such attacks any longer. In any case, managing al Qaeda today does not require nation building in Afghanistan.

But let me state a more radical thesis: The threat of terrorism cannot become the singular focus of the United States. Let me push it further: The United States cannot subordinate its grand strategy to simply fighting terrorism even if there will be occasional terrorist attacks on the United States. Three thousand people died in the 9/11 attack. That is a tragedy, but in a nation of over 300 million, 3,000 deaths cannot be permitted to define the totality of national strategy. Certainly, resources must be devoted to combating the threat and, to the extent possible, disrupting it. But it must also be recognized that terrorism cannot always be blocked, that terrorist attacks will occur and that the world’s only global power cannot be captive to this single threat.

The initial response was understandable and necessary. The United States must continue its intelligence gathering and covert operations against militant Islamists throughout the world. The intelligence failures of the 1990s must not be repeated. But waging a multi-divisional war in Afghanistan makes no strategic sense. The balance-of-power strategy must be used. Pakistan will intervene and discover the Russians and Iranians. The great game will continue. As for Iran, regional counters must be supported at limited cost to the United States. The United States should not be patrolling the far reaches of the region. It should be supporting a balance of power among the native powers of the region.

The United States is a global power and, as such, it must have a global view. It has interests and challenges beyond this region and certainly beyond Afghanistan. The issue there is not whether the United States can or can’t win, however that is defined. The issue is whether it is worth the effort considering what is going on in the rest of the world. Gen. David Petraeus cast the war in terms of whether the United States can win it. That’s reasonable; he’s the commander. But American strategy has to ask another question: What does the United States lose elsewhere while it focuses on the future of Kandahar?

The 9/11 attack shocked the United States and made counterterrorism the centerpiece of American foreign policy. That is too narrow a basis on which to base U.S. foreign policy. It is certainly an important strand of that policy, and it must be addressed, but it should be addressed through the regional balance of power. It is the good fortune of the United States that the Islamic world is torn by internal rivalries.

This is not dismissing the threat of terror. It is recognizing that the United States has done well in suppressing it over the past nine years but at a cost in other regions, a cost that can’t be sustained indefinitely and a cost that could well result in challenges more threatening than a rising Islamist militancy. The United States must now settle into a long-term strategy of managing terrorism as best as it can while not neglecting the rest of its interests.

After nine years, the issue is not what to do in Afghanistan but how the global power can return to managing all of its global interests, along with the war on al Qaeda.

9/11 and the 9-Year War is republished with permission of STRATFOR.

Today's reality: Potential systemic failure or system failed?

Which came first, the chicken or the egg?

Apply that puzzle of philosophy as metaphor to global economics and financial markets, and we all wonder whether equities truly move in advance of economic fundamentals or react to them. Too many swings and oscillations occur to name this or that price swing as distinct from any large economic or financial news item.

In today's speed-of-light world, grave concerns increase re the sanctity of markets and economies, and markets react immediately, devastatingly. Or do markets' renewed declines anticipate follow-on weakness? The economic and financial problems the world faces are no secret; we all know them. What we do not not know, yet, is the fallout from all our past misguided policies and pursuits (by both business and government) and the maladroit attempt to control, top down, the consequences of past bad decisions and actions.

In The Lessons of '92, I alluded that bad decisions beget bad actions, which often create negative consequences. Market speculators smelled blood as a result of the bad policies and actions made by the Bank of England and the UK government, and dove in to the banquet. In The True Objective of All That Money I pointed out how welfare nations everywhere find themselves on a cliff's edge, with one foot dangling and the other sliding toward doom. And now the world finds itself on the cusp of a crack-up boom. (This article ably explains Ludwig von Mises' notion, and the terrifying nature of its consequences.) In essence, not good.

I, and other commentators, could argue (winningly) that the global financial system does not face possible systemic failure; in fact, the system already has failed. You need look no farther than last week's embrace by the EU of the detested nuclear option: the European Central Bank's (ECB) decision to purchase government bonds issued by euro zone members, thus abandoning their long-held resistance to such a move. And which action follows on our (the USA's) many bailouts of the past 2+ years, from which directives, policies, actions, and bailouts the Europeans recoiled with shuddering horror. "Welcome to the (debt) party, Europe! By the way, the hangover is a bitch."

What the Western world attempts today is as misguided as it is noble: to spend money it does not have, to create from thin air the paper necessary to 'cover' the new deficits, to paper over past errors with more paper, to issue more debt to fund existing debt. Oh, and to give to everyone everything he or she wants: jobs, holidays, health care, a car in every garage and a chicken in every pot. (NB: the protests in Greece will come soon enough to a piazza or square, or street, near you.)

For various reasons, parts of the world are immune to this outbreak of the debt contagion: the Middle East (for reasons cultural and religious) and South East Asia (because those nations endured their own version of this financial mess in 1997/1998, and came out for the better). China remains a question mark; the nation has gazillions of liquid reserves, but most of those reserves are in US$ denominated assets (Treasuries, the $ itself), which could wither to zero in an all-out financial storm. The Chinese know and fear this possibility, so the nation hastily diversifies into real assets -- which satisfies one step of Mises' crack up boom: "Everybody is anxious to swap his money against 'real' goods..." Pay attention to what China does with its excess reserves, continues to do, now and in the future.

Global markets reflect this concern, amid mounting doubts as to how governments regard their sovereign debt, and treat their debt-holders. (Servicing debt, especially with more debt, is a bitch!) China's markets peaked months ago, as did the European markets; they all are in the throes of their price corrections. The US markets... well, let's just say the rally since March 2009 is suspect. Chart below is of the S&P 500:

Note a trend that loses upside momentum; note, too, a possible head & shoulders top. (I ignored the integral component of volume, largely because volume has diminished throughout the recovery rally.) This particular, and potentially powerful, pattern remains a work-in-process, so its realization remains anticipatory; it requires a right shoulder (arguably complete) and a breach of the neckline (identified) to confirm. The double-arrowed line measures the potential for the pattern, ~160 S&P points from the breach, a potential decline to ~910-870. (The same level I pointed to for the past several months, well before this pattern showed up on the chart!) Several stair-steps lower must occur first, though, to validate the bearish scenario: 1125, 1110, 1100, the identified neckline, and the 6 May low of 1065.

What could go wrong with the bearish expectation...?
● No right shoulder forms;
● No breach of the neckline (~1070-1065);
● An accelerated rise from a pattern failure. (No pattern is as bullish as a failed H&S top!)

I could argue that the 6 May low represents a climactic low, which would put paid to the entire expected decline (albeit that expectation was for 900-870, not 1065); certainly the data reached oversold levels. Even were that the case, however, climactic lows typically are tested, sometimes repeatedly. Worse, US equity markets trade 'heavy' and a decline of one week, however seemingly climactic, is insufficient to erase all the technical divergences and negatives built up over the past 6 and 15 months. One possible scenario, of which I could limn many, is a sideways range between 1175 and 1075 that endures for several weeks or months -- before the breach beneath the neckline finally occurs in late-summer (August/September time frame). Only time, and the accumulation of new data, will tell the true tale.

Please recall again the post, The Lessons of '92: speculators will sell short an item they deem has a lesser value than its prevailing price. This means speculators could, would, and do sell short sovereign debt, sovereign currencies, even sovereign governments. (Oh, hello, Goldman Sachs -- arguably today's equivalent of Switzerland during WW2; purportedly neutral, but if they can make a buck, then Grandma also is for sale...) The intent of the new positions that occurred on Thursday and Friday of last week could be to test the EU's mettle and intentions. (viz, the EU's $1 trillion commitment of paper and jawboning.) I know not what actions governments will effect in the attempt to bind, or even banish, speculators. Not difficult, though, to imagine a future in which governments impose confiscatory taxes against 'evil' investors (of all types and time frames), which begets more selling to pay the tax. Until resolute action of some form occurs (best would be reining in our individual and collective expectations), currencies weaken, debt prices decline, and investors (even investors!) sell equities. Actions, reactions; sequences, consequences; selling... and more selling? Perhaps the sudden vacuum of no bids on 6 May will soon reoccur, regularly so. Caveat emptor. The game of musical chairs continues. Fun, eh?

The markets finally will break, up or down. What occurs today, before the break, is the usual comparative and relative swapping vs absolute sales (or buys): trading this weaker currency for that stronger currency one (say, the arguably devolving Euro for the strengthening US$), selling short this sovereign debt and going long that sovereign debt, selling short this or that equity or equity market and going long another equity or equity market. This all is the province of hedge funds in their original form (short this/long that), and bespeaks an ongoing process of correction, not bear market; nor the end of days. The bottom could drop out, though, at any moment; certainly the warning signs, economically and financially, begin to dot and dominate the landscape (charts).

I predict nothing. My role as portfolio manager and market commentator is to lessen risk and increase reward. So I seek the new investment themes and the new leaders: those sectors, groups, and companies that not only will ride out the (coming) storm but should succeed, if not excel. Of course, between then and now lies the Land of Uncertainty, and the possibility of lower share prices.

Fascinating topics (global economics / finances, and markets), to be sure; I could continue for a good while longer. Frankly, it all is rank speculation; at least, at this moment. Will the world muddle through (again)? Will markets stabilize, and rise? Will Charon still demand his fee for ferrying us to there from here? In what form will that coin be?

It pays to be ready for all contingencies:
1) Equity markets stabilize, and then rise anew
2) Equity markets plummet, but recover
3) The world (as we know it) ends

I prefer to focus my attention on items 1 and 2 for the obvious reason. I will do just that on InvestmentPoetry, with specific recommendations, in addition to a deeper discussion of the topics I presented above. As always, your comments and insights are welcomed and appreciated.
-- David M Gordon / The Deipnosophist

The lessons of '92

A reader asks, "Please spell it our very plainly for those of us with history deficit disorder, what were the lessons of ‘92?"

Back in the 1980s, hedge funds became laden with lots and lots of money; too much money to utilize their tried and true tactics. To deploy all that new money, a new perspective was required, a global perspective. And thus arose the macro funds. I have forgotten many of the names but you likely recall a few: Mark Strome, Julian Robertson (Tiger Fund), etc. And, of course, George Soros (Quantum Fund).

Several of the macro funds decided correctly that England did not measure up to the ERM’s standards. To wit, the European Exchange Rate Mechanism (ERM) enforced specific measures by which each nation must abide; the Pound Sterling clung tenaciously above its agreed lower limit, but the fundamental situation betrayed that it should not. The macro funds smelled blood in the water and shorted Pound Sterling. They had calculated that the Bank of England (BoE) lacked sufficient reserves to combat their short sales (what with leverage, etc), and if and when the BoE responded to their short sales, it only worsened and weakened the BoE's position... which, in turn, further strengthened the macro fund managers' belief of the Pound Sterling’s fundamental weakness. They piled in: one fund after another, and one position after another. And when that was not enough, they used the inherent leverage in the futures contracts to short even more Pounds. All the while, the BoE kept jawboning the currency markets. The BoE’s position: the Pound must not weaken.

The BoE never did commit fully to backstopping its position... until early-September 1992, and by then it was too late. On the fateful day of 16 September 1992 (Black Wednesday), the Conservative government and the BoE gave up the attempt, and the Pound Sterling tumbled. Big time. Media blared the news with huge headlines, “George Soros, the man who broke the BoE!” and “George Soros, the man who made $1 billion in one day!” What the media had forgot, or never understood, was that Soros had been grievously underwater on the position; in fact, ~$2 billion in the red when the calendar flipped to 1 September 1992...

The lessons?
1) Fundamental shorts trump technical shorts
2) Stay with your conviction (easier for Soros with his track record than Dr Burry, et al)
3) Do not let anyone or any institution frighten you out of your conviction and position

The situation today is eerily similar to Britain’s in 1992. In an excellent, and exceedingly well-written essay, Robert Samuelson encapsulates the true problem, "The welfare state's death spiral..." Samuelson also posits, "There are no hard rules as to what's excessive, but financial markets -- the banks and investors that buy government bonds -- are obviously worried."

Well, yes, but that is an understatement. Investors might be leery, but speculators and traders smell blood in the water. Again. So, in a replay of the events of 1992, they short the currencies and sovereign debt of the countries in the worst fundamental position. I mentioned previously, and as Samuelson articulates, this problem afflicts welfare states everywhere (Japan, England, and the US), but especially those countries with an aging demographic. Especially hard hit, though, is Europe, because its monetary confederation never did give rise to the cultural and political hegemony many European leaders believed would occur.

Will the speculators learn from Soros' success, and repeat that triumph? Or will they panic?After some initial jawboning, the EU learned its historical lesson (England and the BoE in 1992) and committed $1 trillion to its behemoth effort of crushing the speculators. So far, the EU’s effort looks golden.

Will sovereign debt and national currencies tumble in price and value due to speculators' short sales? Will the effort to crush the speculators (further) bankrupt the welfare nations? Answers await to all of these questions, and other questions unasked. And, as with the impoverishment Soros' success inflicted on the English, however ephemeral, so too will the fallout from this story afflict us all.

Your comments and remarks welcomed, as always.
-- David M Gordon / The Deipnosophist

The true objective of all that money

Okay, so "the European Union (EU) unveiled a staggering €750B ($966B) plan to save the eurozone from a debt contagion crisis. These funds include €440B in loans from eurozone nations, €60B from EU emergency funds, and €250B from the IMF. The money will be available to rescue eurozone countries that become financially distressed. Additionally, the ECB will take the step of buying government bonds, previously considered the "nuclear option" of the euro defense measures under consideration... AND the Federal Reserve has reopened a credit line to send dollars to Europe."

The guns are all out, and firing. The immediate result: initial reversals of last week's action. Equities rally globally.  Straying from predictions, we all should ask ourselves: Who or what does all this money target? My reply: It rushes to bandage over the symptoms of the problem, but fails to solve the problem itself.

● The problem: profligate spending by everyone, but especially governments and paid for with debt, ever more debt.
● The symptom: careening debt and equity markets as investors increasingly recognize the con game.

So investors, especially those who recall September 1992, sell short government debt and equities in a huge game of chicken; in doing so, markets decline and havoc results. (Viz the headlines from last week.)  In essence, the EU targets this $1,000,000,00,000 ($1 trillion) against speculators. The true problems remain. And who believes those will be dealt with correctly, forthrightly, transparently?

We shall learn soon enough who recalls the larger lessons from September 1992.
-- David M Gordon / The Deipnosophist

Last week's market action: prologue or dénouement?

Equity markets decided to put on their own show of fireworks, two months ahead of the calendar. And what a show it was! At one point, the Dow Industrials dropped by ~1,000 points, its largest ever one-day point drop.

In light of that crazy action, you are told to "Use limit orders!" Please recall my post, Market Volatility, Liquidity, and You, in which I point out the primary difference between order types:
● Market orders assure an execution, but not a price
● Limit orders assure a price, but not an execution
● And neither type of order protects your portfolio from the shenanigans floor specialists can, will, and do play, especially during "fast market" conditions, such as occurred on Thursday and Friday. (Please re-read that post for more understanding re this topic.)

A brief recap below of my market scenario and what actually occurred:
● US$ rises powerfully (if ephemerally, in a world of fiat currencies), in a flight to safety. Correct, to date.
● Interest rates rise in the US, possibly globally. Initially correct, but subsequently incorrect. (A global flight to safety bid US Treasury prices higher, yields lower.)
● Commodity prices pressured by a rising US$. Correct.
● Share prices of commodity producers under pressure. Correct.
● A ferocious, even "hellacious" price decline in equity markets. Correct, in its initial phase.

Investors anticipate events, not react to them. As such, you likely want to know what I  think will occur next, so I hope to see you on Investment Poetry, where this post continues, with specific recommendations and follow-on discussion.
-- David M Gordon / The Deipnosophist

Fitch warns Japan about debt rating

I mentioned in my post, A Tipping Point for European Debt, that Europe is not alone; England, Japan, and the US could suffer similar dire financial circumstances.

Well, today, Fitch warns Japan to get its financial house in order or suffer a downgrade in the quality of its debt. This is no idle threat; a lower rating means higher interest rates on its sovereign debt. And higher interest rates means increased costs to service that debt. And increased costs could spiral quickly out of control.

This all smacks (is similar to) a maintenance call; if you have ever invested on margin you know what I mean. The first rule of maintenance calls is never pay them, always liquidate. The problem with paying them is that the problem(s) that caused the maintenance call has not gone away, so new maintenance calls are likely... and you have only so much cash. Sadly, if you instead liquidate, you must sell many more times the amount of the call just to meet the call, which effort rapidly becomes asymptotic; the two data points only seem to converge.

Which returns us, and Japan, to the beginning: Get your house in order, stat, or suffer the consequences. Problem is the consequences of Japan getting its house in order has negative ramifications for its international trade, for its domestic economy... but also for us all.

Not a pretty picture.
-- David M Gordon / The Deipnosophist

A tipping point for European debt?

The chart below measures each European nation's budget deficit as a percentage of its GDP; three of the five PIIGS countries (Spain, Greece, and Ireland) lie to the far right (exclude the EU16 and the EU 27). Italy's debt load looks manageable absolutely and comparatively, until you dig deeper. For some reason, Portugal is not shown.

Of the five nations, only Ireland does the necessary heavy lifting, the painful work, to close its deficit; meanwhile, the dream of easy money continues for the other nations. What happens, though, if that dream becomes nightmare? Perhaps interest rates rise, as they will, and the debt service load becomes unmanageable -- what then? Perhaps no buyer anywhere steps forward at any blandishment (rate) to own more of that nation's sovereign debt -- what then?

Really, there once was a cycle for this type of event. When interest rates dropped, debtors would re-finance at better terms and longer term to lock in the low rates. The result was increased liquidity for the debtors, which enabled them to withstand the other side of the cycle, increasing rates.

Not now, though; certainly not for the countries in Europe. (And not for England, Japan, and the US, which all are in equally parlous financial condition.) Does there exist a tipping point that investors perceive to be too much debt? Is this really one giant con game -- investors conned and no one convicted?

Which leaves us with Dorothy Parker's memorable phrase, "Eat, drink, and be merry, for tomorrow we may die." Except this time, few enjoy the party, I fear... and the piles of debt just keep growing larger and larger.
-- David M Gordon / The Deipnosophist

Interesting perspective

Ian, over at Ekonomi Turk, shares that he had "analyzed the relationship between Roubini's popularity in Google search results and S&P 500 index." And the results he finds are pretty interesting.

Roubini's popularity correlates negatively, and significantly so, with the S&P 500 is no surprise. That a one (1) unit increase in Roubini's popularity corresponds to a 114 point decline in the S&P is fascinating. Which means that, on this measure, fair value would be...

Well, check it out for yourself!
-- David M Gordon / The Deipnosophist

A map that shows the risks for 2010?

You bet'cha. A map can be like any other visual representation (a picture is worth 1000 words); make that map interactive and you have something.

Which is precisely what the recently-convened World Economic Forum in Davos, Switzerland did with their Risks Interconnection Map 2010. The RIM 2010 is a network visualization weighting the most important global risks and their connections. The risks are grouped in Economics, Geopolitics, Environment, Society, and Technology.

Go here to see for yourself.
-- David M Gordon / The Deipnosophist

How America Can Rise Again

A brilliant, if very lengthy, essay by James Fallows in the January 2010 issue of the ATLANTIC...

"America will be better off if China does well than if it flounders. A prospering China will mean a bigger world economy with more opportunities and probably less turmoil—and a China likely to be more cooperative on environmental matters. But whatever happens to China, prospects could soon brighten for America. The American culture’s particular strengths could conceivably be about to assume new importance and give our economy new pep. International networks will matter more with each passing year. As the one truly universal nation, the United States continually refreshes its connections with the rest of the world—through languages, family, education, business—in a way no other nation does, or will. The countries that are comparably open—Canada, Australia—aren’t nearly as large; those whose economies are comparably large—Japan, unified Europe, eventually China or India—aren’t nearly as open. The simplest measure of whether a culture is dominant is whether outsiders want to be part of it..."

and

"America the society is in fine shape! America the polity most certainly is not. Over the past half century, both parties have helped cause this predicament—Democrats by unintentionally giving governmental efforts a bad name in the 1960s and ’70s, Republicans by deliberately doing so from the Reagan era onward. At the moment, Republicans are objectively the more nihilistic, equating public anger with the sentiment that “their” America has been taken away and defining both political and substantive success as stopping the administration’s plans. As a partisan tactic, this could make sense; for the country, it’s one more sign of dysfunction, and of the near-impossibility of addressing problems that require truly public efforts to solve."

I already can hear the wails from the FOX News epigones and the libertarians. Just read the article. It offers something for each reader; in fact, it offers riches.

Consider reading it to be your weekend homework assignment. :-)
-- David M Gordon / The Deipnosophist

The Lost Decade?

Wow, if ever a concept meme took root and grew like a wildfire, the suddenly hot notion of a “Lost Decade” would be it. And none too soon either, now that the trading range is older than 10 years.

Most market commentators date the inception of this secular trading range to the market’s high of March 2000, which fails to agree with my perception that a trading range begins with its first breach above resistance, with subsequent tests to prove support. (Once resistance, now support.) We agree on the nature of the secular trend (sideways) and its typical length (16-20 years), but differ on how far along is the trading range, although we do agree the equity market, measured by the broad averages and indices, to be past the halfway mark of the process; I believe the market is ~75% through the trading range.

Moreover, I believe the first groups and sectors to enter their bear market will be the first groups and sectors to emerge into their new bull market. One theme that qualifies, but cuts across many groups and sectors, would be the large cap multinational companies. Almost to a one, their price high was achieved during Q2 1998, almost 12 years ago, so even from that inception, this trading range is 60 – 75% complete. Examples of the large cap multinational companies include Colgate-Palmolive/CL, Coca-Cola/KO, Johnson & Johnson/JNJ, McDonalds/MCD, and Wal-Mart/WMT among many possibilities. Bad news proliferates for many of these companies, but their stocks fails to make lower lows. I watch the lot of them for future signals of distress or success; the recent strength of Colgate-Palmolive/CL and McDonalds/MCD encourages me re the ultimate bullish resolution.

Folly, though, not to acknowledge the gathering weakness that cuts across groups and sectors: Apple/AAPL, Amazon/AMZN, Baidu/BIDU… well, this list could become rather lengthy, if not unwieldy. No doubt about it: global markets and economies are under attack on many fronts:
• Interest rates (now climbing in the US),
• The US$ (further rises augur more pain for commodities (oil, gold, etc),
• Terrorism (here and abroad),
• War (abroad),
• Etc
So many items to fret about. The bears who came late to the party (August/September 2008) caught correctly the hellacious decline that ended the trade across the range (to the lower boundary, and then some)… but then missed the near monolithic move higher of the past 10 months.

All good things come to an end, though, and the price rally of the past 10 months now withers quickly. An ending to the price rally need not equal a bear market, just a return of the trading range; just because the market rallied ~60% in 10 months, it remains bounded by its trading range. Which is another reason why all this talk of bull and bear market is so much nonsense; if you place the recent up trend within context, you are left with… a trading range. Trading ranges need not bounce from lower boundary to upper boundary, and then ricochet back to the lower boundary. In fact, most of the trading tends to be interior to the two bounds, a fact that Marty Pring captures exceedingly well in his recent reports, Are You Prepared For Another Lost Decade?

"Many investors and members of the financial press are only now recognizing that stock prices have lost ground over the last 10 years, labeling this period as the “Lost Decade”. In April 2003, Pring Turner Capital Group published an article which posed the question: “Whither the Secular Trend of Equities?” This piece laid out our case that the year 2000 was a secular or “long-term” peak for the U.S. stock market.The article also forecast a wide trading range market in the years ahead. Our goal with the forecast in this report is to help you prepare for the next ten years…"

To place within context a trend of any duration offers an initial step of pattern recognition, in addition to consistent success.

This post continues at InvestmentPoetry, with more distinctive insights from Marty Pring, in addition to specific recommendations, with annotated charts, from me.
-- David M Gordon / The Deipnosophist

What's Changed This Decade (1999-2009)

Excellent graphic display that says a whole heck of a lot...


Source: Online Education

-- David M Gordon / The Deipnosophist