I get than Putin is a bully. And his power may collapse in the future.
But a new Cold War doesn't make sense. Why? Two reasons: a common threat from radical Islam and current Washington's actions are making it worse for both countries.
Just as our support of the Mujahideen in Afghanistan in the 1980's led to the formation of al Qaeda; our support of Georgia's and Chechnya's repressed independence has led to the formulation of ISIL.
Among the younger generations in Georgia and Chechnya, radical versions of Sunni Wahhabism have replaced the traditional moderate Sufi Islam. There is rampant unemployment, and many of these disillusioned young jihadists now make their way west to Syria via neighboring Turkey. They are inspired by local legend and ISIS commander Abu Omar al-Shishani, who made the same journey only a few years before.
Like so many of the world’s most brutal dictators, military leaders, tyrants, and jihadists, it appears al-Shishani (who's real name is Tarkhan from a Christian family) was trained by the very best: the United States.
A common and more complex narrative is emerging for converts to Islamic Radicalism. Young people that are smart, come from middle-class families and are unemployed/underemployed. They were never pious to begin with. They turn to Islamic Radicalism - just as young Nazis did in the 1920's - for fame, glory and empowerment.
Which brings us back to Russia. Our support of Georgia and Chechnya, as a counterbalance to Russian military aggression of their borders, is like having a pet snake and wondering why it bites back.
THIS, is the reason, the Obama administration was probably too slow to respond to ISIL. The administration thought their support, would foster better ties with Syrian immigrants from Georgia and Chechnya. And were caught off guard when it didn't and when it spread due to the vacuum of leadership in Iraq.
Hence - just as in World War II - the US needs to respond to these new Nazis - by a powerful, although moral ambivalent Russia. We won that war by a partnership of strange bedfellows. The alternative was a two-front war.
Today were are instead fighting a two-front war. And ISIL is the beneficiary. If the US wants to rid new Nazism - Islamic Radicalism - ISIL must be forced to fight their own two-front war. It's called realpolitik; and realpolitik works better than idealism.
October 30, 2014
I hold a US patent on a management theory called the "Hierarchy Of Corporate Success". The above-link is the white paper that accompanies that theory. I have always stuck to it; eating my own dog food, as it were. And in August, my latest company was sold, with tremendous returns to my shareholders.
While I am a self-loathing Chicago Cubs fan, my passions are stirred by North London's Arsenal and the Chicago Bears. This post attempts to explain exactly why the Chicago Bears continually fail through the lens of business.
The latest company I sold, didn't just succeed due to me and my management theories. Rather it succeeded by having great ownership, great employees who bought into the system and great business partners.
As an analog, the Chicago Bears have ownership that is not committed to being the best. That translates into hiring GMs (CEOs) that are at best mediocre and coaches (management) who are either beset with a lack of talent and depth, and/or are exposed as weak by their opponents.
This is straight from the white paper (substituting the Chicago Cubs with the Chicago Bears) -
Now compare the Chicago Bears to the New England Patriots! The Patriots win consistently because they have a rigid operating philosophy. Players are expected to be smart and be able to play multiple positions. Every year they lose great players due to free agency but they don't miss a beat because they draft well and they sign free agents based on whether they can fit into the existing system, not because they are well known, over-paid and did well in past seasons.
Like a lot of things in life; events tend to converge. The Chicago Bears were exposed by the New England Patriots on Sunday. They lost 51 to 23. And while the score clearly shows the Bears were blown out; the game wasn't even that close.
This week, my wife and I will attend, a celebration dinner in the very same area as where the Bears lost. Boston. Great ownership and great business partners will be coming together to celebrate a great team victory.
And the Bears? They are taking this week off during a bye week. Worse they are telling their fans they will right the ship. Well that can't occur in a vacuum. Ownership, management and players can't be changed in a week.
It took five years to make a great company. Each year building. Each year sticking to a system. Each year upgrading the team.
Hence, this week's celebration dinner, is the culmination of five years. Corporations celebrate over dinner and trophies.
And if the Chicago Bears want to win a trophy, they will have to sell the club to great owners, hire the best GM and the best coaches and draft the right players and do it within a system.
It will take at least five years. Nobody likes to hear that. But the sooner they start a complete overhaul, the sooner the Chicago Bears can win as consistently as the New England Patriots.
This isn't rocket science. If I can do it consistently, certainly a wealthy owner with a better pedigree can do it in the NFL. In the meantime, my "team" will actually celebrate success this week and the Chicago Bears will continue to fantasize that success is right around the corner.
October 28, 2014
The 2014 mid-term elections are days away. And I am don't care what the results will be. Why? Even if the Republicans take over the Senate, with a Democratic sitting-duck president, gridlock will continue.
While a Republican House and Senate would have the ability to control the formulation of all bills, and perhaps the votes; Obama can just veto any new legislation. It would then take 2/3 of both houses of Congress to override a presidential veto. And that's just not going to happen.
The last six years have been ugly. Both parties are to blame. And the next two years are guaranteed to be the same. The citizens are fed up with Washington. And they have lost the trust of the American people.
How bad is the trust deficit? Enough so, that it looks increasingly likely, the 2016 presidential election will be between another Clinton and another Bush.
As to the latter, Jeb Bush's son, says his father is more than likely to run. A Jeb Bush Republican candidacy would win the 2016 primaries going away. There is no bench of Republican candidates that can beat Jeb or beat Hillary Clinton in the general election.
The result would be an embarrassing dynastic new president. Dynastic because voters can only cling to the nostalgia of less turbulent political times. It speaks more to how toxic Washington has become, than it speaks to Bush or Clinton's ability to be president.
The US, depends and thrives on a changing of the presidential guard. New leaders bring new ideas to the table. The country continues to seek the next transcendental Reagan. And there is not one to be found.
So the best of the bad options is to pick a Democratic presidential candidate who's husband was impeached by the House of Representatives and a Republican candidate who's brother initiated two bad wars and was the biggest spender since LBJ.
The only silver lining, is that I think Jeb Bush can beat Hillary Clinton. And Jeb Bush is more like his father than his brother. A Clinton presidency would be devastating. But a Jeb Bush presidency - given his success running Florida, along with his ability to be non-polarizing and work with both sides of the aisle - could be just what the country needs. He certainly would get my vote.
But the answer after 2016 can't be just more Bushes. Jeb Bush - if he were to become our next president - biggest legacy should be to make Washington work. And ironically, help ensure new leadership in Congress has a chance to flourish; putting an end to the stop-gap measures of a dynastic presidency, that is more likely than not, in November of 2016.
October 27, 2014
On September 19th, the Dow hit it's peak of 17,230.
It has been on a roller-coaster since.
If it can be said that bull markets tend to ignore bad news; bear markets tend to exaggerate bad news.
There has been a lot of news since September 19th.
I believe that the market, quite logically, made a downward correction (up to 1,000 points) due the weakness of Europe and emerging markets. US multinational companies depend on the former to maintain, and on the later to grow, revenues and profitability.
But some of the volatility, has just been an excuse to buy/sell or sell/buy, depending on how bearish or bullish investors interact, when a market is at a crossroad.
I have consistently said - throughout 2014 - this is not a market to buy into. But whether to sell? That's a more complex and personal choice.
But there are two things, I can now definitely say.
1. I have never seen a currency, like the dollar today, become more valuable, while it's sovereign debt yields are dropping (and its bonds price's are going up). Period.
It goes against all world-wide macroeconomic theory. The reader has to assume (a) anything that is disconnected from the past is not a bullish sign and (b) the only reason for this "market behavior" is a flight to quality. Forget returns on foreign cash investment. Now it's all about returning the cash with as little deflation as possible.
2. The time to buy stocks is when the market capitulates; not when it's volatile. Capitulation occurs when everyone becomes bearish and the market drops in a dramatic and meaningful way.
If you can wait for a falling knife to hit the ground; you will make money by buying stocks. If you touch (buy/sell) a falling knife, you will bleed. And may not recover.
October 24, 2014
Macroeconomics is the study of entire economies. Microeconomics is the study of sectors of economies.
With gas pump prices falling, it's important to understand, the demand/supply relationship in this unique market.
First of all, the oil market is not supply-constrained. Rather it is demand-constrained.
Second, the oil market's supply is very capital intensive. It's not a matter of adding marginal widgets. It's a matter of adding new oil rigs. And they cost about $600 million to bring online.
Third, as can be seen above, on an inflation-adjusted basis, gas pump prices have remained the same as they were in 1918.
Fourth, demand is always rising, and new oil rigs are always being built accordingly. Sometimes demand rises faster than supply; and prices rise above their inflation-adjusted price for a short-time until more supply is built. And sometimes supply rises faster than demand; and prices fall below their inflation-adjusted price for a short-time while adding supply is quiesced.
Because supply is capital intensive, forecasting demand is not an exact science. But it tends to err on the side of adding more supply than needed.
Why? Because demand quickly diminishes when - due to too little supply - pump prices rise above their inflation-adjusted steady-state price.
Bottom line: pump prices will not remain as low as they are today. Demand will continue to rise and supply will remain the same, and pump prices will return to their inflation-adjusted steady-state price. If demand doesn't increase, oil rigs will shut down, resulting in the same rising prices.
October 21, 2014
A Jewish man named Jesus walked the earth over 2,000 years ago. While I find any historical account of Jesus - woefully lacking - something like a "Jesus Movement", which grew so fast and became a major religion, must have had a genesis.
Ask any Christian, who Jesus was and why he was crucified, and you get overly-simplistic answers.
The truth is likely more complex.
Jesus was most likely a political, rebellious and reformist Jew whose proclamation of the coming kingdom of God was a call for regime change, for ending Roman hegemony over Israel and ending a corrupt and oppressive aristocratic priesthood.
While we don't have an historical account of Jesus, the Gospels, when stripped of their proselytism - attempting to convert people to another religion - and a study of Jerusalem while Jesus was alive, do provide a plausible account.
Jerusalem and the landmass of today's Israel, was occupied by the Romans. During any occupation, it is quite logical, that religious authorities made accommodations with the Romans, to preserve a faith.
It is historical fact, that the "temple" was a money raising entity where Romans and Jewish religious leaders both received largess from believers of a faith. So when the Gospels speak of Jesus ridding the temple of "money changers"; it's more a story of hypocrisy than an actual event.
Jesus - the radical reformer - was part of a larger movement. A movement against Roman occupation, taxes levied upon normal citizens, and a religious hierarchy that was intertwined with its occupiers. Jesus is thus more of a compilation of a larger movement, than he was a single human being.
This movement was buttressed by eschatology. Namely that radical reformists would see Roman occupation wither away by sedition (conduct or speech inciting people to rebel against the authority of a state). When Jesus speaks about the end of the world - such as in the Book of Revelations - he is talking about the end of Roman occupation.
His death - just as many others that met their demise - was for the crime of sedition. The radical reformers were Jews. Not a group of people devising a strategy of forming a new religion. But at some point, the people who didn't get executed, carried on the sedition. And their practices left them outcasts within Judaism. Hence "Christianity" started out as a term for the outcast Jewish radical reformers.
The new Pope is also a radical reformer. While he is fighting an uphill battle on homosexuality and divorce/communion, less-noted is his stance on the Church and proselytism.
And we don't need Gospels and connecting the dots from Roman occupation.
Pope Francis on the Church -
"And I believe in God, not in a Catholic God, there is no Catholic God".
“The church sometimes has locked itself up in small things, in small-minded rules".
"You know what I think about this? Heads of the Church have often been narcissists, flattered and thrilled by their courtiers. The court is the leprosy of the papacy."
"Proselytism is solemn nonsense, it makes no sense. We need to get to know each other, listen to each other and improve our knowledge of the world around us."
I believe Pope Francis's statements are as radical and reformist as Jesus's words were. I also believe this pope is fearless; he breaks all security protocol at his own personal peril.
Now there are only two questions that remain. Will his religious detractors marginalize him? Or will a layman strike him down and make him a martyr?
October 20, 2014
While I have been writing about deflation for sometime; I have not really attempted to explain why you should care. So let me try this morning.
On the face of it, deflation, reduces prices and wages. A lot of people don't see the problem in that. If your income goes down by 10% and the rest of goods and services go down by the same percentage, why should you care?
Well, 70% of the US economy is spent on consumption; including housing. Private debt (which doesn't include public debt) stands at about $11 trillion. Mortgages outstanding are about $8 trillion.
In a period of deflation, wages and pricing both may go down, but private debt does not. If your income goes down by 10%, but your debt payments stay the same, you will not be able to buy as much stuff as you did before.
Even if you don't have debt, the consumers who have too much debt, reduce consumption. Reduced consumption reduces the income of retailers and producers. The only way they can keep up is to either reduce their employee's wages or terminate their employees.
Why have I been so concerned with deflation? It's because Japan and now Europe are deflationary. Not only can both countries not sell as much goods and services to their people; they can't import as much from the US. In a world-wide economy, deflation then becomes an immanent contagion.
The fear is not if, but when, that a foreign deflation contagion inflicts the US economy.
At the heart of the deflation problem, is wages and prices fall, but debt remains the same. You might own your house with no debt; but during deflation, buyers of your house need debt to finance buying your house. The debt maybe available; but the buyer knows that debt payments will continue to grow in proportion because their wages go down. And that will slow down or stop the housing market.
Deflation also slows down other consumables. The reasoning is obvious. People have more economic incentive to put off purchases believing pricing will continue to fall. This is what is called the "deflationary trap".
Inflation is bad; but it has been treated and been kept in check for the last thirty years.
Deflation? Economists and central banks don't have well-practiced ways to end "deflationary traps". Japan, for instance, has been deflationary for over two decades, and no one has been able to fix it.
Central banks generally maintain 0 to 2% inflation targets. Well 0% is just a number. 0% inflation only takes a little bit more deflationary force to tip toward negative inflation or deflation.
So central banks should increase inflationary targets to 2 to 3%. 3% inflation holds deflation at bay. And 2% inflation give an economy a 2% cushion on deflation.
If you don't like this kind of new central bank policy - now that you know why deflation is so bad - do you have a better idea?
October 19, 2014
We ask young and naive men and women, to fight tectonic battles decided by people much older and with more complex agendas.
The Iraqi War, by almost all accounts, was a wasted effort. In a word: FUBAR.
The naive and young swear an oath to the chain of command. They are foot soldiers. They have very little control over the war; less their own survival.
The NY Times yesterday, published a blockbuster article, that showed that US troops actually found chemical weapons in Iraq. This article is akin to the Times publishing the Pentagon Papers.
The cache of chemical weapons were not found in Iraq initially. The US and it's allies feverishly looked for them. They never found them. And it was an historical blunder in history.
But the young and naive soldiers, did find pre-1991 chemical weapons years later. They were not looking for them. They instead stumbled upon them. And suffered for it.
The Bush administration covered up this information since 2004. Why? Because the chemical weapons they were looking for, they never found. But more importantly, they covered up the stumbled-upon chemical weapons. because they put the young and naive at risk.
This is hardly the first time, that informational arbitrage, has been used by the Pentagon, and the young and naive have suffered for it.
What instantly comes to mind, is Agent Orange in Vietnam. Not only was it used against the combatant (another wrong war), but many Vietnam veterans suffered from its affect, without being told.
And what about Gulf War Syndrome? It was causes by depleted uranium and sarin gas.
What the covered-up Vietnam, Gulf War and Iraqi War have in common, is the sheer audacity to recruit the young and naive and put them in harms way.
But soldiers suffer from many other injuries when they don't die on the battle field. With a family like mine, in which the young and naive have served, and have been injured; you would think the VA system would be top-notch. If only from the guilt of the injured mentors. But it's not.
My children are very patriotic. Their uncles and grandfathers were Marines. But I am neither young nor naive. And I have nipped any enlistment in the arm forces for my children. Even including a court-ordered cease-and-desist order, for a local Marine recruiter.
It should be right to serve. It should be right to have as much transparency as possible. But covered-up secrets - from Vietnam to Iraq - should give the reader pause as to whether you, should dissuade your children from serving.
October 18, 2014
Finibus Ut Oeconomicam Augmenti is latin for "limitations of economic growth".
How do economies grow and what limits economic growth?
Economic growth is the increase in the market value of the goods and services produced by an economy over time. It is conventionally measured as the percent growth rate of GDP. Of more importance is the growth of the ratio of GDP to population (GDP per capita ), which is also called per capita income.
Productivity. Increases in productivity have historically been the most important source of real per capita economic growth. Over the 20th century the real price of many goods fell by over 90%. Lower prices create an increase in aggregated demand.
Historical Sources Of Productivity Growth. Economic growth is attributed to the accumulation of human and financial capital, and increased productivity arising from technological innovation. Before industrialization, technological progress resulted in an increase in population, which was kept in check by food supply and other resources, which acted to limit per capita income. Most of the economic growth in the 20th century was due to reduced inputs of labor, materials, energy, and land per unit of economic output. But since 2004, U.S. productivity growth returned to the low levels of 1972-96.
Limits of Economic Growth. As stated above, economic growth, is attributed to the accumulation of human and financial capital. While productivity requires less human labor to produce economic output.
Carl Schramm, who heads America’s top entrepreneurial think tank, has a compelling insight into what causes an economy to grow. Growth, he says, is directly correlated to start-ups that get big.
Why? Because financial capital combined with the need for less workers; disconnects traditional labor (downward pressure) and financial capital. Schramm says the U.S. economy, given its large size, needs to spawn something like 75 to 125 billion-dollar babies per year to feed the country’s post World War II rate of growth. Faster growth requires even more successful start-ups.
Which answers Finibus Ut Oeconomicam Augmenti. Economic growth limitation is the result of too few individuals seeking not enough financial capital. Or said another way, excess "workers" - due to improvements in productivity - left to their own devices - limit economic growth. While excess "workers", turning into entrepreneurs, means more individuals seeking financial capital.
What this mean to the reader? Sitting around waiting for the job fairy or investing/watching the stock market isn't just not productive; but they do a disservice to the stock market because of their failure to tap into financial capital on their own and create economic growth. One person with less ability to consume affects the stock market. While an other person, that succeeds in business and increases their own consumption, also increases the consumption of the people they hire.
Income disparity is destructive only because of the "worker" and financial capital are disconnected. Income disparity creates financial capital. Historically income disparity leads to innevitable recession/depression. But the ability to step back and study economic growth theory clearly shows income disparity can eliminate the limits of economic growth.
Suos' Ascendit UT Vos - It's up to you.
October 17, 2014
We have talked about what determines the price of stocks: profits and growth rates.
We have also talked about the historical average price-to-earnings ratio; which is 14.5 while the S&P is trading at 18. Also the Buffet ratio - P/E divided by GDP - which is the highest it has been since the tech stock boom of the late 1990s and early 2000s.
What we haven't talked about is volume. The run up of stocks since 2010, has seen very low volume of trades. The pull-back of stocks over the last three weeks and three day has also seen low volume of trades.
What does this mean? While we watch stock indexes; we don't have any clue at which price point stock owners bought at.
As of yesterday the S&P was at $1,887. At its highest volume - 2010 - the S&P was just above $1,000. So the weighted average of the S$P is logically between these two numbers.
Presumably buyers who bought at the peak of 2,000, are underwater and are likely selling. But what about stock owners that bought at $$1,500? They are still in the money.
If the stock market is trading at a PE ratio of 18 today, and the historical average is 14.5;a 17% drop in the S&P would need a 17% correction. Or 1,887 times 0.17 = $320 or $1,567.
Meaning people that own stock above $1,567 will need to sell and people that own stock below will not sell.
When will the market hit a bottom? When the volume of selling is high and all the underwater investors capitulate. The faster this happens, the less scary the stock market will become and price volatility will diminish.
October 16, 2014