February 26, 2004

Visions of Volcker

Buenos dias amigos. Your editor has made it to his hotel room near the beach and managed to find a local Internet connection. I don't have any charming local vignettes to pass along, yet. But the view sure is good. I can see a mountain range directly in front of me, hugging the beach. Puerto Vallarta is sunny and warm. Tourism will have to wait, however. Business first. I won't be blogging much in the next two days, especially tomorrow. That's when the Supper Club meets (my purpose for being here.) I promise, however, to deliver an update this weekend. For now, someone please tell me when Alan Greenspan sobered up. Twice this week Greenspan has directly attacked two of the economy's scared cows, the GSEs (Fannie and Freddie) and Social Security. Maybe the Maestro is getting nostalgic, remembering that all of Ayn Rand's heroes are misunderstood geniuses despised by the establishment, not shameless lackeys for the largest ponzi scheme in history. Still, hat tip to the chairman. He's still mildly delusional. However, if you'd told me six months ago that a public official could openly speak of reducing social security benefits and regulating the ability of the GSEs to expand their balance sheets, and not get stoned by the mob, I'd have been surprised. Of course Greenspan isn't an elected official. He doesn't need anyone's vote. And perhaps this point, he doesn't really care about public opinion. And that, dear reader, is a good sign. Greenspan is speaking candidly of America's serious fiscal problems. Serious yes, but not fatal. They don't have to be. Not that I think that any of our public officials are going to advocate making the tough choices we have to. But frankly, if they don't, events will take on a momentum of their own, and all that we've been forecasting....an acute dollar crisis, a sell off in U.S. bonds, declining standards of living in America for most...will come to pass anyway. But right now, the Greenspan candor and the heckling from Europe is giving the dollar a reprieve. The ECB may well cut rates. Or it could be political posturing. Either way, I view the current dollar environment as a stay of execution...and a chance for those of you who haven't yet taken a position in gold to do so cheaply. No matter what anyone says, --the Fed Chairman, Schroeder, Raffarin, Bush -- the deficit exists. And the debt--the total of deficits, is not getting smaller. The dollar is fundamentally hamstrung by this debt...and the whole culture of consumption that created it. The world's currency markets may be shuffling along to that reluctant conclusion, like a dog on the way to the vet to be put down. But shuffle they must. I'll check in later tonight after markets close with an update. Meanwhile, on a purely personal note, But your editor finds himself embarrassingly confused trying to speak Spanish. I studied Spanish in high school and actually know how to conjugate verbs in Spanish, something I'm appallingly bad at in French. French and Spanish, as well as Italian, are all romance languages. Italian, which I also speak a smidgen of, sounds a lot like Spanish. And in fact, the times I've been in Italy, I can speak in my bad Spanish and usually be understood. But I have to admit, it's all helplessly jumbled now, a kind of an organic Esperanto. Trying to talk with a man in the lobby last night, I found myself saying something like "J'espere hablo espangol per tutti giorni avec todos las personas." Nonsense of course, although it made sense to me. Effort is the main thing, so far. After all, everyone here speaks English. And so my bad Spanish is kindly indulged (I think it's kindly.) My waiter last night was generous with is praise, if candid. "Your accent is very good," he said in Spanish, "But what you say makes no sense." Usually I only hear that about my writing. "Ho capito," I said, "Mais, es beaucoup dificil para mi. Yo queiro parler in espangol, mais las palabras, no son recuerdo." With that, I bid you adios.

February 24, 2004

On the Road

Unlikely you'll hear from me much tomorrow. I leave Paris around 10 am and get into Puerto Vallarta at 9pm. Wish me luck. And I'll be in touch on Thursday.

Dr. Strangelove Strikes Again: Thinking the Unthinkable

It took me the better part of two months to get an excerpt from a report Andrew Marshall organized over five years ago. Today, we find out via the linked article below that he's been up even more doom-mongering. Keep in mind, Marshall gets paid to theorize about the worst case. It's also that interesting that this article says Marshall is the man behind Rumsfeld's "transformation" initiative in the military (see also the Army canceling the Comanche helicopter.) Marshall, who is known as Yoda to his acolytes, certainly has a history as in imaginative thinker about future threats. But dollars for donuts, I'd say, based on what I know, John Boyd's contribution to "grand strategy" and strategic decision making is more more lasting. But then again, everything Marshall writes is classified, and Boyd hardly wrote down anything! We'll have to trust the secondary source material. As for Marshall began his Pentagon career in 1974 when then Secretary of Defense James Schlesinger created the job Marshall now occupies. He's been in the same office ever since (Net Assessment). Boyd was in his heyday in the early '70s. Boyd and his reformist colleagues in the Pentagon managed to get Schelsinger to support the development of the A-10 for the Army ( a plane the Army didn't want but has proven more durable than many of the Army's more expensive choppers), and the F-16 for the Air Force. Since then, Marshall has been reappointed to his office by every President. His latest document, according to commondreams.org "predicts that abrupt climate change could bring the planet to the edge of anarchy as countries develop a nuclear threat to defend and secure dwindling food, water and energy supplies. The threat to global stability vastly eclipses that of terrorism, say the few experts privy to its contents. " Here's more from the article. 'Disruption and conflict will be endemic features of life,' concludes the Pentagon analysis. 'Once again, warfare would define human life.' "The findings will prove humiliating to the Bush administration, which has repeatedly denied that climate change even exists. Experts said that they will also make unsettling reading for a President who has insisted national defense is a priority. "The report was commissioned by influential Pentagon defense adviser Andrew Marshall, who has held considerable sway on US military thinking over the past three decades. He was the man behind a sweeping recent review aimed at transforming the American military under Defense Secretary Donald Rumsfeld Remember, it's only a report. Incidentally, one of Marshall's acolytes is none other than James Roche, the man who is now Secretary of the Air Force and behind many of the initiative I published earlier today. He was also the keynote speaker at the UAV conference I attended in December, 2003. Why does this any of this matter to our investments? It's a reminder that there are powerful interests within the U.S. government devoted to the study and fighting of future conflict. Ideological objections aside, you could say it's good we have smart people thinking about future enemies. You could also say this kind of endemic thinking creates a momentum of events all its own. Either way, it appeared for a while, during the height of the Nasdaq bubble, that we'd entered a global golden age of free trade, unfettered markets, and peace. The idea that nation states or warfare would have disruptive influences on the price of stocks or the quality of life briefly disappeared. It never went away, though. And now, it's back. It's impossible to predict how the different foreign policies of the nations of the world will affect the pace of economic liberalization. Perhaps they'll bring it to a griding halt. But without knowing what exactly will happen or when, one thing we do know is this: this current world order is much less stable and sturdy that we thought. Whether its systemic risk from the credit-hungry GSEs, or a new age of combative nation states...it's not all lexuses and olive trees anymore.

U.S Attacks Pakistan

"The United States of America uses its B-2 bombers in the year 2012 to launch conventional air-strikes to destroy Pakistani nuclear facilities in a bid to prevent the nukes from falling into the wrong hands. The extraordinary US action follows an unsuccessful Indian conventional attack on Pakistani nukes, and a retaliatory Pakistani nuclear strike against Indian border forces. This sparks the disintegration and disappearance of Pakistan, and creation of an expanded Indian Confederation or Superstate." Pretty Dr. Strangelovely, isn't it? I was never able to find a copy of "Asia 2025" the Pentagon's speculation on strategic threats in Asia. But thanks to the help of some intrepid subscribers, I was able to find portions of it republished in Asian newspapers (curiously, not many excerpts in U.S. papers. You can find the article where this was taken from here, although you'll have to register. Pakistan is already a nuclear power. And a nuclear proliferator. And twice this year, someone has tried to kill its President. Unfortunately, this scenario doesn't seem as outrageous now as it might have a few years ago.

Aging Asia, the China Bubble

On the plane to Mexico tomorrow, I'll be reading Nicholas Eberstadt's "Power and Population in Asia," which you can find here. Haven't read it yet. But I read, maybe from the man who linked to it (www.dandrezner.com) what sounded like a good description: Japan got rich before it got old. China is going to get old before it gets rich. Discuss. What looks like the money graph: "Thus, China's rapidly graying population appears to face a triple bind. Without a broad-coverage national pension system, and with only limited filial resources to fall back on, paid work will of necessity loom large as an option for economic security for many older Chinese. But employment in China, today and tomorrow, will be more physically punishing than in OECD countries, and China's older cohorts are simply less likely to be up to the task. The aggregation of hundreds of millions of individual experiences with this triple bind over the coming generation will be a set of economic, social, and political constraints on Chinese development, and power augmentation, that have not as yet been fully appreciated in Beijing, much less overseas." Incidentally, this is why I think the best way to invest in China is not invest in China, but the countries and companies feeding the Chinese boom. You get China's boom without the best--if you do it right. Do it right? Try Australia. That's the theme of the March issue, which I hope will be on-line late this week or early next.

Mortgage Risk Comes Out of the Closet

Alan Greenspan is in a candid mood, which is fortunate for us. We get to see how absolutely insane the man is. His testimony before the Senate Committee on Banking, Housing, and Urban Affairs was a revelation for anyone wanting to know the nature of the systemic risk posed by the GSEs (something I covered in the Housing Report.) But while Greenspan diagnoses the risk correctly, he subscribes to the theory that disseminating credit risk throughout the world, through mortgage bonds, actually reduces rather than distributes risk. Hard to see how he reaches that conclusion when the testimony of his speech seems to counter it. Below, I offer a few choice quotes. You can find the whole thing here. Fannie (FNM) and Freddie (FRE) are down as I write this. And if Washington does get its act together to put a lid on how fast the GSEs are expanding their balance sheets--without making it seem like the Federal government is worried it's going to have make good on GSE bonds--well then, that would be bad news for Fannie and Freddie stock. "Although the risk that a home mortgage borrower may default is small for any individual mortgage, risks can be substantial for a financial institution holding a large volume of mortgages for homes concentrated in one area or a few areas of the country." Denning comment: Think J.P. Morgan. "Securitization by Fannie and Freddie allows mortgage originators to separate themselves from almost all aspects of risk associated with mortgage lending: Once the originator sells the loan into the secondary market, he or she may play no further role in the contract." Denning comment: And this is good how? Lender makes loan. GSE buys loan from lender, taking loan off lender's books and freeing lender up to make new loan. Who owns the loan (the risk.) Not the lender, but the GSE. But wait, GSE securitizes loan and sells it to....pension fund, mutual fund, hedge fund, foreign government. Who owns the loan (risk)? We all do! "...the sources of credit available to purchasers of cars and users of credit cards have expanded widely beyond local credit institutions. Unbeknownst to such borrowers, their loans may ultimately be held by a pension fund, an insurance company, a university endowment, or another investor far removed from the local area. This development has facilitated the substantial growth of non-mortgage consumer credit. Indeed, in the United States, more than $2 trillion of securitized assets currently exists with no government guarantee, either explicit or implicit." Denning translation: Millions of Americans are, to some degree, dependent on the mortgage payments of other Americans they've never met. Ironically, the GSEs have both concentrated interest rate risk and disseminated like an addictive drug to the bond market. They've concentrated it because they are the middle man. The GSEs guarantee mortgage debt and buy it. They stand behind over $4 trillion in mortgages now....three quarters of all single family homes. The system depends on their solvency and their ability to manage credit risk. Yet the GSEs have managed to distribute that credit risk by making a market in mortgage debt. Attracted by the yield and the implied government yield, trillions in GSE debt sit in the asset columns of balance sheets in both the public and private sector. The financial fortunes of people who may have never heard of GSE ride on the back of the ability of homeowners to make a monthly mortgage payment. No wonder the Fed doesn't want to raise rates.

Fear for Your Lives

The subject line quoting the Lord Denethor from Peter Jackson's version of the Return of the King. Take a look at the Air Force's wish-list of future capabilities. You can find the whole thing here. Air-Launched Anti-Satellite Missile: Small air-launched missile capable of intercepting satellites in low Earth orbit and seen as a past 2015 development. Counter Satellite Communications System: Provides the capability by 2010 to deny and disrupt an adversary's space-based communications and early warning. Counter Surveillance and Reconnaissance System: A near-term program to deny, disrupt and degrade adversary space-based surveillance and reconnaissance systems. Evolutionary Air and Space Global Laser Engagement (EAGLE) Airship Relay Mirrors: Significantly extends the range of both the Airborne Laser and Ground-Based Laser by using airborne, terrestrial or space-based lasers in conjunction with space-based relay mirrors to project different laser powers and frequencies to achieve a broad range of effects from illumination to destruction. Ground-Based Laser: Propagates laser beams through the atmosphere to Low-Earth Orbit satellites to provide robust, post-2015 defensive and offensive space control capability. Hypervelocity Rod Bundles: Provides the capability to strike ground targets anywhere in the world from space. Orbital Deep Space Imager: A mid-term predictive, near-real time common operating picture of space to enable space control operations. Orbital Transfer Vehicle: Significantly adds flexibility and protection of U.S. space hardware in post-2015 while enabling on-orbit servicing of those assets. Rapid Attack Identification Detection and Reporting System: A family of systems that will provide near-term capability to automatically identify when a space system is under attack. Space-Based Radio Frequency Energy Weapon: A far-term constellation of satellites containing high-power radio-frequency transmitters that possess the capability to disrupt/destroy/disable a wide variety of electronics and national-level command and control systems. It would typically be used as a non-kinetic anti-satellite weapon. Space-Based Space Surveillance System: A near-term constellation of optical sensing satellites to track and identify space forces in deep space to enable offensive and defensive counterspace operations.

February 23, 2004

Yahoo! News - 1,980-Pound Pig May Have Been Biggest

Nice metaphor Blogging is lite today as I'm finishing off the March print issue and the weekly e-mail, due out tomorrow. From the AP: BEIJING - Chinese officials figure a 1,980-pound pig that died from lack of exercise has a shot at being named the biggest pig ever. And they plan to apply for a listing in the Guinness Book of Records, the government's news agency said Monday. The pig, which was 8 feet 3 inches long, is already the heaviest ever reported in China, the official Xinhua News Agency said. The beast had a girth of 7 feet, 3 inches and its tusks were 5 3/4 inches long when it died Feb. 5, the agency said. It cited the pig's keeper, Xu Changjin, a farmer in the northeastern province of Liaoning.