Syzygeist

The Quake That Shakes Us All

I was asked to be on a 6 a.m. call this week to London that was cancelled because the European corporate client suddenly had to deal with Japan, its understandable workplace instability amid spreading fears of meltdown and contagion. I had not expected either the call or a related major meeting in Europe to be cancelled, but I was not surprised, given current volatilities around the world.

How prepared are people for the bigger reverberations of major events, and how to deal with them intelligently, of which the first step might be anticipation and planning?

I confess I have not yet read Kenneth Posner’s book, Stalking the Black Swan: Research and Decision Making in a World of Extreme Volatility, although I think it advisable for anyone who applies scenario thinking and other basic risk-management techniques to the rising uncertainties of our time. Posner's attempt, according to reviews, is to mix quantifiable and computer calculation with human instinct, experience and intuition. A worthy goal worth thinking about, and actually trying to do.

(Number me among those readers who attempted Nassim Taleb's The Black Swan and put it down before the end, partly because at a certain point before page 300 I thought I grasped the thesis well enough and because, frankly, Taleb is a writer who does not know why he would use one word if he could use 20. Of those, more than half will be about Taleb's superior view of uncertainty, about which he appears to be uncertain not at all.)

As a longtime scenario practitioner, I have an aversion to certainties of all kinds, partly because it is always the unexpected that changes the way we think and subsequently must behave. Humans must live and work in a constant tension between confidence about what they think they know and flexibility in the face of incomplete information, and sheer ignorance. But how to identify what you do not know well enough and should consider?

Enter Japan's earthquake and unfolding disaster. Were quakes of this kind uncertain? No, they were inevitable (and still are.) Were those plants "safe?" No, they never were, located on the geological "Ring of Fire" that promises serious quakes from here to eternity.

The quake's timing, however, was uncertain, and also the extremity of its effects. We must now all reconsider whether:

- A nuclear cloud will get into the atmosphere and increase cancer risks everywhere

- Anti-nuclear movements will extend globally as the world comprehends that it potentially shares in every other country's nuclear risks

- Nuclear plants should continue to answer the world's energy appetite, given what we now know, and know that we know

- Recalculation of insurance liabilities will render nuclear energy just too costly

- Makers of potassium iodide pills are suddenly a valuable stock investment (Or are you too late?)

I mean this last only partly facetiously. It says something about positive pricing effects in negative macro conditions.

Vital lessons may be taken from Japan's experience - which, pray, does not continue to multiple meltdowns and swathes of dead areas of Japan from nuclear contamination. One lesson might be in the approach that executives and managers take to major "uncertainties" that are likely to unfold at some level and at some point reasonably soon. Don't we know what some of them are?

As much as a U.S. Treasury-market collapse, Middle East (Libya, Saudi-Bahrain) disruptions, oil prices above $120/bbl, rapid global inflation, European financial meltdown and China disruptions are known to be real and proximate possibilities, many corporate and public policy leaders have not really taken the time to think these through. 

Scenario thinking continues to be an invaluable tool in the risk-manager's toolbox because it allows for the unthinkable to be more easily thought and for the unspeakable to be spoken in ways that may be heard and acted upon in time. Examples are many of risks that were contemplated with scenarios and where subsequent actions saved millions or produced strategic options that were acted on profitably. Lives might well be saved as well.

Maybe Japan's quake has shaken the rest of the world enough to reconsider how prepared we are, and are not, on some of these fronts. "What if?" remains a powerful question for managing future risk, but only if you really ask it - the right way with the right people around you - and think it through.

Then you must act.

 

Stop These Wars

It is gratifying to wing opinionated and potentially provocative words into the blogosphere and have words come back, whether affirming or not. The words (and website) below reverberated from my previous question about whether people know the rationale for our waging war in Afghanistan (and a corollary, Iraq), and whether they support it. 

This inquiry caused me to discover and be shocked by the estimated number of nearly ONE MILLION DEAD in combined military and civilian casualties between the two conflicts in the last near decade. Most are civilian. Many of those had nothing to do with terrorism and will not have been drawn closer to the US as a result of the deaths of loved ones, I would suspect.

From a New York City mother of two teenage girls and a younger son:

See www.stopthesewars.org. Check it out.

This will tell you, among other things, that a veterans' protest is scheduled in Washington, DC for March 19, next Saturday, on the anniversary of the Iraq invasion. The argument and its passion may surprise you. You may even be moved to think/feel differently, and possibly to act, on the strength of it.  Also, the demonstrations the following day want to bring awareness to the situation of Bradley Manning, the US Army intelligence analyst currently imprisoned in Quantico and awaiting court marshal, whose allegedly inhumane treatment in custody has been brought to Obama's attention.  

From a former Navy pilot, who came of military age in the Vietnam era:

How about immoral and irrational? The war in Iraq is immoral and the war in Afghanistan is irrational. Iraq sustained the predilection of the US to engage in wars of aggression. Can anyone reasonably doubt that either Vietnam or Iraq was such a war? Both were a departure from our nation's traditional values.
Afghanistan was presumably directed to thwarting Al Quaeda, which in the interim has sprung up like mercury under the thumb in places like Somalia. Nonetheless, we continue to pretend that we are fighting terrorism in Afghanistan. Your "energy lawyer" is spot on, to wit: this is merely a political action initiated by Bush and perpetuated by Obama for political purposes. Can any action possibly be more cynical?
On a related note, the volunteer force disassociates the rest of America, other than the friends and families of those who serve so honorably, from those political conflicts. The detachment permits us to remain disengaged from the conflict. It doesn't touch us so we do not object.
Universal service requires everyone to give something back to the country, and requires each individual in the country (or someone with whom they are related or acquainted) to be "at risk" of serving in each conflict. In addition, it gives those with a VALID moral objection to conflict the mechanism to channel their obligation into an area devoid of the prospect of armed conflict.

As it happens I agree with this reader and feel vindicated that someone of military commitment and bearing sees it this way.

From an author of historical books and former national political reporter:

I of course disagree with your thesis. I don't have much to contribute to the canon on Vietnam - wretched costly mistake steeped in the stupidity of the best and brightest ... but I still think there was a case for invading Iraq and unseating Saddam. The fatal blunders there were:

1. You simply cannot lie about the casus belli for war in a democracy; hanging onto the convenient "Tonkin Gulf" justification of weapons of mass destruction, when at best we had no proof of them and at worst knew they did not exist, laid a flawed foundation for our being there that could not be cured;

2. We did not sustain the wobbly security forces there or replace them with anything else, and did not send enough men - our (Phillips Academy graduate) Andover man Paul "Jerry" Bremer deserves the blame for this, with others; and,

3. We did not respond even remotely adequately to Abu Ghraib. I remember being stuck in a hotel room at Gatwick during Senate hearings when Evan Bayh asked Rumsfeld if he should have resigned over Abu Ghraib, and after a long pause Rumsfeld said, "Yes." He says so again in his new book. Then why, oh why, didn't he? 

As to Afghanistan, I have only a layman's sense that no one can "win" a war there. But it is very hard for me to think that President Obama has some ulterior motive such as re-election driving his support for the surge there - and I do have some qualifications as an expert on presidential elections, so I will say with confidence that I do not see how he picks up a single vote by supporting the surge, but I think he loses some potential support in the primaries for doing so.

I agree that drafting everyone was a vastly fairer and more sensible way of prosecuting wars than the mercenary military we have today. But the reason we do not have universal two-year public service is not the right...it is organized labor.

I cannot anticipate the expressed view of "organized labor" in the universal national service debate. I doubt that "labor" would think and act on this as a monolith. It makes more sense to me that labor in general would favor wars of various kinds, because they are stimulative of basic industries that we have not yet farmed out to other countries. Now that might be considered cynical.

Please do write. 

Or call. 

Someone. 

This is not a neutral topic worthy of indifference or inaction.

Afghanistan: Engaged? Enraged?

Do you know why the US has troops fighting in Afghanistan? Do you support it?

At a recent weekend ski reunion in Nevada I asked this of some high school era classmates, (Phillips Academy, 1966), a relatively well informed and learned professional group, mixing law, public policy and private enterprise in almost equal measure.
I have found that many people, however well educated and apparently informed, do not know the official rationale for our being in Afghanistan. But polls suggest that opposition to the war hit 63% in December, 2010, as US (and other) soldiers continue to sacrifice themselves there and civilian casualties mount. With at least 919,967 people killed in Afghanistan and Iraq since the U.S. and coalition attacks, based on lowest credible estimates, the war should rightfully loom as a major campaign issue in 2012.

About 10 of us had gathered in our former classmate's house and soon became engaged, if not enraged, by the topic, which recalled for us another conflict. Some of us had brothers who fought in Vietnam. Some of us did not have to serve because of the lottery then, or served because of it. 

Most of us had come to see Vietnam as unjustified, as well as unsuccessful. (One of our classmates had written "Loon," a recent first-person account of a high-loss battle in Vietnam and its grim legacy.)

Some of us now fervently believe the US should bring back the draft (perhaps as universal 2-year national service) so that our wars are not fought only by those who volunteer. One advocated the idea on the grounds that if everyone in the country had equal skin in the war game, the country might be more fairly and fully engaged in determining what wars we fight. 

Everyone seemed to agree that this would be good for the country. No one in the room seemed to believe that current leadership would be willing to broach the topic of the draft, or even of withdrawing, before the elections.

One of my classmates served in Congress and now, as an energy attorney, frequents the corridors of Washington and travels the world. He is the member of our group who predictably will have read the most relevant recent book on a topic and have the most informed and thoughtful view.
He cited the recent "Our Vietnam," by AJ Langguth, and reported some disturbing history compiled from original sources. According to Langguth, Kennedy never believed that the war against the North Vietnamese could be won. And he did not believe the "domino theory" that the fall of Vietnam would mean the loss of Asia to communism. He believed he simply could not afford politically to get the US out before the 1964 election because the Republicans would roast him.
By then, Lyndon Johnson, who as Vice President had tried to convince Kennedy to exit the war as un-winnable, found himself similarly trapped by a war that had escalated beyond the point of practical or political withdrawal. (Kissinger would later be instrumental in negotiating a pause in which the US finally could come out.)
This renewed sense of Vietnam history, where domestic politics interfered with common sense, provoked a number of reactions to the current situation. 

One former classmate active on Capitol Hill characterized many Democrats as believing "Afghanistan is an outrage." He wondered aloud if Obama, who promised withdrawal by July 2011, can survive in 2012.
"When you read how the Mideast revolutions are happening, how accelerated everything is, I find it hard to believe that Obama is going to skate through," he said.
As a few of us wondered aloud at the apparent lack of anti-war activism compared to Vietnam's protests, our energy lawyer quoted a recent conversation with author James Fallows on the topic, who said:

"You never know on a given day whether you should be living a normal life or doing something about the most important issue of our time."
Perhaps our war in Afghanistan is not "the most important issue of our time," but it must rank pretty high. How many have US soldiers have died there? The quoted statistics are:  4,683 in Iraq and Afghanistan combined, since "Operation Enduring Freedom" began on Oct. 7, 2001, and "Operation Iraqi Freedom" began on March 20, 2003. Of the total US deaths, 3,708 were reportedly due to hostile fire, and the remainder due to non-hostile actions (such as accident, suicide, or illness).
Perhaps the military deaths are the most important thing, though they do not embrace the thousands severely wounded or mentally affected for life. Officially, 30,490 U.S. service members have been wounded due to combat actions in Iraq and 2,309 in Afghanistan (32,799 total). (Source: Rod Powers, About.com) The civilian death statistics already mentioned are highly disturbing.
If you want the official rationale, you will find it here:
US President Barack Obama, declared on Dec. 1, 2009: “I am convinced that our security is at stake in Afghanistan and Pakistan. This is the epicenter of the violent extremism practiced by al Qaeda. It is from here that we were attacked on 9/11....It is important to recall why America and our allies were compelled to fight a war in Afghanistan in the first place. We did not ask for this fight. On September 11, 2001, 19 men hijacked four airplanes and used them to murder nearly 3000 people.”
In his press conference on military action in Afghanistan and Pakistan, Obama called the region a base for "Al Qaeda and its extremist allies" from which they train terrorists and launch attacks, now "the most dangerous place in the world for the American people" and "an international terrorist challenge of the highest order." An additional 17,000 US troops would be committed immediately, and training of Afghanis would be increased.

Addressing Al Qaeda, Obama said flatly: "We will defeat you." 

One might question if the US is suppressing or defeating terrorism as much as it is stimulating it, as some have suggested, by causing hundreds of thousands of civilian casualties in countries with which we are not at war. And can Al Qaeda and the Taliban be defeated militarily on their home turf?
Our discussion was inconclusive, although the sense of the room was that this issue may be bigger than current debate and lack of open protest suggests.
Is Afghanistan an echo of Vietnam, misguided and un-winnable, and now a tool of US domestic politics?  

Will Obama sustain the hostilities until after the election in 2012, as much as it is supported on the right and opposed on the left? 

Does he believe he has any choice?
Do you?

Have you written your Congressman lately?

Imagine This O CIA

Perusing old notes for a new book project, I find signals in the past that seemed like noise to many people then, but were in fact the signal.
Bran Ferren, now the co-founder of Applied Minds, who had become the head of Imagineering for Disney along the way, was speaking to a CIA audience in the winter of 1998.
He was observing that the number of Web users had hit 100 million in four years and trying to get the audience of official government intelligence workers to think what this might mean.
Imagine, he said (he was then and would become more widely recognized and sought as an expert on imagining), trying to convince the Wright Brothers that in 85 years the industry would be kept alive by mileage incentives.(Newspapers, he said matter-of-factly, would eventually be banned, because too many trees would have to be cut down.)
The "computer revolution" had not even begun, he scoffed, and "the notion of information overload is ludicrous and absurd because humans are made for it." Our evolution was now happening in terms of sensibility and consciousness and you could choose to join actively in the process. (We since have evidence that our intake of information now through all current media is changing the way our brains are developing, and the way we seek meaning.)
If you were not on the Internet at this point, Ferren said, you were on the road to becoming an illiterate. You were missing a crucial opportunity to connect to something fluid and evolving where connectivity would be everything. You needed to start doing R&D in the kind of story-telling you do.
"Right now everyone is doing small r and big D," he went on, "You need to find the smart people and fund them, because it's the best idea we have for inventing the future."
The Internet would be the "single greatest enabling technology for you and your enemies," he said.
"There has never been a great teacher or a great leader who wasn't a great story-teller. Merge story-telling skills with technologists and the disseminators and you have a powerful tool - and an educational system - and if you can touch their hearts, you can open their minds."
His words at that time have a special resonance for me now in light of events in the Middle East. Some of us had done scenarios on that part of the world in the early 90s and at least one future saw the impact of youth and information in new, anti-authoritarian forms.
Did our Central Intelligence Agency not foresee the revolution coming there? Did they lack intelligence, or imagination? What were the chances that cultures living under autocratic or dictatorial rule, with large populations of unemployed youth, could come into the Internet-rich 21st century without unrest? Would it take inflation and food shortages to light their fuses, or would it be something else? Maybe their inevitable connections to the network that was springing up?
It was during the same period (early 1998) that James Barksdale, then CEO of Netscape, was trying to communicate the impacts of Moore's and Metcalfe's Laws on the communication society, as the price of computing power was collapsing by half every 18 months (Gordon Moore, co-founder of Intel) and the power of networks was growing "by the square of the endpoints" (Robert Metcalfe, who invented the ethernet).
The Internet as understood then was growing point-to-point and end-to-end at twice the speed of any other network in history, Barksdale was saying. He predicted Internet commerce of $10 billion in the US by 2000 (actual number $152B online sales in US in 2010, up 12% year-on-year). And commerce was only one index of impact and influence.
"You never know where the endpoints will take you," Barksdale said then. "No one can understand the complexity."
It was a cautionary note not to underestimate what you had not yet imagined coming out of this technology. Just as Gutenberg did not know that newspaper would bring down presidents, we did not think - did we? - that the Internet would bring down regimes in the Middle East.
Didn't we?
What would be the impacts of the technology and all the stories that would be told, or could be told, or could be made up and told by friend or foe, to friend or to foe, and propagated on the Internet as it exploded?
If the Wright Brothers could not imagine mileage incentives, could the CIA not imagine Muslim minds opening up to a real democratic urge? Had they or we (I mean, they are our Central Intelligence Agency, after all) grasped the power of story-telling online, and how to tell it?
Just imagine.

What's Left in Words?

The magic of Facebook - network connections across time and space - brings back a woman friend from long ago who has decided to retire from journalism. She has been among the better columnists in the US press for more than three decades, writing on everything from sports to Catholicism, politics and social change, emanating first from Sports Illustrated and then the San Francisco Examiner and finally from a small paper in Indiana, where ailing parents led her to finish out her career in the town where she grew up.

Hers has been a voice of staunch feminism and independence, mixing sharp wit with a passion for what she believes is right. She has never been afraid to raise her lone voice or express outrage where others had been pressured into silence or rendered too indifferent to speak up. 

Her pronouncement is disturbing.

"I have decided that words are now worth what Deutschmarks were in the Wiemar Republic," she says. "Nothing." 

Nothing?

"Nothing. And no one really wants to read, or follow an argument, or listen to reason that does not agree with what they already believe. It's pointless. I think I am really ready to retire, hang it up." She says this with an air of finality I recognize. (And I know that research suggests the blogosphere is making it easier for people only to follow those they already agree with, polarizing camps of opinion and closing more minds than are opened. So maybe she has a point.)

Perhaps, I think, this is like the rationale of someone who has been forced to relinquish a lover and who suddenly discovers faults that were previously obscure. It is much easier to let go of what we no longer value, or devalue what we wish to leave behind.

I brood on this for about 24 hours, thinking: few if any I knew in the business revered words more than she did, or used them better. And why would she now abandon them - for what in their place? Golf? Party planning? Consuming the words of others but generating none of her own?

Words did not (in my humble view) evolve greater subtlety and richer meaning over time to be demeaned now on a pure volume argument. 

Certainly it is true that blogs and Facebook and Linked In and other networks have allowed almost any Yahoo (including this one) to write and publish with few constraints. Gone are many of the talented editors and the publications that housed them as the Internet erodes traditional publishing across the land. Coupled with that has been the corporatization of the press, which has reduced the range of available news, homogenized opinion and sapped conviction from public dialogue. 

Still, voices can and are being raised across a range previously unthinkable, if you can just figure out how to be found and heard. The one can reach more of the many than ever before in human history, and outside the bounds of traditional publishing authority.

E-book sales increased 176 percent in 2009, romance continued to dominate book sales, but the number of overall titles increased 11.4 percent year to date through June of 2010, from which the book industry took some heart. As Borders goes into bankruptcy and consolidation of book sellers increases, one has to wonder whether a new model may be emerging in which individual writers will reach enormous worldwide audiences without the income being shaved by the middlemen (and women). 

And here the demand equation comes into play - can you say things in a way that will attract? Can you (the blogger or writer of any kind) mix substance and style to be a powerful enough signal in all the noise to strike a note that others want and need to hear?

I attempt a rebuttal.

Nothing is so powerful as an idea whose time has come.  (Words) 

I have a dream. (Words) 

Ask not what your country can do. (Words) 

I love you. (Words) 

I am sorry. (Words) 

What is grass? said the child, fetching it to me with full hands. (Words)

What light from yonder window breaks? Tis the East, and... (Words)

The road was a ribbon of moonlight over the purple moor... (Words)
So I wonder aloud, what is wrong? Do you need a rationale to come to terms with falling silent? 

Some might say that speech and words distinguish humans from other creatures, although we have reason to believe that many of them manage to communicate at a high level. 

But falling silent because language no longer matters? "Pointless?"

It was never meant to be thus. Can't be true. 

Write the thing you were always afraid to.

Build it and they will come.

These Authorities Have to Go

Libya's Gadhafi struggles to hold on to power the only way that dictators of force can hold on, which is with more force. Just how brutal he will continue to be, and how effective, is still to be determined.
How far will this go, and to what effect? 

The debate over the economy is still fully on between the recovery and double-dip camps, but the spreading uncertainty from Libya to Saudi Arabia may favor the latter. Chinese economist Andy Xie points to Mideast (37% of the world's oil production) instability and potential gas price increases to infer that stagflation may be just around the corner. He notes that the oil shock of 1973  triggered a market crash and laid the foundation for stagflation thereafter. OECD countries now have leverage levels that are 50% too high, and must come down, he observes. That is deflationary on its own. Meanwhile, the US continues to flood the world with dollars, which is inflationary.
What is important here is the degree of uncertainty in the system. The Libyan crisis will have its own effects in that country, and has roiled Saudi Arabia, whose leadership has just announced new levels of largesse to keep the population in line.
But what is really going on here globally?
Authority the world over is being questioned and challenged in new ways - faster, more broadly and deeply - in a new era of communication. In the mid-1990's, we postulated that the Internet would act as a universal solvent to erode authority structures of all kinds, from the top down, bottom up, inside out, and so forth. Power would shift to the "end-user." This was long before Google made answers available to most questions or Twitter allowed differing versions of the truth - as well as lies and distortions - to spread at the speed of light, 140 characters per Tweet.
We now know quickly - as can anyone anywhere who wants to ask - that the Greek government has to meet a major hospital deficit in a hospital that has 42 gardeners but no garden. We know American public safety officers bulk up their hours in their final years so they can retire on pensions of 100 percent or more. We know that Democratic state senators fled Wisconsin in order to dodge their responsibilities to address budget deficits, apparently believing in the power and efficacy of denial. Technology guru Mary Meeker has just published a report to suggest that America Inc. is functionally bankrupt on the costs of Medicare and Medicaid. These two entitlements were approved largely by and for Baby Boomers with apparent disregard for intergenerational fairness, let along practicality.
It's all coming home to roost, all over the world. It has to.
The point here is that "the authorities" have made a mess in many places, not limited to Libya. Gadhafi & Co. did not bother to build infrastructure with its oil billions, leaving a poor and uneducated populace now with a void to fill, when/if Gadhafi falls. (See here the first CNN footage in Benghazi, where Gadhafi has already been pushed out.) His is not the only regime to abuse power and abrogate the responsibilities of leadership. So his is not the only regime to sow the seeds of crisis, which cannot and will not be avoided.
The question now is, what will we do? Violence in the streets is the only choice for those who have no other choice. The US mess hopefully will be addressed by those who stay in the room and try to fix the problems with real solutions. But Wisconsin is not the only state where protesters have picked up the vibe from Middle East and staged long and persistent demonstrations against failed leaders. And material support - in the form of pizza for Wisconsin protesters - is pouring in from Egypt, Turkey, and around the world.
Authority that underestmates this unprecedented connectivity, both in how it connects and educates people, is learning fast that a new model is forcing its way forward, outward and down. It is not contained or slowing, only expanding literally at the speed of light. How does your "official future" fair against the potential for stagflation and continuing global unrest?

From there to here...and beyond

I have often been asked how in the world I got from a career in journalism on the West Coast in the 80s to an investment bank on Wall Street in the go-go 90s.

An honest if incomplete answer resides in an old Sufi named Joe Miller who is, alas, no longer living, but who influenced many who sought his counsel. I went to see him after falling ill with pleurisy in 1987. He asked me what advice I would give to myself if I came to me with what was troubling me then. Without thinking about it for more than a second, I said I should try to live closer to my heart and walk in the path of my fear.

At that point Joe had a brief comment – “Most people do not do that,” he said - and then thanked me for coming to see him. I left his San Francisco apartment suddenly determined to sail my 47-foot ketch from San Francisco to Hawaii and back and to let the chips in my life fall where they might.

So I did, and in 1989 quit the San Francisco Examiner to write a book about the experience and other forces in my life.  Now “Into My father’s Wake” has just been published on Amazon. You can find it at http://intomyfatherswake.com.

That it took 20 years to finish the book and that it is coming out into the new e-economy of publishing is a comment on many things, only some of which I think I understand.  In the interim my father died, my brother suffered an injury and stroke, my mother developed Alzheimer’s and Morgan Stanley offered me a job. Then I met and married the mother of my two youngest children, bought a house in Long Island… the rest, they say, is history.

Of course I hope that people I have never met will find the book, and read it, and get something from it that is as useful to them as Joe Miller’s question was to me years ago. The made-up name of this blog – syzygeist – is intended to suggest such moments, when words or ideas or people or events or some combination of those come into alignment and we see or feel something valuable, and it helps us to change direction in ways we need to.

I marvel sometimes that Joe Miller might arguably be the reason that I later – after finishing a first draft, running out of money, getting a job with a boutique consultancy  – that I found myself “Crossing Wall Street. “ This is my working title for a comment on the world I found far from journalism or the life of a writer, which I had aspired to long ago. Life is a path, a philosopher once said, that you beat as you walk it.

Wadsworth on China

Yesterday (Monday October 18th) I watched an old friend and very wise man, Jack Wadsworth, interviewed on Bloomberg TV on the subject of China – its currency, economy and relations with the US.
I have known Jack since he was running Asia for Morgan Stanley in the mid and late 90s. I first saw him at a party for clients and was struck by the thought that if a war started and we all had to join the Navy and Jack had command of a vessel, I would want to serve on it. (I still feel that way.) Jack has run his own venture capital firm that has started about 30 new companies in China in the last half decade. He knows whereof he speaks.
On Bloomberg he had the same air of quiet composure, concern, confidence and good humor that always seems to characterize him. He did his best to persuade his interviewer that the real issue is not whether China adjusts her currency upward as Americans and their politicians would like, but whether America recognizes a labor rate differential in the world that requires our adjustment.
The idea is pretty straightforward – if a country competitor has labor rates that are roughly one-tenth of yours, you have a problem. Their currency adjustment alone is not going to fix it. You have to address it.
I listened to Jack trying patiently to explain this in the mini-bites of information that modern television news coverage allows. I have been involved with Jack in numerous meetings to discuss this issue: how the US-China dynamic should concern all of us, because if it goes off the rails, we (the world economy) all go together.
With U.S. mid-term elections approaching, a rising political theme is that China has to do something about its currency in our favor, and then somehow things will be different, better, “fixed.” Most troubling is the ring of 1930s protectionism implied – or actively expressed – if “they” don’t do what we want.
Jack’s quiet message – though I doubt it was heard through the veil of “tell me a happy truth that makes us feel better” – was simply that China cannot solve our problem. Its currency may be 5-10% undervalued, but we have a 10-1 imbalance to consider.
I would feel encouraged if I thought the American body politic can face this music and begin to dance together, but I do not. The Obama administration, public employee unions, the unemployed, Tea Party activists etc are not likely to come together with an attitude of “America has a problem that it must fix.” Wall Street and those profiting from currency market machinations could care less, as they will win no matter who loses. (Okay, some may lose there, but not the ones who should.)
Rather, we will seek outside causes for our ills and play a blame game as further difficulties come home to roost. The Greeks protest austerity. The French strike to defend their retirement age. And the US will find its own ways to defend the status quo. I predict we will look to others to blame instead of into the mirror, failing to consider that we have seen the enemy and it isn’t “them.”
What does that mean? Our currency will keep getting weaker, unemployment will remain at these levels or worsen, stock and currency markets will continue to fluctuate, and the hole the US has been digging will deepen, the reckoning yet to come.

View the clip of Jack Wadsworth speaking about China on Bloomberg here.

Look Out Below!!!

I had dinner this week with a couple of the smartest people I know in the realm of macro economic analysis and prognostication. By “smartest” I mean that what they have been willing to predict in the past has tended to come true (one called the ‘80s collapse of the Nikkei right on the button, and foresaw Japan’s ongoing troubles), so I tend to listen to them more than to others, particularly since I doubt the ability of most people to predict with any particular accuracy.

Both are extremely bearish about US prospects, for a variety of reasons – political misguidance, trillions in debt, the continued papering over of liabilities, rising baby-boom retirement and health costs coming, unemployment, etc.  Both see the dollar in deep trouble, gold rising for now, and no recovery relief in sight. The question is when the “next crisis” will unfold, and in what form.

Michael Peskin of Hudson Pilot, formerly of Morgan Stanley, an expert in pension and asset systems, points to a system of incentives that has created a financial industrial complex composed of congressional oversight, public employee unions and a banking system that has a stranglehold on fiscal and tax policy. 

Roger Cass, an independent analyst with an extraordinary track record for seeing when countries are about to hit walls (he homered on Japan when the world thought it had figured out its own economic miracle), says failure is written all over Obama’s health care and other domestic agenda. The current leadership is without a functional compass, even if it knew which direction to take and had the resolve to take it, which he is convinced that Obama & Co. do not. 

Cass just issued a report to clients that warned, among other things:

• The world is entering stage four of an ongoing global financial crisis, unfolding next in Euro sovereign debt. Unemployment, slow growth and protests will mark Europe’s near term future as the situation worsens.
• Developing countries will not be able to offset slowdowns in Europe and the US, but will suffer as trade demand slows, so there is no global rescue in the emerging (BRIC) countries.
• China is operating a real estate “Ponzi scheme” and a collapse in prices has already begun. “Across China dozens of so- called ‘Fabric Cities’, ‘Electronic Cities’, and ‘High Technology Cities’, hybrids of department stores, factory outlets, and distribution centers specializing in the named products, have vacancy rates of 50% or higher, with investors demanding the return of their investments from local governments and developers. The process in which property values were driven ever higher by this Ponzi scheme of circular fraudulent transactions between local governments and corrupt bank loan officials and SOEs is now beginning to unwind.”
• We are about to go through a period of disinflation, but “…the massive stimulus programs and the eventual monetization of the accompanying record deficits by the U.S, European, Japanese, and Chinese governments to stave off financial collapse are setting the stage for a new round of rising global inflation, interest rates, and a weakening dollar.”

And he quoted Von Mises:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of the voluntary abandonment of a further credit expansion, or later as a final and total catastrophe of the currency system involved”.

- Ludwig von Mises

These are just a few outtakes of a scathing and distressing report that prompt the fair question: what to do?

Peskin believes deflation is coming, and inflation will follow, as does Cass. Both are negative about stock markets, with a few exceptions, and both are bullish on Canada, and gold. While this may not seem conventional wisdom, in my experience it is likely to turn out to be wisdom after all, so I would ignore it only at my own risk. For further insight, track these guys down and ask your own questions. 

 

Capitalism After the Crisis

April 26th's news (see WSJ Page 1) on how Warren Buffett has intervened in the Congressional debate on derivatives is not good news. It underscores the point made eloquently and persuasively in the recent paper “Capitalism After the Crisis,” by Luigi Zingales, a professor of finance at the University of Chicago School of Business.

Zingales’ warns that the nature of American capitalism is at risk. Financial industry interests – as distinct from the interests of a fair and open-to-competition market – are becoming too powerful and risk being unduly served by government. America is becoming more like Europe or many Asian and South American markets, where it is not what you know but whom you know (or can influence to your way of thinking and in your interest).

Buffett’s latest intervention - in the interest of his holdings and the interests of non-transparent financial practice – is a powerful signal of this financial influence on the political process.

It may be that Obama can resist Buffett on this, but I would wager not. And will the resulting legislation actually serve the public interest in a fair market? Zingales is asking us to consider what is really at stake here, as a Congress heavily supported in campaign contributions by financial interests (note Goldman Sachs et al), and influenced by lobbyists (is Charles Schumer a handmaiden in disguise?), is about to decide where the power will lie. We should remember that Warren Buffett is an investor with investors to protect, and a P&L to preserve.  And P&L is not an acronym for public interest.