Thursday, March 31, 2011

San Onofre and Sunset: Persistence of the Past

At Haggerties and Swamies
Pacific Palisades
San Onofre and Sunset
Redondo Beach L. A.
All over La Jolla
At Wa'imea Bay.

Everybody's gone surfin'
Surfin' U.S. A.

-Brian Wilson, 1963 (credit also to Chuck Berry as tune is that of Sweet Little Sixteen)

Times have changed. Now, even landlocked 80 year olds surf, but is from their computer, and it is cyberspace rather than the waves they enjoy. Now as then, a young Democratic president engages in deficit spending to get the economy moving again. Then, San Onofre was merely an isolated beach in northwest San Diego County.
Now, it has two functioning nuclear power plants sitting oddly by the popular beach/surfing spot as well abutting I-5, the same site also including a decommissioned plant that is used to store "spent" nuclear fuel.

An entrepreneur has proposed a "green" project that would, his company asserts, cleverly use power from the tides to generate more electricity than the two plants generate, while saving costs by tying into the power lines the nuclear plant uses. This modest proposal has excited opposition from surfers and fishermen, among others. Environmental damage is feared.

Will the surfers still rule at San Onofre?

I don't know, but it strikes me that something as allegedly simple as meeting California's energy needs and desires via the uber-renewable source of tidal power ought to be relatively noncontroversial. The fact that such is not the case strikes me as indicative of how difficult it is to effect change in settled situations.

Let's take a walk down recent memory lane.

Financial Armegeddon in 2008?

No problem, let's just react using existing tools. And make sure we defend all our actions leading up to the financial myocardial infarction. Take a fresh look at new (different) paradigms? Heavens forfend?

Rampant abuse of public corporations for insider gains?

No problem, the "market" must continue (resume) its upward course. (Why that is important is not explained.)

Economic activity not fast enough to suit the central authorities?

No problem, just force-feed the goose. It always produced delicious foie gras in the past.

Recovery still slow?

Just print (electronically) even more money. Output gap? It must be filled. By order of: the authorities.

Isn't all this money issuance unfair to savers, by diluting out their savings, just as the California Gold Rush made existing gold worth somewhat less?

Sorry. Don't save: speculate.

Even if you are a well-meaning statist (if that's not inherently an oxymoron), you will tend to identify with Hamlet:
You tend to want to bear the ills you have than fly to others that you know not of.

And so the government flails on, doing whatever Big Finance wants every day, and trying to buy off or at least placate most other constituencies with one-offs as needed: one day making the unemployed happy with enhanced benefits, another day making high earners happy with continuation of current tax rates, another day making Big Pharma and Big Insurance happy with corporatist-oriented health care "reform", another day making the military-industrial complex happy with expanded wars in non-core parts of the world, the next day making the bond guys happy by keeping interest rates in their 30 year downtrend, another day making perverts know where to get a fun job by mandating nude scanning or intrusive patdowns simply for wanting to fly from LA to NYC, and so on.

A government that is simply trying to please enough constituencies by promising and giving money so promiscuously is one that is planning to bear the ills of inflation rather than some other pain.

The financial markets see through the fiction that quantitative easing is anything other than the central bank buying its creator's debt because no rational market participant would want to do so it at the price (interest rate) the government requires to issue so much of it. Whatever shifting explanations the central bank gives for its rationale can, at a first cut, be ignored: As John Mitchell of the Nixon administration said, watch what the Fed does over what it says. The Fed is not independent by statute and from its operational onset in 1914, it was immediately squeezed between the twin powers of Treasury and the big banks. This remains the case. The government means to inflate the debt burden away, and it has tremendous powers to do just that. From an individual investment standpoint, resistance is futile, no matter how much one may believe that this policy is improper, unfair, and counterproductive.

Just as it is hard to get away from burning hydrocarbons to obtain energy even with renewable sources such as tidal power, it is hard to get away from the global memory that gold is a store of wealth independent from the tyranny of governments that impose one and only one currency system on an entire society.

Thus I "like" gold because I see the U. S. government making numerous promises it does not mean to keep. I also "like" hydrocarbon producers that have leverage to a "high" price of oil and gas, and I "like" such companies to have borrowed a lot of money at existing rates to develop resources at today and tomorrow's nominal costs, because then I have double-barreled leverage to the potential for much higher nominal hydrocarbon prices in not-too-many future years.

In medicine as in finance, the DoctoRx rule is that tomorrow is usually more like today than it is different, and patterns of the past persist more often than not. I expect that surfers will continue surfing at San Onofre (and Sunset) no matter whether tidal power is harnessed beneath the waves, and I also expect that as the effects of rampant base money creation percolate through the economy, traditional ways to sustain purchasing power as described above will likely prove to be better investments than cash, bonds or "conservative" stocks.

Simultaneously, I am well aware that the superstructure of our financial system is unstable. Might it crash? Yes. Might that crash be deflationary? Yes. Am I confident I can predict such in advance to take evasive action? I hope so. Currently, though, I believe that the powers that be want growth and they want inflation. So, I'm putting new money flows alongside what I believe is the government's intention, all the while resenting their power.

So it goes.

Copyright (C) Long Lake LLC 2011

Wednesday, March 30, 2011

Fortress America

Fortress America might be a sensible approach now.

There is no expanding Japanese empire as in the 1930s. There is no Germany seeking "lebensraum". There is simply a local dictator in Libya, and there is opposition. Both the ins and the outs want control of their share of the oil revenue. Are the outs "better" than the "ins"? Who is to say? The U. S. has no dog in this fight.

It would be enough to say to both sides that if either one commits atrocities, then the U. S. and its allies will put boots on the ground and find and prosecute the perps.

It may not have occurred to the Peace Prize President that such a threat might have forestalled the violence that he claimed required the use of American force.

Remember that Reagan ingloriously pulled out of Lebanon when all those Marines were blown up in their barracks. His reputation easily survived that embarrassment. As for Reagan, so for Obama. War is bad for children and other living things. Stopping NATO's aggression in Libya would be the right thing. If atrocities incite the American people to support an invading force, then Congress can so authorize, and a Blackhawk down-type setback will not in that case force a retreat.

As with Libya, so with Pak-ghanistan. Peace is the default, best answer. When in doubt, don't bomb. It's hard to kill innocent people from the air when you're peacefully putting your full energies to improving the US of A at home, where we live and need better times.

It's time to build, and rebuild, more shining cities on more hills at home rather than killing Muslims abroad.

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Monday, March 28, 2011

Stagnation Plus Inflation Equals What Again?

Some random economic news of the day:

First, from the gov't, the key part of the incomes report that Bloomberg ignores:

real DPI fell 0.1%.

Next, courtesy of

Massachusetts job fair canceled because of lack of jobs

Economic spin reaches only so far.
A Massachusetts employment organization has canceled its annual job fair because not enough companies have come forward to offer jobs. Richard Shafer, chairman of the Taunton Employment Task Force, says 20 to 25 employers are needed for the fair scheduled for April 6, but just 10 tables had been reserved. One table was reserved by a nonprofit that offers human services to job seekers, and three by temporary employment agencies.

Nice pick-up, Eric.

Combine the above with the drooping real income status of Americans and you can see that stagflation is here. It is not "coming". It is here. What the future holds will be known in due time. I expect that until "inflation" becomes public enemy number one, investments should continue to be oriented to sectors that "benefit" from it rather than cash, bonds, or defensive stocks.

Copyright (C) Long Lake LLC 2011

Sunday, March 27, 2011

Updates from Pak-Ghanistan, as Obama's Efforts There Founder

Meanwhile, while Libya implodes/explodes, things ain't looking so hot in Pak-ghanistan.
From the Pakistani newspaper Dawn:

Pakistan’s Foreign Secretary Salman Bashir on Saturday said that efforts made by the international community to establish peace in Afghanistan were failing, DawnNews reported.

He said a clear solution to the Afghan problem was no longer visible.

Also from Dawn:

Taliban insurgents abducted around 50 off-duty Afghan policemen in an ambush in a volatile province in northeastern Afghanistan, the militant group and provincial officials said on Sunday. . .

The policemen were abducted by militants in the Chapa Dara district of remote northeastern Kunar province after returning from neighbouring Nuristan province where they had travelled to collect their salaries, Nuristan governor Jamaluddin Badr said.

“The policemen were in civilian clothes and had no weapons with them,” Badr told Reuters from Nuristan.

Then, from a different Pakistani paper, The Nation:

Pakistan is beefing up its arsenal of long-range missiles by embracing China as its new strategic arms partner and backing away from the US, analysts have told Fox News.

Also from The Nation:

- The United States is considering various options including typical hardcore solutions based on its carrot and stick policy in repairing strained relations with Pakistan by demanding military operation in North Waziristan Agency without any further delay.
Well-placed diplomatic sources told The Nation on Sunday that Washington had been weighing various options in response to Islamabad’s March 17 strong protest with the United States over its inhuman drone hit on a peace congregation in North Waziristan Agency.
The US drone attack on a peace congregation, which killed at least 39 innocent people, had drawn a strong and rare condemnation both from civilian and military leadership of Pakistan which led to serious friction in relations between the two countries.

It appears to me as though things are going badly for the U. S. in this region.

This being a modern age, let's do some relativistic thinking. According to President Obama, it's justified for the U. S. to engage in extrajudicial killings of "militant" in Pakistan from the air, even though we are not at war with Pakistan and never have been. If an unknown number of civilians die from American-fired missiles, it's OK, it's war. However, when a rebellion occurs in Libya, and is repelled, and the leader of Libya says that anyone who surrenders will not be harmed, the U. S. is supposed to intervene. And of course, candidate Obama sponsored a resolution in the Senate insisting the "W" Bush gets Congress' approval before any military action in and against Iran, a country with which even Jimmy Carter launched a military operation without Congress' overt consent. But when it comes to Libya, which apparently buried the hatchet with the U. S. 8 years ago, it's the imperial presidency all over again.

It appears at Econblogreview that the U. S. should clean up its own act regarding civilian killings in Pak-ghanistan. The easiest way to do that is by declaring "victory" and leaving.

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US on the Offense in Libya, Reportedly Favoring Islamist Rebels

The reports that the story that all the "coalition" was doing in Libya was protecting the innocent from a massacre cannot be defended. The "coalition" has likely been in league with the "rebels" all along, and was forced to act when, to general surprise, the government refused to cave. This report follows yesterday's Telegraph report that the "rebels" contain a significant al-Qaeda contingent, as Col. Qaddafi has claimed from the start. Here is the relevant part of today's report:

Meanwhile Sirte on the Mediterranean coast was pounded overnight intensively by allied warplanes, it was claimed.

"The city has become a ball of fire," the resident said. "The doors in our house were flung open from the force of the blasts."

"Most of the residents have fled into the desert terrified by the air strikes."

Having cooperated (apparently) with the anti-al Qaeda posture of the US since its 2003 deal with the Bush administration, why is the US turning its back on that deal in favor of unknown "rebels" who apparently are Islamists?

Update: The West now attacks Tripoli. Clearly a declaration of war by the US Congress should be required to initiate regime change. (From Reuters):

TRIPOLI - At least six explosions resonated in the Libyan capital Tripoli on Sunday, possibly signaling renewed air strikes by Western coalition forces.

The explosions were followed by sustained bursts of anti-aircraft gunfire by Libyan forces.

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Friday, March 25, 2011

Invading Extremistan

With the U. S. engaging in increased military activities under a "peace" president, it appears apt to use a military metaphor to our Washington-directed economic/financial policy.

As with storage of nuclear fuel and Palestinian refugee camps, often there is nothing so permanent as that which is "temporary". So it seems with ZIRP, the famous zero interest rate policy that was introduced as an emergency measure late in 2008. In Talebian terms, the U. S., via the central authorities working through the Federal Reserve Board of New York as the implementer, has invaded monetary Extremistan and looks to be building an embassy there. The authorities mean to stay a while.

Just as the pace of price increases collapsed from double digits to low single digits rapidly following the reintroduction of high interest rates in late 1980 through 1982-3, with a resulting double dip and severe recession, so may price increases surge surprisingly rapidly as stimulative fiscal and monetary policies continue apace. A sudden and substantial rise in price inflation has happened many times before in America. I cannot think of one reason why it will not happen again, and I think it is happening now. (This is not the same as hyperinflation.)

I think that people who expect important price declines in housing and stocks are correct in real terms, but I think that's a dubious (but possible) proposition in nominal terms.

We simply may have entered a period where, even with an ounce of gold above $1400/ounce, a saver is taking more risk with a (say) 2-year certificate of deposit than with ownership of gold in a cost-efficient manner.

The occupation of financial Extremistan has been going on so long that the natives are beginning to accept ZIRP as normal. It is not normal at all. The old rules simply may not apply. The War on Savers began in 2001 and except for a brief period in 2006-8, continues.
Resistance is not, however, futile.

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Thursday, March 24, 2011

Libran Rebels Not Worth Fighting For

The Independent, from the UK, tells us all I think we need to know to decide that America doesn't really have a dog in the civil conflict in Libya. The headline of today's report pulls no punches. It is:

The resistance has foundered on its own indiscipline and farcical ineptitude

. . . Rather than press home their advantage and retake Ajdabiya, the rebel fighters – known as the Shabaab – were too busy having their pictures taken with the wreckage or looting anything left intact from the supply trucks. A desultory attack late in the day was easily repulsed by the regime's forces which then dug in around the city.

The bombardment by the US, France and Britain was meant to break the regime's forces and galvanise the rebels. Extraordinarily, it appears to have had the opposite effect, with the Shabaab retreating yet again in the next 48 hours.

There is little sign of leadership on the issue from the political hierarchy at the opposition's capital, Benghazi, where the provisional administration, with the prize of international recognition seemingly within reach, has been enmeshed in a bout of internal rivalry. . .

To date the Shabaab has wasted at least three times the ordnance than it has fired in anger by shooting into the air in celebration of often non-existent victories. It has blown up guns by using the wrong type of ammunition, crashed its few tanks into each other and shot down two of its own planes. . .

The "best" part of the article is the end, which is straight out of Catch-22:

The rebels' operations are further undermined by an absence of command and control. On Monday two men standing within a hundred yards of each other, "Captain" Jalal Idrisi and "Major" Adil Hassi, claimed to be in charge of the fighters who were meant to be attacking Ajdabiya. A brief advance soon turned into a chaotic retreat. Major Hassi then claimed that the misjudgement in going forward had been Captain Idris's idea. But why didn't they liaise? "We haven't got communications equipment" he responded. But the Captain is standing just over there, journalists pointed out. "I don't talk to him," said Major Hassi.

In addition, the pro-war camp needs to explain the following. In 2003, Libya came to terms with the US and agreed to dismantle its nuclear weapons program and cooperate against al-Qaeda. Perhaps it has done something egregious to violate the terms of that agreement. If not, and if the US simply turned against Libya after striking a deal to let bygones be bygones, what hostile nation will every again trust America after it has, only 8 years later, turned to regime change by force of arms against the regime it willingly dealt with?

Congress should invoke the 1973 War Powers Act and should explicitly either cut off funds for all offensive and clandestine activities in Libya, absent a showing of appropriateness from the White House.

As the Independent points out, the issue is not whether the Libyan regime is "good". But the North Korean regime tortures and executes its own people. Syria has just killed about 25 protesters in the past few days. Supporting the Karzai regime in Kabul is bad enough. What's so hot about the Libyan rebels that we prefer them to the existing government enough to go to war?

Since President Obama has set a goal of doubling exports, perhaps what he should do is hire the US military out as mercenaries, with the goal of deposing all "bad" regimes worldwide. Since there are so many of them, that could be a real money-maker. But the Libyan intervention is on our dime, which means it is done with newly printed money, which is a further blow to savers and investors in the US markets. It is, however, good for many campaign contributors such as those in the oil and military industries. It couldn't be that the new Chief of Staff, Daley, has thought of that, could it?

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Wednesday, March 23, 2011

This Cannot Be Good (Fuku-shima update)

Steam rising from 4 reactors at Fukushima plant

An NHK helicopter crew has confirmed what appears to be steam rising from No. 1, 2, 3 and 4 reactor buildings at the troubled Fukushima Daiichi nuclear power plant.

This is the first time that steam has been seen coming out of the No.1 reactor.

The helicopter crew was filming from a location more than 30 kilometers from the plant shortly before 7:00 AM on Thursday.

The Tokyo Electric Power Company says that black smoke seen rising from the No.3 reactor building on Wednesday was no longer visible as of 6:00 AM Thursday.

Thursday, March 24, 2011 09:31 +0900 (JST)

THE above is from the Japan Broadcasting Company's NHK World.

The health situation in the Fuku-shima region is far worse than the authorities have been letting on. As in the 2007-8 financial crisis in the U. S., the truth gradually is dribbling out. Nonetheless, people in California etc. will not start glowing in the dark. Japan, however, may be in a Chernobyl-type situation, at least for areas around Fuku-shima prefecture.

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Miner Leagues

In the unending search for relative investment value in this overpriced neighborhood we call today's markets, yours truly has, following some indecision, to sink some real money into certain gold mining stocks. Criteria I have used include standard criteria that would apply to any company, such as rising profits and free cash flow, and preferably dividends. Just having gold in the ground is not good enough for me to invest in a company.

I also like to see good, or better than good, relative strength of the stock compared to its peers. In other words, I like to see that Mr. Market has been on my side. I also need to be absolutely convinced that a reasonable base case provides for adequate total return in a defined time frame.

Why is it worth the trouble to risk capital and spend time in these matters, given how picked over the stock market is by people smarter and better informed than I, and who work with the aid of immense computing power, inside information and other advantages? (I am talking large cap investing here.)

The answer comes from having an economic philosophy that the market has not priced in.

The many insights of the Austrian school of economics, which I recognize as at base simple common sense, have not been accepted by the investment mainstream. Thus when I invest in gold (unhappily, given that gold is the anti-dollar and I am a loyal American), I feel that no matter what surges its price has, I can see that the miners are themselves buffeted by rapidly rising costs of mine development, so I know that there is reality behind the nominal price of gold. This would change if the authorities in Washington either lost power or pursued policies of decades ago (not to mention those of the post-Civil War era).

Much more speculative than large cap dividend paying stocks are the junior miners and yet more speculative are the explorers. My sense is that at some point, "the Bernank" will have a "von Havenstein moment (lite, I hope)" and this (prolonged) moment will be associated with huge moves in said speculative stocks, mirroring the NASDAQ of the late 1990s. I fervently hope that this does not come to pass, but since hope is not an investment strategy, I will disclose that I own some of these highly speculative securities as well. Not enough to get hurt if they revert to what may be a lower fair value, but enough to provide some juice should things explode upward.

Large caps meeting my criteria include ABX, GG, and FNNVF. The GDXJ and GLDX funds are good enough for me right now, as they respectively cover junior (producing) gold mining companies and exploration (non-producing) companies, with some silver exposure included.

Copyright (C) Long Lake LLC 2011

Tuesday, March 22, 2011

Stop the Nuclear Spin Cycle

The American media misses the tip of the nuclear power plant issue.
We don't get much of the following information:

Reuters reports:

"We continue to see radiation coming from the site ... and the question is where exactly is that coming from?" James Lyons, a senior official of the International Atomic Energy Agency (IAEA), told a news conference in Vienna on Tuesday. . .

Senior IAEA official Graham Andrew said that the overall situation remained "very serious" and that the U.N. atomic watchdog was concerned it had not received some information from Japan about the Fukushima nuclear plant.

"We have not received validated information for some time related to the containment integrity of unit 1. So we are concerned that we do not know its exact status," he said.

The IAEA also lacks data on the temperatures of the spent fuel pools of reactors 1, 3 and 4, he said . . ."

Meanwhile, has for some reason decided that radioactive cesium inside the body is safe, quoting an "expert":

Cesium, with a half life of 30 years, isn’t a cause of concern in the water, said Lam Ching-wan, a chemical pathologist at the University of Hong Kong’s medical school (what precisely is a chemical pathologist?).

“Cesium doesn’t cause many problems with cancer because it’s mainly concentrated in the muscles and not other organs,” he said. “Muscles aren’t dividing cells. Even if there’s a mutation, it cannot stimulate cells and grow and produce cancer.”

Yet here is the Argonne Nat'l Lab on cesium radioactivity, from 2005:

"While in the body, cesium (-137) poses a health hazard . . . the main health concern is the increased likelihood for inducing cancer."

This physician will go with Argonne.

While the US media is downplaying matters, as may well be the Japanese media, such is not the case everywhere. The UK's Telegraph reports:

"Radiation 1,600 times higher than normal levels was detected 12 miles from the power station, the limit of the evacuation area.

While radiation at that level is not considered high for a single burst, it could harm health if sustained."

Back to DoctoRx. Talk about British understatement! Yes it "could" harm health! Let's add a few more exlamation points. !!!

The Telegraph also reports:

"The pool at the Fukushima Daiichi nuclear plant heated up to around boiling point, and with water bubbling away there was a risk that more radioactive steam could spew out."

Apparently the utility, TEPCO, that operates the Fukushima plants, is classifying this incident as a 'Level 5', the same as Three Mile Island of 1978. A quick search for TMI will show that is ridiculous. Massively more radiation has been released in this incident than in TMI, just based on the quotes contained in this little blog.

Meanwhile, pro-nuclear sources are already on the offensive. I read yesterday about a proposed scheme to put small-scale nuclear reactors in cities.

These people don't get it. What they don't get is that almost everyone knows that the electricity production from U-235 is safe. However, at least in the US, there is no plan on where to put the toxic fuel once it has reached its useful life.

Here's an analogy. You don't go into an investment without an exit plan. A surgeon doesn't begin a non-emergency operation without a plan on closing the wound and recuperation of the patient. You don't bring a puppy into the house unless you have a plan on where the poop is going to go (you housebreak the pet, of course).

Where oh where is all the nuclear waste, currently and massively stored throughout the US in "temporary" receptacles, going to go?

Without an agreed-upon plan for waste disposal, I don't care how safe the operation of the plant is.

Copyright (C) Long Lake LLC 2011

And So the U. S. Comes to Lib(erate)-Ya, with Predictable Results

Foraging for firewood in Afghanistan 3 weeks ago, nine Afghan boys aged 9-15 were killed by Americans from the air. Allegedly they were mistaken for terrorists. Now Barack Obama., not satisfied with military intervention in three Muslim countries (at least), feels it is in the American national interest to intervene in a civil war in a Muslim country in Africa. To no one's surprise, allegations already appear that the U. S. has shot more civilians there. From today (Libya Live blog):

16.15 The US Joint Task Force Commander has just refused to comment on our reports that six Libyan civilians were shot by US rescuers. Admiral Locklear said that an investigation into the rescue mission had been launched and he would say nothing until it was complete. When pushed, he also refused to comment on whether any shots had been fired. He was fielding questions during a US press briefing.

15.59 Events are moving fast so let's clear up any confusion. This is what we know now. Two pilots crash landed in a field near Benghazi this morning. One was handed over to rebels and then given to US officials before being taken to the USS Kearsarge in the Mediterranean. During the rescue of the second pilot a US heliocpter shot and injured villagers. This pilot is believed to be "safe in American hands" at an unknown location.

It's time to break out 1960's folk songs. When will they ever learn?

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Sunday, March 20, 2011

Neocon (Uh-Oh Version)

It's one thing to run for president because you opposed the Iraq War and then turn neocon. It's another to be burned by the Arab League within 24 hours of offensive action in the first war you did not inherit from your predecessor. From (Libya Live blog):

"13.58 Rather worryingly the Arab League has criticised the air strikes against Libya despite being at the forefront of calls for a no-fly zone. Arab League secretary general Amr Mussa said:

QuoteWhat has happened in Libya differs from the goal of imposing a no-fly zone and what we want is the protection of civilians and not bombing other civilians...From the start we requested only that a no-fly zone be set up to protect Libyan civilians and avert any other developments or additional measures.

This appears to show that the Arab League believes report from Gaddafi that civilians have been killed during Coalition air strikes. It begs the question whether Britain, America and France will continue with their military plans without Arab support. A press conference has been scheduled in about two hours where we will be seeking further clarification."

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Barack Obama won the Democratic nomination over Hillary Clinton because he (correctly) opposed military intervention in Iraq and she favored it. Now, he is reported to have swung to her support of war in Libya against the advice of the Republican Secretary of Defense, Bob Gates. Here is early reporting from the (its real-timeg blog) on the results so far:

13.16 Russia is calling for an end to 'indiscrimate use of force' by foreign states in Libya claiming that they have led to civilian casualties. Foreign Ministry's spokesman Alexander Lukashevich said in a statement:

QuoteIn that respect we call on countries involved to stop the non-selective use of force. . .

113.07 It is of course an irony that the UAE have come to the side of the rebels in Libya while they have also sent forces into Bahrain to help crush the uprising there.

13.00 Libya's government has begun distributing arms to more than one million people and will complete the operation within hours, the state news agency reports today. Jana news agency quoted sources in Libya's defence ministry as saying they "expected the operation to end in the next hours to arm more than a million men and women."

12.56 German Foreign Minister Guido Westerwelle dismissed allegations that Berlin is internationally isolated after refusing to join its NATO allies in staging military strikes on Libya. He said:

QuoteThe impression that Germany is isolated in Europe or the international community is completely wrong. Many other countries in the European Union not only understand our position, not only respect it, but also share it.

12.54 A Libyan health official said the number of people killed as a result of Western air strikes overnight had risen to 64 from 48, a figure given by the government.

"People died from their wounds so the death toll has risen," said the official, who did not want to be identified. The figure could not be independently verified.

The much-reviled "W" got approval from a Democrat-controlled Senate for intervention in Afghanistan and again for war with Iraq. Subsequently, when sabers were being rattled against Iran in 2007, MSNBC reported:

Democrat Barack Obama introduced a Senate resolution late Thursday that says President Bush does not have authority to use military force against Iran, the latest move in a debate with presidential rival Hillary Rodham Clinton about how to respond to that country's nuclear ambitions. . .

'We wish to emphasize that no congressional authority exists for unilateral military action against Iran,' it says."

Here is the beginning text of a Nixon-era law, which was passed despite a Nixon veto. What part of Section 2(c)(3) applies in the current case of war with Libya?

The War Powers Act of 1973

Public Law 93-148

93rd Congress, H. J. Res. 542

November 7, 1973

Joint Resolution

Concerning the war powers of Congress and the President.

Resolved by the Senate and the House of Representatives of the United States of America in Congress assembled,


This joint resolution may be cited as the "War Powers Resolution".


SEC. 2. (a)
It is the purpose of this joint resolution to fulfill the intent of the framers of the Constitution of the United States and insure that the collective judgement of both the Congress and the President will apply to the introduction of United States Armed Forces into hostilities, or into situations where imminent involvement in hostilities is clearly indicate by the circumstances, and to the continued use of such forces in hostilities or in such situations.
SEC. 2. (b)
Under article I, section 8, of the Constitution, it is specifically provided that the Congress shall have the power to make all laws necessary and proper for carrying into execution, not only its own powers but also all other powers vested by the Constitution in the Government of the United States, or in any department or officer thereof.
SEC. 2. (c)
The constitutional powers of the President as Commander-in-Chief to introduce United States Armed Forces into hostilities, or into situations where imminent involvement in hostilities is clearly indicated by the circumstances, are exercised only pursuant to (1) a declaration of war, (2) specific statutory authorization, or (3) a national emergency created by attack upon the United States, its territories or possessions, or its armed forces.

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Saturday, March 19, 2011

To Lib(ya) and Let Lib(ya): Not

Invoking the name of France's state-owned oil company, Carla Bruni's husband has stated that "Our determination is total" and has begun an unprovoked attack against Libya.

All about oil?


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Thursday, March 17, 2011


The United States is preparing hostile military action against a weak country that neither attacked, threatened to attack, or harbored terrorists who had recently attacked the U. S.
In addition, the constitutional lawyer who is President is so far giving no indication that he thinks Congress needs to approve of this oncoming act of war.

One wonders if the Nobel Peace Prize-givers regret their choice.

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Wednesday, March 16, 2011

Helicopter Drops

Almost a decade after Ben Bernanke gave his speech that pointed out that a determined central bank could almost literally drop money from helicopters in case of threatened deflation, we are seeing the horrifying spectacle of real helicopters dropping water onto pools of water (or what once was watery) designed to cool down spent nuclear rods. This in a technologically sophisticated nation. This in a nuclear complex located directly by the sea.

This whole business of running out of power and running out of water is as disconcerting as finding out that almost all financials institutions were, more or less, bust in September-October 2008, just a couple of months after being reassured by Gentle Ben, Tall Hank et al that what was happening in subprime was staying in subprime. I am a cardiologist. Many of my patients wore tiny, internal lithium-powered pacemakers just under their skin. These devices lasted year after year without a recharge. How can it be that an entire nuclear complex only had back-up battery power that would last only for a fraction of a day?
Who'd of thunk it?

If these rods in the "pond" explode, or if some other catastrophe occurs in this nuclear complex, various stock markets may implode in their own uncontrollable chain reaction. Whether that would be unjustified in the larger scheme would not matter if panic sets in. The "Keynesian" money-printers have gone beyond anything Keynes specifically advocated. Thus we have a financial system that is perhaps even more prone to meltdowns than the troubled nuclear facility in Japan. Nassim Taleb was a lonely voice the past few years calling for the financial system to be "robustified". Instead we got "extend and pretend".

Helicoptered money has not worked to reliquefy the housing market. Let us hope that the real helicopters in Japan, or some other emergency expedients, prevent something that invites direct comparisons to Chernobyl.

In today's and tomorrow's markets, I reiterate my comment from earlier in the week: Safety first.

Copyright (C) Long Lake LLC 2011


In case you have not noticed, the evolving horrors in Japan have merged with the disorder in the Mideast and cycles in the U.S. (probable peaking of economic momentum) to cause a decline in numerous asset prices lately. In what strikes me as not a coincidence, the 10 and 30 year Treasury bonds have peaked in yield right around their long-term trend lines.

The Treasury bond bull lives on, in a sort of repetition of the 1940s experience. In that decade, during peace, then war, then peace, then war, interest rates stayed insanely low relative to the decade’s average price increases of 7%. Adjusted for inflation, the stock market did not do very well, but nominally, it was one of the best games in town. And we live in a nominal world, something one can forget if one reads too many exegeses written by economists. Of course, the market began and ended the 1940-49 decade with far lower fundamental valuations than it has today (meaning it was undervalued then), and thus had a margin of safety that I believe is lacking today.

So far as I can see, the major trends that have been in force for years remain in force. An aging and manipulated Treasury bond bull market is coexisting with and, in a sense that strikes me as a crucial sense, is driving the gold (and silver) bull market. In that context, the price of second-hand stocks (i.e. “the market”) is secondary in importance to the authorities keeping the government funded and, except for precious metals stocks, is of at most secondary importance to true “bugs” on precious metals.

Based both on average price-earnings ratios for the past 10 years and on replacement costs for the assets of the S&P 500, both as judged by Andrew Smithers, the stock averages are as of this writing near their 1929-level of overvaluation and are similar to their 1965 and 2007 overvalued states. By this analysis, a 50% off sale of the stock market would leave it only somewhat undervalued. Unfortunately, the factors that take markets from highly valued (i.e. overvalued) to undervalued essentially always involve fundamental deterioration that destroys actual value as well as it simultaneously destroys confidence and optimism. It also destroys liquidity. Thus at true market bottoms, as in 1932-3, 1974, and 1982, most people with cash are too scared to get in near the bottom.

So far as stocks go, space in this blog does not permit a full explanation, but it is important to emphasize that if one wants income, one should not think first of common stocks. Dividends are both not guaranteed and payment of a dividend results in the equivalent drop in the stock’s price. For example, several drug stocks are “high” dividend payers. Yet the stocks sell at high multiples of book value and price-sales ratios. They were hot growth stocks in prior decades. Thus they really are simply busted growth stocks but without physical resources that can hold their real value as central banks destroy the value of savings by creating unlimited new money at unfairly low yields.

In contrast, mature companies that own natural resources and that pay out significant dividends while yet retaining much of their cash flow may be especially attractive in the current environment of muddled finances, central bank money-printing, and a global “growth” agenda. Integrated oil stocks and some natural gas stocks fill that bill.

Unlike drug stocks, no one thinks of the major oils as fast growing companies, so their prices never get bid up far too high due to the delusion that they can save the world the way a drug stock can get wildly overpriced. The dirty not-so-little secret of the connected, wireless age is that it is an energy hogging world. With the increasingly uncertain future of nuclear, there is no technology to replace hydrocarbons to allow the world to “grow”. High-yielding energy stocks and precious metals stocks are the only major asset classes of stocks that appeal to me in the here and now. Lower stock prices, such as for owners and operators of base metals, and for top-tier tech and other companies, would change that assessment. No matter what happens in Japan in the days and weeks ahead, Chindia and Brazil want to achieve Western standards of living. They continue to be willing to save to get there to a degree that the West except for Germany has forgotten how to do. The marginal value of a gallon of gas is clearly greater to an Indian getting his first car or motorcycle that lets him get to a good job a distance from home than it is to an American who does a good deal of pleasure driving.

For some time, I have been feeling as I did in 2007, on the one hand that the 3rd year of a presidential term was bound to be a good one in the stock market–and so it was in 2007 from start to finish; but I exited financial stocks in the winter in 2007 and exited virtually all stocks in the late summer. That the averages hit new highs after I sold out was surprisingly not bothersome to me. I was confident that a recession had arrived and that the risk-reward for stocks was poor.

This was without forecasting the disaster of 2008 or the “Keynesian” lunacy that subsequently”solved” the crisis. Just as the surprises with Bear Stearns funds in the spring of 2007 began to explain the underperformance of financial stocks over the prior year, the increasing comparisons of Barack Obama with Jimmy Carter suggest to me that Mr. Obama’s inexperience and his laid-back manner (i.e. lack of leadership skills) can allow negativity to surge as it did during Mr. Carter’s tenure as people sense drift at the top during difficult times.

I think the American economic system and related financial markets have a malaise that in some ways is similar to that of the extended Johnson-Nixon-Carter era and that in some ways is quite different. Thus, both equal (in some ways) and opposite (in other ways), in fine Newtonian thermodynamic fashion. With 3-month T-bills collapsing to new lows of 7-8 basis points, the markets are again going “Japanese” (pre-earthquake sense), and thus there are no imminent signs of hyperinflation from the markets.

As I said from the time I began blogging in late 2008, “stimulus” was not going to stimulate. The Austrian economists got it right. The money-printers got it wrong. Other than technical advances in some gadgets, what has really been accomplished in the economic “expansion” of the past almost two years? Extend and pretend, that’s mostly the extent of it.

Compare the current situation to the manifest improvement in real economic conditions and in psychology by mid-1984, with disinflation the order of the day and reversal of the sense that the Soviets were unstoppable. Or to 1993, when employment surged massively just a bit too late to help Bush 41 and when it was apparent that the system was putting numerous S&L malfeasors in jail and was rapidly liquidating the associated malinvestments. This time it’s different. It’s the first American credit collapse since the Great Depression, and it’s playing out with just as hollow a recovery as occurred in the FDR era. It’s simply not easy to get out of a credit collapse, and it’s typical for stock prices to get ahead of the economy and then, unpredictably, again reflect reality and sink back as the economy does its difficult thing of adjusting to years of unsound allocations of capital.

As I write this (early Tuesday morning New York time), gold and oil are down in price, futures on American stocks are plunging, and Treasuries are continuing their surge up in price (down in yield). The non-barking dog is that the U.S. dollar is unchanged against the basket of currencies comprising the widely-followed dollar index, DXY.

In the Reagan-thru-Clinton period, the buck would be surging in the aftermath of the Mideast turmoil and then the disaster in Japan. This non-barking dog is in my mind the greatest tragedy of all, and the blame has to go primarily to the political leadership in Washington and to the Fed, along with their enablers in Big Finance and the lapdog media.

What maddens me the most about today’s financial system and our markets is that since the world’s fiat money is a debt instrument (in contrast to a gold standard where money has its own value and also in contrast to true helicopter drops of paper currency), the process of inflating the base money supply involves selling more debt. The extra money created goes, nowadays, in large part to purchasing the debt the issuance of which created the money. If that seems circular to you, then you now understand the essence of Bernanke-ism. The implications of this mean, in part, that the pricing of bonds can increasingly become divorced from positive real returns, and the market can stay irrational longer than you can believe; again, think 1940s. Add all the opaque derivatives and unknown status of bank balance sheets, and one cannot really know what’s going on in the financial markets.

As with nuclear power plant design and seawall height in tsunami-prone zones, so it should be with capital. Safety first, especially so when valuations are stretched. Even more so when the government has abandoned sound economic principles but brooks no financial diversity, maintaining its monopoly on money within a largely unfree command and control structure guiding several of the critical sectors of the economy.

Buyer beware; seller beware; owner beware.

Risk off, in other words, till it’s risk on again. But eventually the public may just “fuggedaboutit” and let the insiders trade with each other. If and when that happens for real, you will see asset prices get cheap in a hurry, because true insiders buy low. Personally, given the reflex of the Bank of Japan to create massive amounts of additional money in the face of a deflationary disaster, I can sleep at night owning gold, because while you can’t eat gold, neither can you eat yen, and central banks can’t print metal out of thin air; nor can they provide adequate levels of electricity without uranium or hydrocarbons.

A back to basics mentality may be coming in financial markets, and money and energy are, along with food, basics of any semi-modern economy. If investors keep their focus on what’s vital rather than what’s peripheral, I think they will be well prepared for the times ahead, whether they be good or bad.

(Note: This was written early AM March 15 and posted later March 15 on Posted here March 16 . . .)

Copyright (C) Long Lake LLC 2011

Monday, March 14, 2011

Indian Poker

In college, probably our crowd’s favorite two indoor games were Risk (the game of world domination, in retrospect a funny fave for a group of aggressively anti-war counter-cultural types) and Indian Poker. We all know about risk on and risk off in the financial markets, but Indian Poker has its place.

For those unfamiliar with the term, Indian Poker is played by placing a single playing card on one’s forehead facing outward, visible to the other player or players.

Betting then ensues, with high card winning. The suit is irrelevant.

The game is also known in polite company as blind man’s bluff. In college, among the more printable names by which we knew it were Bullsh-t and One-Card Schm-ck. Gambling is done with faux or real money.

Here’s how one game might evolve, with follow-up reference to financial markets.

Let’s say for simplicity that you are in a two-person game, which was our favorite way to play. Mano a mano or, more properly, forehead a forehead.

Let’s say you pick a 2. With aces high, you’re in trouble. Your opponent knows he can’t lose. 48 times out of 51, he’s got you beat;

3/51 times he will also have a 2 and the round will be a draw. It’s in his interest to make you think you have an ace rather than a pitiful deuce. He thus may play possum to get you to bid him up to a high level. Then he closes the trap.

When you see your card, you realize he’s been slinging the sh-t and that you were the schm-ck. Thus our terms for the game.

As in Indian Poker, so in financial markets. The insiders don’t necessarily hold all the cards, but they see them more comprehensively and earlier than you.

One of the examples of this came in the second half of the 1990s. The insiders knew that most of the tech stocks were overpriced, and the fact that the media and financial community induced a mania by pushing prices illogically higher was just like your opponent letting you push the stakes higher and higher when in fact your deuce had no chance of winning. The housing scam of the aughties was similar. In each case, large amounts of money were made by the connected class on the way up and also on the way down.

Nowadays, I think that there is also a scam going on. The scam is called fighting deflation. The authorities are playing the game of Bullsh-t with the public. They are trying to convince them of the opposite of what is really happening, on plan and on schedule, which is worsening inflation.

MIT’s Billion Prices Project is showing a 3% year-on-year rate of price increases from its survey of online retailers. Since this survey covers neither houses (stable to downward pricing) nor oil products nor food (soaring pricing), let’s say that the true CPI is in fact 3%. Thus pricing short-term interest rates near zero is wildly inappropriate.

Eddy Elfenbein of has calculated that a short-term interest rate Fed strategy that produces stable gold prices is one in which the 3-month T-bill rate is 2 points above CPI. For every point above or below that metric, the price of gold moves down or up 8% over the next year. Thus if CPI and interest rates were both 3%, the correlation he has discovered would project that gold prices would rise at a 16% annual rate. Right now the Fed is behind the Elfenbein curve by about 5 points. This would project a 40% price increase for gold this year should conditions stay as is. That would translate to about a $2000 gold price within a year. (There is of course no guarantee that this a posteriori relationship will continue to hold.)

We are seeing a form of a rerun of the inflationary booms or boomlets of the late 1960s and 1970s. The authorities are blasé. I am not.

What happens in the Mideast is of little importance to the general price level. If oil is more plentiful, then pricing power will move to other sectors, but Austrian economic theory states that the net effect is the same. The central bank is creating a great deal of base money at vastly inflated price (overly low yield, in other words). The Federal government is using its command and control structure to force-feed the economy to grow. Of course, much of this Federally-induced spending is malinvestment and is wasted from the standpoint of providing the capital needed for legitimate future growth. Thus a true, durable boom appears unlikely.

One way to be the winner in the game of One-Card Schm-ck that Dr. Bernanke and the Feds are playing with the public is to watch what they do, not what they say. The Treasury is selling overpriced securities to its captive central bank, with the Primary Dealers acting as middlemen to keep the form of the circular debt monetization proper.

It is true that as in 2008, the system can crash and there can be a brief period of true deflation. I see that as a low probability event for the months ahead. To base one’s investing on the possibility or even probability of another 2008 is indeed a rational strategy, but one that requires the patience to lose ground steadily to the money-printing in the hope of jumping in during a panic.

In this particular case, you can avoid being the schm-ck by seeing that the Feds are holding deuces. You probably don’t want to buy their patter or their inventory. Eventually, there will come a time when they will be forced to truly “fight inflation” and when the gold bugs will be pushing overpriced merchandise. I can’t wait for that future game of Indian Poker, but I’m not holding my breath for it to begin any time soon.