History moves in cycles, the past repeats itself, Hitler made the same mistakes as Napoleon because he was caught in the same historical cycle. Predicting the future is only possible if you know which cycle the big wheel is spinning through. Most historians who have an opinion state that China today is like Germany of the late 19th century and America is like Britain from that same era. A rising power and a declining one.
Wrong. China is like the Persian Empire 2000 years ago and America is like ancient Rome. The great Eastern power and the global superpower. The Romans fought the Persian Empire under its different names for 700 years and never conquered it. The previous model of a single world empire includes an unconquered smaller second empire that coexists uncomfortably alongside the big one. One world government is impossible. It will instead be two world government.
The parallel to Cold War II is the seven centuries of Roman-Persian Wars. And this is my forecast for the length of Cold War II: seven hundred years, the same as the earlier cycle. But wheels turn within wheels. And Cold War II will also resemble Cold War I. And the professors who say China resembles 19th century Germany aren't all wrong either.
Both Rome and Persia were ultimately destroyed by Islamic armies of the caliphate. America and China face a common foe in global jihad. The bad guys have a very strong grasp of history. They see themselves as the second Great Caliphate. Between the two caliphates we have total victories over Rome, Persia and the Soviet Union, three superpowers defeated. This is why they are so cocky.
Friday, December 31, 2010
Thursday, December 30, 2010
Cold War II Looks Better
The announcement that six-party talks with North Korea are starting up again puts recent Cold War II events in a better light. All of a sudden it seems pertinent that America told the world that China has deployed the DF-21 aircraft carrier killing missile. Shouldn't China be rattling China's saber, not America? Now it looks kind of phony yesterday when the US defense establishment solemnly told the globe that they were really really afraid of the DF-21. Now I'm recalling how China's Silkworm missile only damaged but didn't sink that British aircraft carrier back in the Falkland War.
The six-party talks make everything look better. Because it is so willing to play hardball, Team Obama kicks ass at diplomacy. Team Obama is going into the six-party talks with Russia fired up and singing Yankee Doodle Dandy because of the new START treaty. Japan has grown a set of cojones; witness the troops and bases it is establishing on contested islands. So Japan is going into the talks fired up. South Korea has also grown a set recently. And China goes into the talks thumping its chest after America praises its new missile.
So these talks should actually bear fruit, unlike the previous six-party talks, which only made the problem worse.
And the stock market is beginning to realize that it has been valuing South Korean stocks incorrectly as KOSPI multiples expand toward the level of other emerging market bourses. In time North Korea is going to take the same path as Vietnam and China, transforming communism into capitalism. At that point North Korea is going to become a tremendous asset to South Korea rather than a deadly foe. It only seems impossible because we are wrapped up in day to day drama. Consider: Vietnam is currently America's de facto ally, and truthfully the most important one in Asia, the only one that China truly fears. It's as if the Vietnam War never happened. Someday we'll say the same thing about the Korean War and North Korea.
Cold War II will take some bad turns in the future and it will hurt stocks when that happens. But for now it doesn't look too bad.
The six-party talks make everything look better. Because it is so willing to play hardball, Team Obama kicks ass at diplomacy. Team Obama is going into the six-party talks with Russia fired up and singing Yankee Doodle Dandy because of the new START treaty. Japan has grown a set of cojones; witness the troops and bases it is establishing on contested islands. So Japan is going into the talks fired up. South Korea has also grown a set recently. And China goes into the talks thumping its chest after America praises its new missile.
So these talks should actually bear fruit, unlike the previous six-party talks, which only made the problem worse.
And the stock market is beginning to realize that it has been valuing South Korean stocks incorrectly as KOSPI multiples expand toward the level of other emerging market bourses. In time North Korea is going to take the same path as Vietnam and China, transforming communism into capitalism. At that point North Korea is going to become a tremendous asset to South Korea rather than a deadly foe. It only seems impossible because we are wrapped up in day to day drama. Consider: Vietnam is currently America's de facto ally, and truthfully the most important one in Asia, the only one that China truly fears. It's as if the Vietnam War never happened. Someday we'll say the same thing about the Korean War and North Korea.
Cold War II will take some bad turns in the future and it will hurt stocks when that happens. But for now it doesn't look too bad.
Wednesday, December 29, 2010
Long War Good. Cold War II, Not So Much
Geopolitics: In the Pak tribal belt, CIA drone strikes are moving north, as the bad guys move north. In Afghanistan, Green Beret night raids targeting Taliban leaders are moving north of Helmand province as the bad guys also move north. The Great Retreat is underway. It is moving at a glacier's pace. The American public is unhappy. Even though the US is winning, they want it to happen much faster. Personally, I want fried chicken to make me skinnier. Reality dictates that the Long War moves at a slow pace and fried chicken is fattening.
Cold War II isn't going as well as the Long War. China has deployed the Dong Feng-21D anti-aircraft carrier missile. The DF-21D can sink US aircraft carriers that are not heavily protected by Aegis-equipped cruisers and destroyers, most of which are parked in the Persian Gulf defending against Iranian missiles. The US has 24 Aegis warships and needs about 100. The US public will not tolerate the construction of new warships, not unless an aircraft carrier is actually sunk by a Chinese missile. Remember, a Chinese Silkworm missile nearly sunk a British aircraft carrier in the Falkland War. China has been working on anti-aircraft carrier missiles for a long time.
Coinciding with the new Chinese missiles is an announcement that China is curbing the exports of rare earth minerals, a move that especially hurts Japan. China controls 97% of all rare earth production and these minerals are vital for the global electronics industry. Ferro Corporation (FOE) is also dependent on Chinese rare earths. It has long term contracts for these minerals. If these contracts are broken it will hurt FOE. If they are not broken, then FOE will have a big competitive advantage.
Cold War II isn't going as well as the Long War. China has deployed the Dong Feng-21D anti-aircraft carrier missile. The DF-21D can sink US aircraft carriers that are not heavily protected by Aegis-equipped cruisers and destroyers, most of which are parked in the Persian Gulf defending against Iranian missiles. The US has 24 Aegis warships and needs about 100. The US public will not tolerate the construction of new warships, not unless an aircraft carrier is actually sunk by a Chinese missile. Remember, a Chinese Silkworm missile nearly sunk a British aircraft carrier in the Falkland War. China has been working on anti-aircraft carrier missiles for a long time.
Coinciding with the new Chinese missiles is an announcement that China is curbing the exports of rare earth minerals, a move that especially hurts Japan. China controls 97% of all rare earth production and these minerals are vital for the global electronics industry. Ferro Corporation (FOE) is also dependent on Chinese rare earths. It has long term contracts for these minerals. If these contracts are broken it will hurt FOE. If they are not broken, then FOE will have a big competitive advantage.
Monday, December 27, 2010
Media Miscalculation
Geopolitics: Newspapers are offering maps of Afghanistan published by the UN which shows Taliban attacks on foreign aid workers in different parts of the country over time. The attacks are up everywhere, but especially in the north as Taliban fighters are driven out of Kandahar. The media is saying these maps are proof that NATO is losing in Afghanistan.
To understand why this is not true we must review the history of the Afghan war. For the last eight years NATO has had a policy in Afghanistan called "mowing the lawn." In theory this policy applied just enough force to the Taliban to prevent their numbers from expanding, buying time for America to win in Iraq, at which point an American surge would be initiated in Afghanistan and a true counter-insurgency war would begin and the bad guys would start losing.
The mowing theory did not coincide with practice and during the past eight years the Taliban have gotten stronger because the mowing operations were merely a light trim, not a good solid weed waking. Much of the fault lies with the British Army, but let's set that aside for now. During the mowing the lawn part of the Afghan war foreign aid workers were basically unmolested. Why should they be molested? Much of the aid was flowing straight to the Taliban.
Now America is taking the wood to the bad guys in Kandahar, the Vatican of the Taliban, their holiest and most sacred ground. The jihadist fighters are retreating north and setting up shop in their new digs. Setting up shop means killing local civilians and foreign aid workers. Yesterday I used the term "jihadist retreat/battle lines." The Great Retreat is a strategic retreat: a carefully planned and executed fighting retreat where innocents, good guys, and bad guys are killed.
The low casualties of the mowing the lawn era were an illusion. Now let's really take a step back. Democracies always start out poorly when they fight dictatorships. Democracies always take a long time to ramp up and mount effective offensives. When these offensives finally get under way they always generate high casualties and the good guys always win eventually.
Specific Stocks: I grade the accuracy of my geopolitical forecasts by movement within financial markets, not words from the New York Times editorial page. Yesterday I suggested that ITT has a leg up in creating a Long War surveillance web. Today NASA awarded ITT a huge contract to tie together all its orbiting assets (like the int'l space station and satellites) into a single web. The work ITT will be doing for NASA will help it with similar work with the Pentagon. So I just got a gold star in my forecasting.
Ferro Corporation (FOE) is down about 2% today. I still believe in this stock but would like to point out how I used charts to build my position. FOE is a super volatile high beta stock that screams up and down. I buy it when it dips to the 50-day moving average and finds support. Most of my industrials and materials are so-called growth at a discount stocks (Harsco, Koppers Holding, DuPont, ITT). I take bigger positions in these lower beta stocks than in ones like FOE.
To understand why this is not true we must review the history of the Afghan war. For the last eight years NATO has had a policy in Afghanistan called "mowing the lawn." In theory this policy applied just enough force to the Taliban to prevent their numbers from expanding, buying time for America to win in Iraq, at which point an American surge would be initiated in Afghanistan and a true counter-insurgency war would begin and the bad guys would start losing.
The mowing theory did not coincide with practice and during the past eight years the Taliban have gotten stronger because the mowing operations were merely a light trim, not a good solid weed waking. Much of the fault lies with the British Army, but let's set that aside for now. During the mowing the lawn part of the Afghan war foreign aid workers were basically unmolested. Why should they be molested? Much of the aid was flowing straight to the Taliban.
Now America is taking the wood to the bad guys in Kandahar, the Vatican of the Taliban, their holiest and most sacred ground. The jihadist fighters are retreating north and setting up shop in their new digs. Setting up shop means killing local civilians and foreign aid workers. Yesterday I used the term "jihadist retreat/battle lines." The Great Retreat is a strategic retreat: a carefully planned and executed fighting retreat where innocents, good guys, and bad guys are killed.
The low casualties of the mowing the lawn era were an illusion. Now let's really take a step back. Democracies always start out poorly when they fight dictatorships. Democracies always take a long time to ramp up and mount effective offensives. When these offensives finally get under way they always generate high casualties and the good guys always win eventually.
Specific Stocks: I grade the accuracy of my geopolitical forecasts by movement within financial markets, not words from the New York Times editorial page. Yesterday I suggested that ITT has a leg up in creating a Long War surveillance web. Today NASA awarded ITT a huge contract to tie together all its orbiting assets (like the int'l space station and satellites) into a single web. The work ITT will be doing for NASA will help it with similar work with the Pentagon. So I just got a gold star in my forecasting.
Ferro Corporation (FOE) is down about 2% today. I still believe in this stock but would like to point out how I used charts to build my position. FOE is a super volatile high beta stock that screams up and down. I buy it when it dips to the 50-day moving average and finds support. Most of my industrials and materials are so-called growth at a discount stocks (Harsco, Koppers Holding, DuPont, ITT). I take bigger positions in these lower beta stocks than in ones like FOE.
Sunday, December 26, 2010
End Of Year Super Blog
The Long War is entering a new decade and its time for long range forecasting. Imagine a map of central Asia. Draw a line from Kandahar in southern Afghanistan up into northern Afghanistan. This is an active retreat line for the Taliban that is seeing heavy traffic as I write. Now extend the line up into Uzbekistan. This probably is also an active retreat line and is seeing very light traffic. Obviously the Great Jihadist Strategic Retreat or Great Retreat has begun.
Fast forward several years and I forecast the jihadist retreat line snakes through half of Uzbekistan and all of Kazakhstan to terminate in the Caspian Sea. By this time Afghanistan will be essentially pacified.
On the other side of the Caspian Sea another battle line is drawn from Russia's Dagestan province and into the Caucasus region. Like a candle burning at both ends there is a drone air campaign and a small ground war at either end of this line. The southernmost part of Uzbekistan is the American end and Chechnya is Russia's end. So there are two mirror image wars with drones ranging hundreds of miles out from the ground fighting. Probably American and Russian drones will overlap to some degree or maybe the sea in the middle will mark a boundary for either country's drones.
The picture I am painting is similar to what we see today except now there is only one small land war (in Afghanistan) and one drone campaign (in tribal Pakistan). In the future there will be two. Let's call these land and drone campaigns LAD campaigns or LADs. While one LAD is run by the Russian government and the other by the US government, there will be an integrated global surveillance web run by the US that Russia has access to. As they win battles and push bad guys into further retreat the two LADs move closer together along the jihadist battle line that connects them just as Russian and American armies moved toward a central point (Berlin) in WW II. Russo-American LAD co-operation will be better than WW II.
While all this is happening there will be Long War activity on the Arabian peninsula and North Africa. Combat there will produce higher casualties and actually be much hotter than in central Asia. The African theater will, however, generate much fewer headlines than the other one, a situation true today. The African theater will be structured like central Asia with two LADs moving together along a jihadist battle/retreat axis. At its longest the African line reaches from Yemen to the fringes of the Sahara Desert. There will be a separate integrated surveillance web over Africa and the Arabian peninsula. It will link information into a single web from every satellite and drone in the theater and any good guy can instantly gain access.
Assuming my forecast is accurate, there are stock market implications in all this. Example: ITT just bought a small surveillance company with the express purpose of getting a leg up in the architecture of the Long War web.
One final point, I've written blogs suggesting that the Long War could last hundreds of years. The above scenario would call for a shorter timeframe, maybe 50-100 years.
Fast forward several years and I forecast the jihadist retreat line snakes through half of Uzbekistan and all of Kazakhstan to terminate in the Caspian Sea. By this time Afghanistan will be essentially pacified.
On the other side of the Caspian Sea another battle line is drawn from Russia's Dagestan province and into the Caucasus region. Like a candle burning at both ends there is a drone air campaign and a small ground war at either end of this line. The southernmost part of Uzbekistan is the American end and Chechnya is Russia's end. So there are two mirror image wars with drones ranging hundreds of miles out from the ground fighting. Probably American and Russian drones will overlap to some degree or maybe the sea in the middle will mark a boundary for either country's drones.
The picture I am painting is similar to what we see today except now there is only one small land war (in Afghanistan) and one drone campaign (in tribal Pakistan). In the future there will be two. Let's call these land and drone campaigns LAD campaigns or LADs. While one LAD is run by the Russian government and the other by the US government, there will be an integrated global surveillance web run by the US that Russia has access to. As they win battles and push bad guys into further retreat the two LADs move closer together along the jihadist battle line that connects them just as Russian and American armies moved toward a central point (Berlin) in WW II. Russo-American LAD co-operation will be better than WW II.
While all this is happening there will be Long War activity on the Arabian peninsula and North Africa. Combat there will produce higher casualties and actually be much hotter than in central Asia. The African theater will, however, generate much fewer headlines than the other one, a situation true today. The African theater will be structured like central Asia with two LADs moving together along a jihadist battle/retreat axis. At its longest the African line reaches from Yemen to the fringes of the Sahara Desert. There will be a separate integrated surveillance web over Africa and the Arabian peninsula. It will link information into a single web from every satellite and drone in the theater and any good guy can instantly gain access.
Assuming my forecast is accurate, there are stock market implications in all this. Example: ITT just bought a small surveillance company with the express purpose of getting a leg up in the architecture of the Long War web.
One final point, I've written blogs suggesting that the Long War could last hundreds of years. The above scenario would call for a shorter timeframe, maybe 50-100 years.
Thursday, December 23, 2010
Geopolitics
On the ground in Afghanistan the situation is better than the Pentagon lets on. They really learned their lesson in Vietnam and now under count enemy casualties and tell the American public things are going along somewhere between poorly and okay when in fact the progress is terrific. No, the Pentagon says, Progress is fragile, but there is progress, just barely. American military brass don't crow about victories or do high fives. That's smart, good management of public opinion.
Here are the facts on the ground. The Battle of Marja is over. The three step process is complete. Clear. Hold. Build. The Battle of Kandahar is half over and is predictably following the same victorious path carved by the earlier battle. Kandahar is larger than Marja and will take longer. In WW II there were many battles larger than Stalingrad and some of them took place after Stalingrad. Despite it not being the largest, Stalingrad was the turning point of WW II. And so it is with Marja. The Marines have a formula for winning.
And of course that formula, known as COIN, also has a successful track record in Iraq. The IMF forecast Iraq's GDP will grow by 11% in 2011. This might be the highest GDP growth of any country on Earth. Small wonder, the US Army left Iraq with a free market economy similar to Singapore's. Too bad the US Army doesn't design the US economy. In any case, over the next few years Iraq is going to take oil production from 2 million barells a day to 13 million, thereby saving the planet from a double-dip recession.
There are stock market implications in all this. Consider Ferro Corp (FOE). It just bought a tile factory in Egypt to go after the building booms in North Africa and the Mideast. High end homes in Somalia have loads of ceramic tile in them. And lots of luxury homes are getting built outside Mogadishu and in Southern Iraq.
Here are the facts on the ground. The Battle of Marja is over. The three step process is complete. Clear. Hold. Build. The Battle of Kandahar is half over and is predictably following the same victorious path carved by the earlier battle. Kandahar is larger than Marja and will take longer. In WW II there were many battles larger than Stalingrad and some of them took place after Stalingrad. Despite it not being the largest, Stalingrad was the turning point of WW II. And so it is with Marja. The Marines have a formula for winning.
And of course that formula, known as COIN, also has a successful track record in Iraq. The IMF forecast Iraq's GDP will grow by 11% in 2011. This might be the highest GDP growth of any country on Earth. Small wonder, the US Army left Iraq with a free market economy similar to Singapore's. Too bad the US Army doesn't design the US economy. In any case, over the next few years Iraq is going to take oil production from 2 million barells a day to 13 million, thereby saving the planet from a double-dip recession.
There are stock market implications in all this. Consider Ferro Corp (FOE). It just bought a tile factory in Egypt to go after the building booms in North Africa and the Mideast. High end homes in Somalia have loads of ceramic tile in them. And lots of luxury homes are getting built outside Mogadishu and in Southern Iraq.
Wednesday, December 22, 2010
Long War to Last 450 Years
Geopolitics: In reference to the Afghan war Gen. Petraeus often tells reporters that it is "The longest campaign in the Long War." The last two words of the quote are always printed in newspapers in small letters and the overall impression given by the media is that the general is using the term "long war" in a poetic manner. No, he is saying the Afghan war is not a war at all but a campaign within a global war and the Afghan campaign will probably last longer than the ones to follow.
There are already two separate campaigns in the Af/Pak region: the Afghan ground war and the CIA's drone campaign in the tribal belt of Pakistan. When and if the proposed reorganization of the CIA occurs (where it is given its own army in the form of US Special Forces soldiers), then there will be a dramatic escalation in the CIA's campaign in the tribal belt as it ramps up a ground war that will exist alongside its current air war for a long time. How long will the Afghan campaign last? If we scour media pronouncements from top US Army or Marine officers when they are asked this question a figure of 14 years tends to pop up.
Fourteen years is not only a number we hear from military officers, it is also the average length of a counter-insurgency campaign. So let's say that each one of the many campaigns in the Long War will last 14 years from the point where a full-fledged counter-insurgency campaign (COIN) is launched.
Currently only Afghanistan is experiencing a full-fledged COIN. The next one to go from a partial campaign to a COIN will be Pakistan's tribal belt, a few years from now. These partial campaigns are waiting in the wings to become full-fledged COINs: Yemen, Somalia, Philippines, and Russia's Caucasus region. And new campaigns will emerge over time. Eritrea will certainly join the queue at some point. So how long will the Long War last? An easy calculation will provide the answer.
It took two years for the term Cold War to gain popular usage from its first appearance in print. So all we have to do is measure the time it takes for the word Long War to gain popular usage and then put that number in front of the number two and create a ratio then multiply that by 45 years (the length of the Cold War). For instance if it takes 20 years for the word Long War to gain popular usage then the actual Long War will last 450 years, ten times longer than the Cold War because it took ten times longer for the war to acquire a name.
There are already two separate campaigns in the Af/Pak region: the Afghan ground war and the CIA's drone campaign in the tribal belt of Pakistan. When and if the proposed reorganization of the CIA occurs (where it is given its own army in the form of US Special Forces soldiers), then there will be a dramatic escalation in the CIA's campaign in the tribal belt as it ramps up a ground war that will exist alongside its current air war for a long time. How long will the Afghan campaign last? If we scour media pronouncements from top US Army or Marine officers when they are asked this question a figure of 14 years tends to pop up.
Fourteen years is not only a number we hear from military officers, it is also the average length of a counter-insurgency campaign. So let's say that each one of the many campaigns in the Long War will last 14 years from the point where a full-fledged counter-insurgency campaign (COIN) is launched.
Currently only Afghanistan is experiencing a full-fledged COIN. The next one to go from a partial campaign to a COIN will be Pakistan's tribal belt, a few years from now. These partial campaigns are waiting in the wings to become full-fledged COINs: Yemen, Somalia, Philippines, and Russia's Caucasus region. And new campaigns will emerge over time. Eritrea will certainly join the queue at some point. So how long will the Long War last? An easy calculation will provide the answer.
It took two years for the term Cold War to gain popular usage from its first appearance in print. So all we have to do is measure the time it takes for the word Long War to gain popular usage and then put that number in front of the number two and create a ratio then multiply that by 45 years (the length of the Cold War). For instance if it takes 20 years for the word Long War to gain popular usage then the actual Long War will last 450 years, ten times longer than the Cold War because it took ten times longer for the war to acquire a name.
Tuesday, December 21, 2010
Democratic War
Geopolitics: Chairman of the Joint Chief's, Adm. Mike Mullen, tells us that he was up all night monitoring the South Korean Navy's recent artillery test. Which is to say that the US Navy was ready to shove nine yards of aircraft carrier flight deck up Kim Il Sung's gungus pung if the North had responded to the test fire.
This brings us to the broader issue of democracies and warfare. In all of history there has never been an example of two mature democracies going to war with each other. There have been wars between democratic components of a large democracy fractured by civil war. The American Civil War and several British colonial wars appeared to be wars between democracies but in truth were examples of big democracies breaking up or almost breaking up. What this tells us is that democracies hate war. Not only do democracies never attack other democracies, they have never started any of history's countless democracy vs. dictatorship wars.
Throughout the long march of time dictatorships always mistake democratic pacifism for military incompetence. Once roused, however, the bad guys always learn that the opposite is true.
The US Navy has been holding joint military exercises with the navies of Vietnam, Japan, South Korea, and India (all democracies except Vietnam). These exercises are not just for show. The US Navy is taking the first steps in welding these five navies into an alliance that will contain China's military ambitions like NATO did to the USSR.
If the US is successful in its containment strategy there will be enormous pressure on China to undergo democratic reform. The pressure will come from within China (students and intellectuals) and from democratic Taiwan as reunification moves closer and closer. There are stock market implications in all this. For instance, stock markets in democracies tend to have higher valuations than ones in dictatorships.
This brings us to the broader issue of democracies and warfare. In all of history there has never been an example of two mature democracies going to war with each other. There have been wars between democratic components of a large democracy fractured by civil war. The American Civil War and several British colonial wars appeared to be wars between democracies but in truth were examples of big democracies breaking up or almost breaking up. What this tells us is that democracies hate war. Not only do democracies never attack other democracies, they have never started any of history's countless democracy vs. dictatorship wars.
Throughout the long march of time dictatorships always mistake democratic pacifism for military incompetence. Once roused, however, the bad guys always learn that the opposite is true.
The US Navy has been holding joint military exercises with the navies of Vietnam, Japan, South Korea, and India (all democracies except Vietnam). These exercises are not just for show. The US Navy is taking the first steps in welding these five navies into an alliance that will contain China's military ambitions like NATO did to the USSR.
If the US is successful in its containment strategy there will be enormous pressure on China to undergo democratic reform. The pressure will come from within China (students and intellectuals) and from democratic Taiwan as reunification moves closer and closer. There are stock market implications in all this. For instance, stock markets in democracies tend to have higher valuations than ones in dictatorships.
Monday, December 20, 2010
North Korea Backs Down
Geopolitics: South Korea has just finished its artillery drill. The drill was massive and the shells were not directed away from North Korean positions in any way. Right before the drill the South Korean Navy destroyed a Chinese fishing boat while engaging a Chinese fishing flotilla that was in its waters illegally. This comes on top of a complete leadership change and a new overall posture for the South Korean military. In other words, South Korea has been acting super aggressive and targeting China directly, striking at the puppet master not the puppet.
After the artillery drill North Korea issued a statement saying that the South's military exercise was a childish display of fire and that the North won't dignify the South's infantile temper tantrum with a response. It is beneath the North's dignity to do so. And then the North asked for disarmament talks to start up again.
As we have seen so many times over the past two years Team Obama and its allies are completely on top of foreign affairs and there is now talk of Obama being awarded a Golden Bull award.
After the artillery drill North Korea issued a statement saying that the South's military exercise was a childish display of fire and that the North won't dignify the South's infantile temper tantrum with a response. It is beneath the North's dignity to do so. And then the North asked for disarmament talks to start up again.
As we have seen so many times over the past two years Team Obama and its allies are completely on top of foreign affairs and there is now talk of Obama being awarded a Golden Bull award.
Sunday, December 19, 2010
Obama Turns Hard Right
Charts: For over 120 years the strongest time of the year for stocks (on average) has been from Christmas through January. When this strength is manifest traders say we are in a Santa Claus Rally (SCR). Historical data shows that a true SCR does not start until after Christmas. Some people attribute the SCR to America's tax code, but this cannot be the case because the modern tax code of the late 20th century neither strengthened nor weakened the SCR. What then is the cause of this seasonal strength? Since it has existed for so long and is seemingly immune to outside historical factors like the tax code, the SCR must be like Fibonacci retracement levels, i.e. something that taps into the fundamental fabric of the stock market. As such it is an important technical indicator.
Fundamentals: Because of Tea Party Republicans and remarkable support from Pres. Obama, Congress for the first time in decades refused to pass a budget filled with pork laden earmarks. Yields on US government debt had been spiking before the pork got skewered. But yields came down after the porky omnibus spending bill failed, a train wreck averted. Obama has shifted harder to the right after the mid term election losses than Clinton did under similar circumstances. This is what we learned from the Clinton Presidency: A liberal Democrat in the White House that shifts to the right can get things done that a conservative Republican never could. Clinton examples: NAFTA and welfare reform. Think about the Bush tax cut extension that Obama shoved through. It contains the most aggressive accelerated deprecation schedule ever. History shows that accelerated deprecation is the only stimulus program that actually works in America.
Geopolitics: The Long War is looking good. A few months ago Al-Shabab controlled 60% of Mogadishu (Capital of Somalia). Now the super bad guys control only 40%. The African Union Army and the CIA supported Islamic militia Ahlu Sunnah are slowly dismantling the super bad guys. This helps the situation in Yemen and all of North Africa and puts the CIA in the running for an unprecedented 3rd Golden Bull Award!
The Pentagon just gave its big review of the Afghan war to Obama and it basically said progress is being made everywhere except in the Pak tribal lands. Obama responded with a new policy calling for US Special Forces to get more involved in the tribal lands and even greater emphasis on drone strikes.
There has been a lot of noise about the Pak ISI supposedly unmasking the CIA Pak station chief. But the day after this supposedly happened one of the biggest and juiciest drone strikes ever occurred in a part of the tribal lands where the drones had been forbidden to fly. Obviously the ISI gave up a huge number of Taliban leaders to the CIA. Pretend for a moment that you are a midlevel Taliban commander and you are informed that every one of your superiors has been blasted away by CIA drones and your next, but oh wait there is good news: the CIA station chief has been outed and is flying back to America for a little R&R. Are you happy? I didn't think so.
The Long War is going swimmingly but Cold War II is off to a bumpy start. Cold War II is what I am calling the nascent conflict between China/N. Korea and America with all its Asian allies. South Korea is conducting artillery drills from the island that North Korea shelled a few weeks ago on Monday. The North says that these drills mean war and yet the South is carrying them out anyway, which it absolutely must do. Cold War II started with China's attempt to wrest an island away from Japan a couple months ago. While the media portrays the Long War in defeatist terms it does the opposite with Cold War II, downplaying it. For instance, the Chinese fishing trawler that rammed two steel hulled Japanese warships a while back was itself a warship with a steel reinforced ramming hull. In other words, there has already been a minor naval engagement between Japan and China. Obama's response to Cold War II has been spot on so far. Just because he is doing the right stuff doesn't mean CW II won't get hairy. Once again the world has two antagonistic nuclear superpowers (scary).
All foreign policy events must be seen through the twin lenses of the Long War and Cold War II. Take the new START treaty limiting Russian and American nuclear weapons. Without looking through our two lenses you might (truthfully) say that Russia has ten times more tactical nuclear weapons in Europe than America and this yawning disparity is not addressed in START and so it is a bad treaty. But look through the twin lenses and you would say, "So what? We need Russia to defeat Iran, China, and Al-Qaeda. The USSR doean't exist anymore. Get with the program and ratify START."
Fundamentals: Because of Tea Party Republicans and remarkable support from Pres. Obama, Congress for the first time in decades refused to pass a budget filled with pork laden earmarks. Yields on US government debt had been spiking before the pork got skewered. But yields came down after the porky omnibus spending bill failed, a train wreck averted. Obama has shifted harder to the right after the mid term election losses than Clinton did under similar circumstances. This is what we learned from the Clinton Presidency: A liberal Democrat in the White House that shifts to the right can get things done that a conservative Republican never could. Clinton examples: NAFTA and welfare reform. Think about the Bush tax cut extension that Obama shoved through. It contains the most aggressive accelerated deprecation schedule ever. History shows that accelerated deprecation is the only stimulus program that actually works in America.
Geopolitics: The Long War is looking good. A few months ago Al-Shabab controlled 60% of Mogadishu (Capital of Somalia). Now the super bad guys control only 40%. The African Union Army and the CIA supported Islamic militia Ahlu Sunnah are slowly dismantling the super bad guys. This helps the situation in Yemen and all of North Africa and puts the CIA in the running for an unprecedented 3rd Golden Bull Award!
The Pentagon just gave its big review of the Afghan war to Obama and it basically said progress is being made everywhere except in the Pak tribal lands. Obama responded with a new policy calling for US Special Forces to get more involved in the tribal lands and even greater emphasis on drone strikes.
There has been a lot of noise about the Pak ISI supposedly unmasking the CIA Pak station chief. But the day after this supposedly happened one of the biggest and juiciest drone strikes ever occurred in a part of the tribal lands where the drones had been forbidden to fly. Obviously the ISI gave up a huge number of Taliban leaders to the CIA. Pretend for a moment that you are a midlevel Taliban commander and you are informed that every one of your superiors has been blasted away by CIA drones and your next, but oh wait there is good news: the CIA station chief has been outed and is flying back to America for a little R&R. Are you happy? I didn't think so.
The Long War is going swimmingly but Cold War II is off to a bumpy start. Cold War II is what I am calling the nascent conflict between China/N. Korea and America with all its Asian allies. South Korea is conducting artillery drills from the island that North Korea shelled a few weeks ago on Monday. The North says that these drills mean war and yet the South is carrying them out anyway, which it absolutely must do. Cold War II started with China's attempt to wrest an island away from Japan a couple months ago. While the media portrays the Long War in defeatist terms it does the opposite with Cold War II, downplaying it. For instance, the Chinese fishing trawler that rammed two steel hulled Japanese warships a while back was itself a warship with a steel reinforced ramming hull. In other words, there has already been a minor naval engagement between Japan and China. Obama's response to Cold War II has been spot on so far. Just because he is doing the right stuff doesn't mean CW II won't get hairy. Once again the world has two antagonistic nuclear superpowers (scary).
All foreign policy events must be seen through the twin lenses of the Long War and Cold War II. Take the new START treaty limiting Russian and American nuclear weapons. Without looking through our two lenses you might (truthfully) say that Russia has ten times more tactical nuclear weapons in Europe than America and this yawning disparity is not addressed in START and so it is a bad treaty. But look through the twin lenses and you would say, "So what? We need Russia to defeat Iran, China, and Al-Qaeda. The USSR doean't exist anymore. Get with the program and ratify START."
Thursday, December 16, 2010
Specific Stocks
As a bull market matures growth stocks begin to outperform value stocks. This bull market is 21 months old, middle-aged and ripe for what the pros call "growth at a discount," or growth stocks that are undervalued. Two weeks ago I mentioned a core positon of mine, Koppers Holdings (KOP), which is a railroad/steel mill supplier and it trades at a discount to most railroad and steel stocks. Since I mentioned it KOP exploded and is up by double-digits. Growth stocks should be bought when they are in basing patterns. KOP is roaring well beyond its basing pattern so I am not adding to my position but sitting back and enjoying the ride.
Of more interest is ITT Corporation (ITT). It operates in three spaces: 1) Defense. 2) Giant water pumps for mines, sewage treatment plants, and municipal water supply. 3) Engineered products for railroad rolling stock and cars. ITT has a P/E ratio of 12, as if it were a pure defense company. For the past year analysts have been warning investors to stay away from defense companies like ITT. But a few days ago the analysts have been waking up and saying, "Wait a minute, ITT is levered to mining, railroads, and the coming expansion of emerging market water delivery and treatment facilities, it is undervalued!" What they haven't been saying but should is, "Not all defense companies suck, ITT is the leader in night vision goggles and other Long War gear, not main battle tanks designed to counter a non-existent Soviet threat." In other words all of ITT's businesses are pretty good.
Of more interest is ITT Corporation (ITT). It operates in three spaces: 1) Defense. 2) Giant water pumps for mines, sewage treatment plants, and municipal water supply. 3) Engineered products for railroad rolling stock and cars. ITT has a P/E ratio of 12, as if it were a pure defense company. For the past year analysts have been warning investors to stay away from defense companies like ITT. But a few days ago the analysts have been waking up and saying, "Wait a minute, ITT is levered to mining, railroads, and the coming expansion of emerging market water delivery and treatment facilities, it is undervalued!" What they haven't been saying but should is, "Not all defense companies suck, ITT is the leader in night vision goggles and other Long War gear, not main battle tanks designed to counter a non-existent Soviet threat." In other words all of ITT's businesses are pretty good.
Wednesday, December 15, 2010
Capitalism Is Winning
Charts: The S&P 500 has traded above the key 1227 Fibonacci long term indicator for 6 days in a row, which is bullish. Volume patterns are bearish as is the advance/decline line; a mixed bag. Yield on the 10-year treasury note has also pushed up above a key Fibonacci level. This speaks to higher interest rates, if that trend continues it will destroy the US housing market, very bad.
Fundamentals: China just raised its inflation target from 3% to 4%, an admission of defeat. Actual Chinese inflation is running at 5% and has increased by one full percentage point for each of the last two months. China cannot tame inflation by raising interest rates because it will then be flooded by foreign capital despite whatever capital controls it might dream up. A flood of foreign capital would drive Chinese inflation even higher. Global equity markets are beginning to wake up to the fact that China cannot step on the brakes and are tentatively happy. China is the locomotive for world growth, so this is maybe good news, and maybe not. Imagine you are a passenger on a train and want to zoom forward to your destination. The conductor tells you that the locomotive is running at full throttle. Okay, sounds good. Then the conductor tells you that the train doesn't have any brakes. Uhh, a bit worrisome. Then the conductor tells you that there are obstacles on the track that the train may smash through (the obstacles are the Euro-Zone debt crisis and maybe the budding US sovereign debt crisis) or the train may hit these obstacles and derail.
This all sounds very scary and will probably end badly unless the world economy gets a second locomotive, i.e. the US economy needs to start growing at about 5%. There is so much idle productive capacity in the US economy that if it were to start growing, then inflation would actually slacken on the jump in global output. This brings us to Obama's big shift to the right: Extending the Bush tax cuts, freezing Federal workers pay for two years, free trade deal with South Korea, and the wonderfully harsh report from Obama's deficit cutting commission. All this represents a massive shift to the right. After shifting Obama blasted the liberals, actually hurting their feelings. He is talking to the Republicans. They speak the same language on foreign policy. He likes hanging out with them. Furious, the liberals talk of supporting a total left wing idiot like Ralph Nader in the next Presidential primary. If this were to happen it would be incredibly good because it would consign the hard left liberals into Purgatory for years.
Geopolitics: Iraq is forming a unity government. It is game over for Al-Qaeda in Iraq. This paves the way for Iraqi oil production to roar. This will go a long way to putting a cork in Chinese inflation. Also, consider that Iraq has the freest economy of any Arab state, except perhaps Yemen, which has no real central government: forcing a kind of free market economy through default. Yemen and Iraq are both growing at about 8%. We have to step back and remember that the Long War is not radical Islam vs. Christianity or radical Islam vs. democracy. No, it is radical Islam vs. capitalism. At 8% GDP growth capitalism is winning and Al-Qaeda is losing.
Fundamentals: China just raised its inflation target from 3% to 4%, an admission of defeat. Actual Chinese inflation is running at 5% and has increased by one full percentage point for each of the last two months. China cannot tame inflation by raising interest rates because it will then be flooded by foreign capital despite whatever capital controls it might dream up. A flood of foreign capital would drive Chinese inflation even higher. Global equity markets are beginning to wake up to the fact that China cannot step on the brakes and are tentatively happy. China is the locomotive for world growth, so this is maybe good news, and maybe not. Imagine you are a passenger on a train and want to zoom forward to your destination. The conductor tells you that the locomotive is running at full throttle. Okay, sounds good. Then the conductor tells you that the train doesn't have any brakes. Uhh, a bit worrisome. Then the conductor tells you that there are obstacles on the track that the train may smash through (the obstacles are the Euro-Zone debt crisis and maybe the budding US sovereign debt crisis) or the train may hit these obstacles and derail.
This all sounds very scary and will probably end badly unless the world economy gets a second locomotive, i.e. the US economy needs to start growing at about 5%. There is so much idle productive capacity in the US economy that if it were to start growing, then inflation would actually slacken on the jump in global output. This brings us to Obama's big shift to the right: Extending the Bush tax cuts, freezing Federal workers pay for two years, free trade deal with South Korea, and the wonderfully harsh report from Obama's deficit cutting commission. All this represents a massive shift to the right. After shifting Obama blasted the liberals, actually hurting their feelings. He is talking to the Republicans. They speak the same language on foreign policy. He likes hanging out with them. Furious, the liberals talk of supporting a total left wing idiot like Ralph Nader in the next Presidential primary. If this were to happen it would be incredibly good because it would consign the hard left liberals into Purgatory for years.
Geopolitics: Iraq is forming a unity government. It is game over for Al-Qaeda in Iraq. This paves the way for Iraqi oil production to roar. This will go a long way to putting a cork in Chinese inflation. Also, consider that Iraq has the freest economy of any Arab state, except perhaps Yemen, which has no real central government: forcing a kind of free market economy through default. Yemen and Iraq are both growing at about 8%. We have to step back and remember that the Long War is not radical Islam vs. Christianity or radical Islam vs. democracy. No, it is radical Islam vs. capitalism. At 8% GDP growth capitalism is winning and Al-Qaeda is losing.
Tuesday, December 7, 2010
CIA vs Iran
Over the past few months the CIA has assassinated four top Iranian nuclear scientists. The most recent was last week; not only was the Islamic Republic's number one A-bomb expert snuffed, the number two guy was severely injured. Since the Agency only waxes the top talent in Iran's nuclear weapons program all an Iranian scientist has to do to survive is produce substandard work. Do a crap job and you will not be targetted. Think of a class of bright physics students, but all of them are competing to get "F's."
But even if he were willing to risk his life by working hard, an Iranian nuclear scientist would still have to face the NSA generated viruses tearing his centrifuges apart. And on top of all that, the CIA has been successful in placing cracked valves in Iranian centrifuges. So there are two ways to blow them apart: bad valves and bad software.
On Monday Iranian nuclear disarmament talks began. In the morning, the Iranian negotiator bitterly complained that the world is turning a blind eye to the numerous sins routinely committed by the CIA and NSA. He was obviously depressed and not up to the job of getting a good deal out of his American adversaries.
Small wonder. Right before the talks Iran announced that it can produce yellowcake uranium from raw uranium. Which is to say that it can hammer uranium ore out of rock, which any African country with uranium deposits is capable of doing. If Iran is spending money on developing yellowcake refining capacity, then it is probably unable to make even token progress on weapons grade enrichment.
But wait a minute, the CIA says Iran is only months away from having working nuclear weapons. Here is how we know if a CIA spokesman is lying, his lips are moving. The CIA knows more about lying than any other organization or individual.
AS far as individual stocks, this is bad news for Raytheon.
But even if he were willing to risk his life by working hard, an Iranian nuclear scientist would still have to face the NSA generated viruses tearing his centrifuges apart. And on top of all that, the CIA has been successful in placing cracked valves in Iranian centrifuges. So there are two ways to blow them apart: bad valves and bad software.
On Monday Iranian nuclear disarmament talks began. In the morning, the Iranian negotiator bitterly complained that the world is turning a blind eye to the numerous sins routinely committed by the CIA and NSA. He was obviously depressed and not up to the job of getting a good deal out of his American adversaries.
Small wonder. Right before the talks Iran announced that it can produce yellowcake uranium from raw uranium. Which is to say that it can hammer uranium ore out of rock, which any African country with uranium deposits is capable of doing. If Iran is spending money on developing yellowcake refining capacity, then it is probably unable to make even token progress on weapons grade enrichment.
But wait a minute, the CIA says Iran is only months away from having working nuclear weapons. Here is how we know if a CIA spokesman is lying, his lips are moving. The CIA knows more about lying than any other organization or individual.
AS far as individual stocks, this is bad news for Raytheon.
Monday, December 6, 2010
Smokes and Railroads in Asia
The head of South Korean intelligence says that the recent North Korean attacks are a result of Kim Il Un's ongoing efforts to takeover the North's leadership. The younger Kim has been purging the N. Korean Army of disloyal generals. It is very difficult to go into any large and powerful military organization and start killing top generals. So the N. Korean generals who survived the purge were given a cookie: the wanton slaughter South Korean civilians (Karl Marx would have been proud). This all makes sense but I have a different take on recent events.
Thanks to WikiLeaks we know that China has an open air corridor running from North Korea to Iran and through Beijing. This air route is used to funnel North Korean military technology to Iran and thereby guaranteeing China a ready supply of Iranian oil. Yes North Korea is paid for the military technology but this is vastly outweighed by economic loss from US sponsored sanctions. In other words, North Korea is China's puppet. Also, consider that China's big bone of contention with the rest of Asia is a group of islands in the South China sea that it is trying to steal from Japan, plus other islands that it wants to steal from other Asian countries. Consider the symbolism of the North Koreans shelling a S. Korean island in contested waters. Long story short: America has a China problem not a Korean problem.
Happily within days of the North Korean shelling the USS George Washington aircraft carrier battle group had surrounded the S. Korean island in question. It is difficult to overstate how powerful the battle group actually is. It could shred the People's Liberation Army Air Force into confetti. China is building its own aircraft carrier fleet and designing huge anti-carrier missile batteries that will eventually line its coast. But all this is in the distant future, so for now the US Navy has control over the Pacific. Any major conflict with China will be fought at sea, not on land, and the sea is not China's friend. It is important to ignore the hysteria of the popular press, i.e. China will rule the world the day after tomorrow, the sky is falling. The bottom line: Asia is still where its at for investing.
Which brings us to specific stocks. Kopper Holdings (KOP) is the largest supplier of railroad cross-ties to Asia. Phillip Morris International (PM) is the largest supplier of cigarettes. It is impossible to run an Asian country without plenty of cigarettes and expanding railroads. Both pay big dividends and when the US Congress extends the Bush era capital gains tax cut it should help dividend paying stocks.
Thanks to WikiLeaks we know that China has an open air corridor running from North Korea to Iran and through Beijing. This air route is used to funnel North Korean military technology to Iran and thereby guaranteeing China a ready supply of Iranian oil. Yes North Korea is paid for the military technology but this is vastly outweighed by economic loss from US sponsored sanctions. In other words, North Korea is China's puppet. Also, consider that China's big bone of contention with the rest of Asia is a group of islands in the South China sea that it is trying to steal from Japan, plus other islands that it wants to steal from other Asian countries. Consider the symbolism of the North Koreans shelling a S. Korean island in contested waters. Long story short: America has a China problem not a Korean problem.
Happily within days of the North Korean shelling the USS George Washington aircraft carrier battle group had surrounded the S. Korean island in question. It is difficult to overstate how powerful the battle group actually is. It could shred the People's Liberation Army Air Force into confetti. China is building its own aircraft carrier fleet and designing huge anti-carrier missile batteries that will eventually line its coast. But all this is in the distant future, so for now the US Navy has control over the Pacific. Any major conflict with China will be fought at sea, not on land, and the sea is not China's friend. It is important to ignore the hysteria of the popular press, i.e. China will rule the world the day after tomorrow, the sky is falling. The bottom line: Asia is still where its at for investing.
Which brings us to specific stocks. Kopper Holdings (KOP) is the largest supplier of railroad cross-ties to Asia. Phillip Morris International (PM) is the largest supplier of cigarettes. It is impossible to run an Asian country without plenty of cigarettes and expanding railroads. Both pay big dividends and when the US Congress extends the Bush era capital gains tax cut it should help dividend paying stocks.
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