A Tribute to a True Veteran

I just finished a 48-hour nonstop slog trying to figure out the trading and investment consequences of The New World Order, and then to get the message out to my subscribers.

So, I am taking a hard earned day off today.?

It is Veterans Day, and I?ll be putting on my faded Marine Corp fatigues, with gold railroad track bars on my shoulders, and leading the hometown parade. So, I thought it would be a good day to tell you the story of my Uncle Mitch.

Since job prospects for high school graduates in rural Pennsylvania in 1936 were poor, Mitch walked 200 miles to the nearest Marine Corp recruiting station in Baltimore.

After basic training, he spent five years rotating between duty in China and the Philippines, manning the fabled gunboats up the Yangtze River.

When WWII broke out, he was a seasoned sergeant in charge of a machine gun platoon. That put him with the seventh regiment of the First Marine division at Guadalcanal in October, 1942.

When the Japanese counterattacked, Mitch was put in charge of four Browning .30 caliber water-cooled machine guns and 33 men, dug in at trenches on a ridge above Henderson Field.

The Japanese launched massive waves of suicide attackers in a pouring tropical rainstorm all night long, frequently breaking through the line and engaging in fierce hand-to-hand combat.

If the position fell, the flank would have been broken, leading to a loss of the airfield, and possibly the entire battle. WWII would have lasted two more years.

After the first hour, all of Mitch’s men were either dead or severely wounded, shot or slashed with samurai swords.

So Mitch fired one gun until it was empty, then scurried over to the next, and then the next. In between human waves, he ran back and reloaded all the guns.

To more easily pitch hand grenades, he cut the arms off his herringbone fatigues. When the Japanese launched their final assault, and then retreated, he picked up a 40-pound Browning and ran down the hill after them, firing all the way, and burning all the skin off his left forearm.

Mitch’s commanding officer, Col. Herman H. Hanneken, heard the guns firing all night from the field below.

He was shocked when he visited the position the next morning, finding Mitch alone in front of a twisted sea of 1,000 Japanese bodies, not a scratch on him.

Mitch was awarded the Congressional Medal of Honor in Australia a few months later.
Henderson's Ridge 1942

Henderson?s Ridge in 1942

Medal of Honor

After the war, Mitch, now a colonel, was handed the plum of all Marine Corp jobs, acting as the liaison officer with Hollywood.
He provided the planes, ships, and beaches needed to make the great classic war films. He got to know stars like John Wayne, Lee Marvin, and yes, even Elvis Presley.?

The iconic fictional hero in the 1949 film, Sands of Iwo Jima, Sergeant John M. Striker, was modeled after Mitch.

Tradition dictated that all military officers salute Mitch, even five star generals, and he was given a seat to attend every presidential inauguration from FDR on.

Pacific countries issued stamps with his image, and Mattel sold a special GI Joe in his likeness.?

When Mitch got older and infirm, I used my captain’s rank to escort him on diplomatic missions overseas to attend important events, like the 40th anniversary of D-Day in Normandy.

Whenever Mitch was in town, he would join me for lunch with some of my clients with a history bent, and a more humble and self-effacing guy you never met.

Mitch passed away in 2003 while he was working as a technical consultant for the pre-production of the HBO series, The Pacific.
The funeral in Riverside, California was marked by an eagle continuously circling overhead which, according to the Indian shaman present, only occurs at the services for great warriors.

When I get back from the parade, I’ll take out the samurai sword Mitch captured on that fateful day, a 1692 Muneshige, the hilt still scarred with 30-caliber slugs, and give it a ritual polishing in sesame oil and powdered deer horn, as samurai have done for millennia.

To learn more about the First Marine Division’s campaign during the war, please read the excellent paperback, The Island: A History of the First Marine Division on Guadalcanal?by Herbert Laing Merillat, which you can buy from Amazon by clicking on the title.

The Island

Guadalcanal Patch

Hanging Out With the Woz

I first spoke to Steve Wozniak via HAM radio when I was 12 and he was the 14-year-old president of the Homestead High School Radio Club in Cupertino, California.

With seven children, my dad was pretty stingy with allowance money. But when it came to electronic parts, I had an unlimited budget, as that is where he saw the future.

So while other kids collected baseball cards, I stocked up on tubes, resistors, capacitors, and rheostats. This was back when you could buy WWII surplus parts from Radio Shack for pennies a pound.

Then the transistor came out, and building projects, like simple computers programmed with basic ‘1’s’ and ‘0’s’ suddenly became possible.

By junior high school, I had gained my radio license, learning Morse code at the required five words per minute, and a path opened that eventually led me to Woz.

Whenever I had a design problem, Woz always had a solution. He seemed to know everything about electronics.

I planned to attend De Anza College in the San Francisco Bay Area to collaborate with Woz, but then the State of California dropped a big fat scholarship to the University of Southern California in my lap, and we parted ways.

That?s government for you. The state thought I was smarter than Woz. Ha!

The last thing he taught me was this really cool way to make long distance phone calls for free with something called a ‘blue box.’

I later heard that Woz went to work for some kind of fruit company designing computers, which sounded stupid to me at the time, but Woz was always a guy who marched to a different drummer.

A decade later, I was an ambitious young vice president at Morgan Stanley, and ran into Woz again while escorting Steve Jobs around to big institutional investors hawking an Apple (AAPL) secondary share offering.

By then he had gained a lot of weight. He fascinated me with stories about how he had gone from scrounging around for a bootleg $12 chip, to making $100 million on the Apple IPO in just three years.

The phrase ?only in America? has to come to mind.

We bought our planes at the same time, me a Cessna 340 twin, and he a Beechcraft Bonanza. When I heard he totaled his in a crash in Santa Cruz a few years later, I sent flowers to his hospital room, even though he was in a coma and wasn’t expected to live.

In later years we moved into the same philanthropic circles at the San Francisco Ballet, the Computer Museum, and local art museums. To me, Woz always stood out at the social events as the only one who was not an inveterate social climber.

That was vintage Woz. He just didn’t care.

When I finally stumbled across his autobiography, iWoz, I grabbed it and devoured the pages in a couple of days.

The tome filled in the holes about what I knew about the man: the wives, the rock concerts, his universal remote control idea, and the early days at Apple.

You also learn a lot about electronics and basic computer hardware and software design.

While there are a lot of 5th grade science teachers who wish they were billionaires, there is only one billionaire who aspired to teach 5th grade science. That is what Woz did for ten years.

Despite the billions, Steve is still an all right guy. To buy the book of his engaging and entertaining story from Amazon, please click here.

Steve WozniakiWoz bookcover

Shaking the Hand that Killed Osama bin Laden

The team fought their way up two flights of stairs in pitch-blackness, dispatching several fighters along the way.

A tall figure emerged in the green glow of the night vision goggles. It hesitated. Two shots were fired, and the body hit the ground.

That was how Navy Seal Team Six member, Mark Owen, described the last seconds of Al Qaida leader, Osama bin Laden, in the raid on his Abbottabad, Pakistan compound.

I can?t tell you how I met Owen, except that the circumstances are classified, and it took place at an undisclosed location. A number of terrorist groups are seeking retribution for the raid, making Mark and his teammates prime targets.

He and his family now live in the witness protection program buried deep somewhere in the US.

Owen isn?t his real name of course, but a nom de? guerre. In fact, I can?t even tell you what he looks like. His prosthetic make up and wig were so convincing, I doubt his own mother could recognize him.

But there was no doubting the bone-crushing handshake of a Navy Seal.

Spending an hour with ?Owen?, I learned several fascinating details about the raid. Just before launching, the team was told there was a 70% chance the Pakistani Air Force would shoot them down on the way in.

There was also the possibility that their top-secret stealth helicopters would crash on a ground hugging flight through the mountains on the darkest night of the month. Every man was given the option to pass on the mission.

Not one did.

However, that didn?t stop them from joking among themselves about the suicide aspects of their assignment.

What guts!

What was the inside story of the raid?? The most wanted man in the world, the author of the 9/11 attack that killed 3,000 at the World Trade Center, used ?Just for Men?. ?

That was the brand of the hair-coloring agent the Seals discovered in the world?s greatest terrorist?s bathroom, used to make him look younger than he was.

Some of the seals speculated he did this to cut a more threatening figure in his online propaganda diatribes. Others said it was because he had two wives at the site.

The discovery of bin Laden?s secret fortified compound was the result of a decade of tireless investigation by CIA analyst, Maya Lambert. Her role was portrayed in the 2012 film, Zero Dark Thirty, with much embellishment.

The US torture of suspects probably slowed down the hunt, rather than accelerated it, because a glut of false information obscured valuable tips. People will say anything to stop the water boarding, right?

I would.

In the end, it was a junior CIA analyst trolling through ten-year-old archived data gathered in Morocco that uncovered the crucial clue. That was the name of Ibrahim Saeed Ahmed, who turned out to be bin Laden?s personal courier to the outside world.

Constant National Security Agency monitoring of his mother?s phone line in the Persian Gulf led to Ahmed?s location in Pakistan. He was then discretely followed to the mysterious compound in Abbottabad.

Bin Laden successfully hid for so long because he had fallen far off the grid of modern civilization. He never left the building, and didn?t use cell phones or the Internet. Trash was burned on site.

His sole means of communication was via flash drives and DVDs physically carried by Ahmed on an infrequent and unpredictable basis. Bin Laden had effectively jailed himself for five years to stay under the American radar. How ironic.

Since there was no means to verify the identity of the compound?s occupants before the raid, the Seals were the only option. Maya Lambert personally saw them off on their departure from an Eastern Afghanistan base. She too was committed to the mission to the very end.

Even when the helicopter in which Owen was riding crashed because of freak lift conditions, the mission went ahead. Since their carefully crafted and much practiced plan fell apart, they improvised on the spot, a mandatory Seal quality.

They professionally and methodically breached the compound?s outer wall and blew some steel doors off their hinges before they reached their third floor destination.

Owen went to great lengths to explain how the civilians on the site, including bin Laden?s own family members, were kept out of harm?s way.

After dispatching their target, the Seals quickly photographed him, took a DNA sample, and uploaded it via satellite link to Washington DC. Confirmation came back in minutes.

They had gotten their man.

Before the team cleared out, they bagged every possible item of intelligence value. There was so much material that they ran out of bags to carry it. Computers were smashed open and the hard drives pried out to save on space and weight.

Analyzed back home, this data revealed that several new attacks on the United States were in the planning stages.

After blowing up the remains of the crashed helicopter, the entire team piled into the remaining operational one, with only minutes of reserve fuel left. A much-feared counterattack from the Pakistani military never appeared.

After further identification, bin Laden was buried at sea from a US aircraft carrier in the Indian Ocean.

The success of the raid has done much to alter the discussion on the future of military forces, in the US, and around the world.

It turns out that it is strategically and tactically advantageous, and much more cost efficient to field a small number of super warriors, like the Seals, than a large number of cannon fodder.

Every general and admiral I know, and there are quite a few, would love to junk expensive, antiquated Cold War weapons systems whose sole benefit is that they create jobs in battleground congressional districts.

The Army still buys useless, unprotected, IED vulnerable Humvee?s because they are built in Florida, a major swing state in the last six presidential elections.

The Air Force has more wheezing, ancient, fuel inefficient C-130?s than pilots to fly them (we?re now on upgrade number 22) because they were assembled in Georgia, the home state of former Speaker of the House, Newt Gingrich.

Oh, and the manufacturer, Lockheed Martin (LMT), made sure to buy parts supplied by all 50 states to make it politically ?kill proof.?

Better to spend money on training, cyber warfare, drones, and Special Forces, which will be essential to fight the wars of the future.

?The greatest threat to national security is wasting money in the defense budget,? one brass hat told me, with some irritation.

In fact, the Seals, and the Army?s Delta Force are so effective and destructive that they could well replace entire divisions of the past. It?s a matter of hundreds doing the job of tens of thousands.

Owen went into great detail to explain the incredible difficulty of Navy Seal training. Only small fractions succeed at the 24 week Basic Underwater Demolition/Seal (BUDS) program.

The majority, ?ring the bell,? give up early, and are reassigned elsewhere in the military, without shame.

Mark says he was trained to ?eat the elephant one bite at a time,? and described how he struggled to get through a half year of torture a half day at a time. ?You wake up hoping to make it to lunch without quitting. Then at lunch you focus on getting to dinner without giving up. You then repeat this everyday until you graduate.?

Mark spoke of being dumped a few miles offshore and told to swim home in the icy Pacific. Classes would link arms and lie in the surf for eight hours to get accustomed to hypothermia.

They were tied up and thrown in a swimming pool for ?drown proofing.? For good measure they would then have to push a bus uphill, or repeatedly hoist a telephone pole over their heads.

Modern Seals can not only jump out of a plane at high altitude and blow up anything, they can also hack into computers, disassemble cell phones, and track you down online, no matter where you are.

Spurred on by my Dad?s tales of the old Under
water Demolition Teams (UDT), with whom he had experience during WWII, I once thought about applying to the Seals myself. But in the end, I passed. I didn?t think I could make it through the training. There are not a lot of things I won?t try, but this was one.

Because of their prolonged and extreme training, the Seals always get the toughest missions. Owen also participated in the rescue of Mark Phillips, the captain of the containership, Maersk Alabama, kidnapped by Somali pirates.

The cost of these accomplishments is high. Owen held up his cell phone and said it still contained the numbers of 40 close friends killed in action. He will never delete those contacts.

The Seals? focus on teamwork and leadership is so legendary that it has become an area of interest by American corporate management. Seals will volunteer for once unheard of 10th, 11th, and 12th tours to Iraq and Afghanistan, not because of any extreme patriotism, but because they want to be there to support their buddies.

Unsurprisingly, the divorce rate among Seals is about 90%.

Because of this spectacular record, the Seals are shouldering an ever-larger share of our defense burden.

Their numbers have expanded greatly in the past decade. I can?t tell you how many Seals are in action today because it is classified, but it is a much larger number than you think.

One of the greatest honors I have received in writing this letter is when I was invited by Seal commanders to attend a BUDS graduating class in Coronado, California.

Despite receiving many medals and commendations, Mark comes across as humble and self-effacing. It turns out that the braggarts and big talkers don?t make it through BUDS training.

The son of Christian missionaries in Alaska, Owen is now retired from the forces and is trying to get his life back together.

On complaining about neck pains after his helicopter crash, Mark said the Veterans Administration sent him home with a one-year supply of Motrin. After a hedge fund manager friend volunteered to pay for a private specialist, he was told his neck was ?broken? and sent into surgery the next day.

That sheds some uncomfortable light on the current VA scandal.

When my precious hour was up, I thanked Mark for his service and wished him well.

Mark has published his amazing account of the Abbottabad raid in his book ?No Easy Day.? It is a real page-turner, partially ghost written by a journalist friend. To purchase the book from Amazon, please click here.

bin Laden Compound

It?s All about Discipline and Teamwork


Tribute to a Giant of Journalism, Roy Essoyan

I had been filled with great sadness when I had learned of the passing of an old friend and mentor, Roy Essoyan, the former Tokyo bureau chief for the Associated Press.

When I was a young, wet behind the ears financial journalist in Japan during the early seventies, Roy had the charity to take me under his wing and teach me a few tricks of the trade.

We often met for lunch at the Foreign Correspondents? Club of Japan, partaking in the excellent cheeseburgers there, and battling wits over a popular dice game called ?ballout?.

I gathered up what crumbs of wisdom Roy would graciously part with, he careful never to compromise a pending AP scoop. He gave me enough encouragement to give me hope of breaking into this unassailable profession.

The Club was then a hotbed of intrigue between transient writers, foreign intelligence agents, assorted soldiers of fortune, mercenaries, Japanese lobbyists, and opportunists from giant multinational corporations.

There I met Walter Cronkite, John Glen, Deng Xiaoping, Yasser Arafat, Ronald Reagan, Margaret Thatcher, Rupert Murdoch, and countless others. It was a great place for me to end up at the hardened age of 22.

Roy was born in a remote Japanese fishing village in 1919, his parents Armenian refugees from the Russian Revolution. That polyglot background enabled him to become fluent in Russian, Japanese, and finally English.

He was stateless until his early thirties. The outbreak of WWII trapped him in Shanghai. Somehow he survived by writing for an English language newspaper there while avoiding internment in a Japanese concentration camp.

After the war, he made his way to Tokyo, where his language skills landed him work for the Associated Press. Later assignments took him to Hawaii, Beirut, Cairo, Vietnam, Hong Kong, and then back to Tokyo. At press conferences he palled around with Nikita Khrushchev in his native Russian. His claim to fame came when he broke the story of the Soviet-Chinese rift in 1957, which earned him a deportation.

Roy retired to the North Share of Oahu in 1985, within earshot of the pounding giant waves of Waimea Bay and with a fabulous view of the Pacific.

Roy was a man who didn?t suffer fools gladly, but still maintained a dry sense of humor. His suspicion of governments knew no bounds, having witnessed many atrocities first hand.

Roy instilled in me a great instinct to enjoy and participate in history, as well as to survive it. I don?t think I?ve stopped moving since.

When I made the switch from journalism to trading, Roy used to chide me about me never actually producing anything, just poking away at a computer to generate numbers.

I responded that I didn?t see a future in a profession that paid peanuts and was dominated by chain smoking, philandering alcoholics who are now all dead. He knew all the people who I knew and he understood.

When I last visited him at his Hawaiian abode a couple years ago we paged through together scrapbooks of 70-year-old yellowing cuttings of his old stories. They spoke of the corruption, poverty, and inequities then rampant in lawless Shanghai, and the build up to war with Japan.

I?ll never forget how he described small children plucking silk cocoons out of boiling water with their calloused and senseless bare hands in Chinese sweat shops.

When I heard his golf handicap was rising, I knew the end was coming. Roy stayed sharp and irreverent almost to the end. When he died, I knew they wouldn?t make them like him anymore.

Roy EssoyanRoy Essoyan of the Associated Press

Dinner with Ben Bernanke

You would never guess Dr. Ben Bernanke was once one of the most powerful men in the world, indeed in all of human history.

There he sat across the table from me in a popular San Francisco Italian restaurant wearing a poorly made grey suit and a cheap pair of shoes, with rubber soles.

Only the occasional interruption from an autograph seeker belied his true importance.

I managed to snare Ben for a couple of hours on his national book tour promoting his just released ?The Courage to Act.? Out only days, it was already at the top of the New York Times Best Seller list.

Ben is a different guy now. For a start, you can now call him ?Ben? instead of ?Governor.?

Remember those carefully parsed, measured, and deliberate words he used to use to explain Federal Reserve monetary policy and his future intentions? That guy is long gone.

The new Ben is funny, in a subtle, but wickedly clever manner. He is also instructional, thoughtful, even professorial. At the end of the day, Ben Bernanke is now your favorite faculty member.

Ben?s big revelation to me was that there were no potential triggers out there for another 2008-09 type financial crisis.

American banks have been recapitalized to the extent that they now have a stronger safety net with which to weather any future volatility. US banks are bigger than ever.

The big global concern right now is with emerging markets, where trillions of dollars worth of US dollar denominated debt have been borrowed, collateralized by depreciating local currencies.

Another worry is the perceived ?Fed put,? which is allowing investors to get complacent with their risk taking.

Bernanke believes that rising income inequality is the biggest structural problem we face. It means that not all are benefiting from an improving economy, a goal of Fed policy.

This has been unfolding for 40 years, and won?t be solved in a day, as several presidential candidates are promising.

As a result, the ?Horatio Alger? effect, whereby the poorest can rise to success through brains, hard work, and thrift, is now much less likely to occur than in the past.

Bernanke himself is a perfect example of that phenomenon.

Ben and I spoke at length about the dark days of the crash, and he remembered the emails I used to pepper his staff with proposing fixes or patches on an almost daily basis.

Regulation dating from the 1930?s had become outmoded and was woefully out of touch with modern day finance. It was far too lax in the run up to the crisis.

For example, insurance giant AIG was monitored by the Office of Thrift Supervision, which was utterly clueless when it came to pricing mathematically complex derivatives.

Bernanke warned President Bush as early as 2005 that real estate prices were getting too high and that a crash was coming.

His predecessor, Alan Greenspan, had cautioned during the 1990?s that Fannie Mae and Freddie Mac had a flawed business model that would eventually blow up and take down the financial system with it.

In the end, every major financial institution was tottering on the edge.

Bernanke had the benefit of completing his PhD thesis on the causes and mistakes of the Great Depression, once an arcane area of economic study.

Thanks to the laissez-faire philosophy of the 1920?s, the Fed let the money supply collapse, and one third of all banks went under, some 8,000 in total. This froze the entire credit system.

Eight decades later, Ben therefore saw the answer to another looming depression in an inflated money supply, which we saw with QE 1,2,3, and 4.

He also helped engineer the $700 billion TARP that bailed out the 20 biggest banks, which he described as the ?the most successful, but most hated government policy in history.?

When it was wound down, the US Treasury made a $15.3 billion profit on the program.

Part of the problem in selling the TARP, and later, President Obama?s 2009 $831 billion stimulus budget, was that while the crisis started in New York and Washington, it was slow to reach the hinterlands.

One Republican congressman in Iowa called local car dealers in his district and asked what the big deal was. Ben said, ?Just wait,? and General Motors filed for bankruptcy months later.

I asked Ben who was his favorite president, as he was appointed by both George W. Bush and Barack Obama. He confirmed that he liked working for the two men, but that Bush was the natural practical joker.

When Chairman of the Council of Economic Advisors, Bernanke was required to give a weekly briefing on the state of the economy. Once he committed the grievous sartorial error of wearing tan socks with his trademark grey suit.

Bush complained, stating that the White House had dress standards to maintain.

Bernanke answered that he thought the Bush administration was one of fiscal responsibility, and that he had bought a four pack of the controversial socks at the Gap for only $10.

When Ben attended the next meeting a week later, he wore the required grey socks with his grey suit. He couldn?t help but notice that everyone else at the meeting was wearing tan socks with their navy suits, including the president.

When Bush met Bernanke to discuss his appointment as Chairman of the Federal Reserve in 2006, he asked if he had any political experience.

Bernanke replied that he had served two terms on the Montgomery County, Maryland Board of Education. Bush said ?that was fine.?

Bernanke is an extremely intelligent man. You can almost hear the wheels whirring when he is thinking.

I asked him my ?gotcha? question.

Wasn?t quantitative easing just a means of bridging the demographic chasm of the 2010?s, when 85 million baby boomers are retiring? Isn?t it just a way to pull growth forward from the 2020?s?

He paused for a moment, and then changed the subject.

Finally, I had to ask if Bernanke ever got a chance to read The Diary of a Mad Hedge Fund Trader while Fed Chairman. He diplomatically responded that the ?Fed takes great pains to take in all views.?


To learn more about Ben Bernanke?s amazing, ?only in America? rise from obscurity, please click the titles ?Who Is Ben Bernanke,? and ?Why Ben Bernanke Hates Me?.

To buy ?The Courage to Act? at discount Amazon pricing, please click here.


Bernanke - The Courage to Act

The 'Population Bomb' Echoes

With the entire agricultural space one of the preeminent investment disasters this year, you?d be hard pressed to find a long-term bullish argument for the troubled sector.

You know all those John Deere (DE) and Caterpillar (CAT) hats I saw American tourists wearing in Venice, Italy three years ago?

This year, I didn?t see one!

That is, of course, unless you read this newsletter.

Pack your portfolios with agricultural plays like Potash (POT), Mosaic (MOS), and Agrium (AGU) if Dr. Paul Ehrlich is just partially right about the impending collapse in the world’s food supply.

You might even throw in long positions in wheat (WEAT), corn (CORN), soybeans (SOYB), and rice.

The never dull, and often controversial Stanford biology professor told me he expects that global warming is leading to significant changes in world weather patterns that will cause droughts in some of the largest food producing areas, causing massive famines.

Food prices will skyrocket, and billions could die.

At greatest risk are the big rice producing areas in South Asia, which depend on glacial run off from the Himalayas. If the glaciers melt, this crucial supply of fresh water will disappear.

California faces a similar problem if the Sierra snowpack fails to show up in sufficient quantities, as it has for the past four years.

Rising sea levels displacing 500 million people in low-lying coastal areas is another big problem. One of the 80? year old professor’s early books The Population Bomb was required reading for me in college in 1970, and I used to drive up from Los Angeles to San Francisco Bay area just to hear his lectures (followed by the obligatory side trip to the Haight-Ashbury).

Other big risks to the economy are the threat of a third world nuclear war caused by population pressures, and global plagues facilitated by a widespread growth of intercontinental transportation and globalization. And I won’t get into the threat of a giant solar flare frying our electrical grid.

?Super consumption? in the US needs to be reined in where the population is growing the fastest. If the world adopts an American standard of living, we need four more Earths to supply the needed natural resources.

We must to raise the price of all forms of carbon, preferably through taxes, but cap and trade will work too.

Population control is the answer to all of these problems, which is best achieved by giving women an education, jobs, and rights, and has already worked well in Europe and Japan.

All sobering food for thought.

MON 9-28-15

WEAT 9-28-15

SOYB 9-28-15

DBA 9-28-15

? Paul R. Ehrlich

Fruit Market

An Evening with the Chinese Intelligence Service

Watching the Shanghai double over the past six months brought back memories of my four decade long relationship with the People?s Republic of China.

I normally avoid the diplomatic circuit, as the few non-committal comments and soggy appetizers I get aren?t worth the investment of time.

But I jumped at the chance to celebrate the 62nd anniversary of the founding of the People?s Republic of China with San Francisco consul general Gao Zhansheng.

Happy Birtday ChinaHappy Birthday China!

When I casually mention that I survived the Cultural Revolution and interviewed major political figures like Premier Deng Xiaoping, who launched the Middle Kingdom into the modern era, and his predecessor, Zhou Enlai, modern day Chinese are enthralled. It?s like going to a Fourth of July party and letting drop that I palled around with Thomas Jefferson and Benjamin Franklin.

Five minutes into the great hall, and I ran into my old friend Wen, who started out her career with the Chinese Intelligence Service, and had made the jump to the Foreign Ministry, as all their best people did. She was passing through town with a visiting trade mission.

When I was touring China in the seventies as the guest of the Bank of China, Wen was assigned as my guide and translator, and we kept in touch over the years. I was assigned a bodyguard who doubled as the driver of a tank like Russian sedan.

The Cultural Revolution was on, and while the major cities were safe, we ran the risk of running into a renegade band of xenophobic Red Guards, with potentially fatal consequences.

I asked Wen when China was going to float the Yuan? She explained that this is something China knew it had to do, but it wasn?t going to be rushed into by some opportunistic foreign politicians.

If it moves too soon, millions will lose jobs, creating political instability, something the central government wants to avoid at all costs. Many of the largest scale employers were only marginally profitable, and a hike in the renminbi of only a few percent would force them out of business. I pointed out that that was exactly what was happening in the US.


YuanWorth More Than Meets the Eye

I warned that if the Middle Kingdom waited too long, Washington would force them into an appreciation through punitive import duties and anti-dumping actions, as we did with Japan 40 years ago.

It was Nixon?s surprise ban on textile imports in 1971 that finally persuaded Japan to float the yen, then at ?360. If that didn?t convince the Chinese, then imported inflation would. The longer China delays, the bigger the pop when their currency is finally set free.

Wen then went on the offensive, claiming that Chinese workers were being exploited by American companies keeping wages low. The product that China made for $1, and sold to the US for $2, was then sold by Wal-Mart (WMT) for $20, which kept all the profits.

She pointed out that the Walton family had a combined net worth of $100 billion, more than the total worth of the lower 40% of the US population. This could never happen in China.?

I told her that by selling the product at $20, Wal-Mart wiped out another US company that used to make that product domestically and sold it for $40, throwing those people out of work.

Chinese FactoryModern Times in China

I then asked Wen what were her country?s plans for its massive foreign exchange reserves, now at $3.7 trillion? She agreed that this was a problem because the reserves were pouring in so fast, at an embarrassingly high rate of $10 billion a month, and that it was the most rapid accumulation of wealth in history (click here for the data). In any case, reserves have been falling for the past year from a peak of $4.1 trillion.

While it had more than enough Treasury bonds, any attempt to sell might cause their value to collapse and freeze relations with the US. I suggested China should start hedging its gigantic holdings without selling them, or some managers would be facing a firing squad in the future.

China tried to recycle its surpluses by buying foreign companies that produce the natural resources it desperately needs. But takeover attempts were fought tooth and nail as a foreign invasion, or on national security grounds, such as the attempt to buy California?s Unocal in 2005 and Australia?s Oz Minerals in 2012.

It was now using a strategy of buying low profile minority stakes in foreign resource companies. China took a big stake in the Petrobras (PBR) secondary equity offering, which didn?t work out so well, as the company is now facing bankruptcy.


Unocal TruckCheck Out This tasty Little Morsel

I asked her about the real estate bubble in China that was causing so many foreign investors to lose sleep. She said it was true that sales were slow at some luxury buildings in Beijing and Shanghai, but the great majority of developments were aimed at working people, and were filling up as soon as they came on the market.

The 40% down payment demanded by the People?s Bank of China headed off the rampant speculation that brought the American financial system down. Buyers of second homes were required to pay entirely in cash.

Buildings-TallRooms With Views

Wen then complained about the aggressive military stance the US was taking towards China, ringing it in with the Seventh Fleet. Holding a knife so close to the country?s foreign supply line jugular vein made them nervous.

China was basically indefensible. All it would take was the sinking of a few grain ships, and 50 million would starve within a year. President Bush was rattling his saber as soon as he moved into office, until 9/11 diverted his attention to Afghanistan and Iraq.

Wen told me there is a school of thought in Beijing that as the country?s economic power grows?it has passed Japan to become second in GDP last year?the US will increasingly perceive it as a military threat. This would lead America to mete out the same hostile treatment to China as it did Russia during the cold war.


Aircraft CarrierWalking Softly, But Carrying a Big Stick

I assured her that the Seventh Fleet was there to watch and listen, but to do nothing. It was really in position to provide a security blanket for allies, like Japan and South Korea, but nothing more. China wasn?t engaging in the belligerent behavior that Russia was at the height of the cold war, like blockading Berlin, basing missiles in Cuba, stationing fast attack nuclear submarines off our coasts, and invading Afghanistan.

I argued that if China truly has no expansionary intentions, the more we know about you, the better. It is always prudent for a potential adversary to conclude you are not a threat, and that no action is needed.

The more you help the US do that, the better. China is decades behind the US in military technology, and you really have nothing we want. Little more than 200 nuclear weapons without an ICMB or submarine delivery systems were hardly viewed as a major threat.

Wen seemed perturbed that I was aware of her country?s nuclear stockpiles, and asked how I knew this. I said that former CIA director Leon Panetta told me?click here for ?Lunch with the CIA?). She said ?Oh.? I asked what was that test downing of a satellite in space about, anyway? She didn?t answer.

In any case, with our military fully committed to fighting two wars in the Middle East, we lacked the resources for an Asian offensive if we were so inclined, even against a piddling, mismanaged, rogue state like North Korea. But looking at the world for the next 30 years, who is the Pentagon going to model and war game against, but China, with its 2.5 million-man army?

Wen countered that the People?s Liberation Army was purely a defensive force. With a 12,000-mile land border, an 11,000-mile coastline, and dubious neighbors like Russia, Iran, and India, they have no other choice. Its ability to project force over great distances, as the US can, is virtually nonexistent.

Its 1979 invasion of Vietnam was about reclaiming ten miles of lost territory. China got involved in Korea only after general Douglas MacArthur threatened to rain atomic bombs on the mainland, losing 2 million men, including Chairman Mao?s son. China could have done a lot more in the Vietnam War, but didn?t, limiting its participation to a supply, logistical, and advisory role.


Map-BordersThat?s a Lot of Border to Defend

I then warned that if you really are worried about the Pentagon, you should stop hacking into our computers. She replied that the US started this by emptying out Chinese mainframes many times, and they were only responding in kind.

I said yes, but that China was targeting private companies, like Google (GOOG), Hewlett Packard (HPQ), and Oracle (ORCL) that without military grade software, were unable to defend themselves. The Chinese agencies involved then used the data to their own commercial advantage.

PentagonWhat Did You Say the Password Was Again?

By the time Wen married, China had already adopted its one child policy. As much as she wanted more children, she understood the government?s need to adopt such a drastic policy. Without it, the population today would be 1.6 billion, not 1.2 billion, and all of the money that went into buying capital goods would have been spent on food imports instead.

The country would have stagnated at its 1980 per capita income of $100/year. There would have been no Chinese economic miracle. She was very proud of her one son, who was a software engineer at Microsoft (MSFT) in Beijing.

Her husband, a mid level official at the Ministry of Commerce, fared less well, dying of lung cancer at a relatively early age. The US and Europe had exported their worst polluting industries to China to take advantage of lax environmental controls, turning the air in Beijing into a choking haze.

Sometimes her son would come home from school coughing and wheezing so badly that he couldn?t play outside. The two packs of cigarettes a day her husband smoked didn?t help either.

Chinese WomanImported From the USA

I asked if she recalled our first trip together and a dark cloud came over her face. We were touring a section of Fuzhou when three policemen marched up. They started shouting at Wen that we were in a restricted section of the city where foreigners were not allowed. They started mercilessly beating her with clubs.

I was about to intercede when my late wife, Kyoko, let go with a blood curdling tirade in Japanese that froze them in their tracks. I saw from the fear in their faces that she had ignited their wartime fear of Japanese authority and the dreaded Kempeitai, or secret police, and they beat a hasty retreat.

To this day, I?m not exactly sure what Kyoko said. We took Wen back to our hotel room and bandaged her up, putting ice on the giant goose egg on her head. When I left, I gave her my copy of HG Well?s A Short History of the World, which she treasured, as the book was then banned in China.

Wen mentioned that she was approaching the mandatory retirement age of 60, and soon would be leaving the Foreign Service. I suggested she move to San Francisco, which offered a thriving Chinese community. She laughed. No matter how much prices had fallen, she could never afford anything here on a Chinese civil servant?s salary.

Wen told me that China was grateful for the billions of dollars that foreigners had poured into her country as a result of my writings. I replied that I was simply trying to show my readers where to make some money, nothing more. It was pure opportunistic self-interest.

One of my recommendations, for Chinese search engine Baidu (BIDU), was up more than tenfold in less than two years, (click here for the call). Did she happen to know about any more future Baidu?s? Wen said that she wasn?t that close to the stock market, but that she would get back to me.

I asked Wen if she still had the book I gave her nearly four decades ago. She said it had become a family heirloom, and was being passed down through the generations. As she smiled, I notice the faint scar on her eyebrow from that unpleasantness so long ago.

In view of Wen?s comments, I think you have got to buy the Chinese ETF (FXI), which is the top performing stock market of 2015, once the ?RISK ON? trade comes back into favor. You also better revisit my stock picks in the area, including Baidu, China Mobile (CHL), and China Telecom (CHA).

SSEC 6-1-15


FXI 6-2-15

BIDU 6-2-15


CL 6-2-15

CYB 6-2-15

Murray Sayle: The Passing of a Giant in Journalism

I was saddened when I heard of the death of my close friend, the Australian, Murray Sayle a few years ago, after his long battle with Parkinson’s disease at the age of 84.

Murray was one of the giants of journalism in the second half of the 20th century. He started by editing the newspaper at University of Sydney, where his incendiary opinions got him expelled from school. It seems there was a problem with his suggestion to erect a statue of Priapus at the administration building honoring the chancellor, but only at the back door.

He moved on to London’s Fleet Street in 1952, arriving as a wet behind the ears, but sassy colonial, and landed a job with a small paper named The People. This was when the media was then dominated by giant daily broadsheets. He went on to become the quintessential war correspondent, reporting for the London Times, known in the trade as the ?Thunderer?, because the building shook when its giant presses ran.

I first met Murray in 1975 at a Mensa meeting in Tokyo where I was presenting a paper on the chemical structure and properties of tetrahydrocanabinol. Murray was on the hunt for a story, as always. He was cooling off after a decade of dodging bullets, bombs, shrapnel, and napalm covering the war in Vietnam.

Murray once told me that since his writings were often perceived as antiwar, it was a tossup who would shoot him first, the Vietcong or the Americans. Murray told me that the Foreign Correspondents’ Club of Japan had one of the best English language libraries in the country, and that he would be happy to sponsor me for membership; thus inadvertently, launching me on a career in journalism.

Murray moved into a converted 19th century silk worm grower’s farm house in a small mountain hamlet three hours outside of Tokyo with his wife Jenny, his tireless and loyal supporter. There, they raised three children who went through the local Japanese school system, soldiering on in their 19th century black German cadet uniforms as the only white kids in the district, emerging as flawless interpreters. I often made the long and arduous trip to Aikawa-cho (?Love River?) on weekends spending long nights over endless flasks of hot sake listening to Murray drunkenly quote extended passages verbatim from Rudyard Kipling.

We passionately debated the issues of the day until we fell asleep at the kotatsu. If I learned nothing else, it was that there is always another way to look at any issue. As I had the tendency to always turn up with a different Japanese girlfriend, his pet name for me became ‘Randy’.

Over a career that spanned nearly 70 years, Murray scored countless interviews with notoriously difficult to reach figures, like Ch? Guevara and Yasser Arafat. He managed to nail defecting British spy, Kim Philby, by staking out the one newspaper stand in Moscow that sold the Financial Times. Murray would regale me with tales of Ugandan dictator ‘Big Daddy’ Idi Amin, who stored the severed head of his wife’s former lover in his refrigerator.

Murray won numerous awards for his Vietnam coverage and for his description of the barbarous downing of a Korean Airlines flight 007 off the coast of Japan by a Russian fighter in 1983, which killed 269 helpless civilians.

Just before he died, the university that shamefully ejected him 65 years earlier, made amends by awarding him an honorary doctorate. The wit, candor, and insight of this larger than life figure is sorely missed.

Murray Sayle

Dinner with Joseph Stiglitz

The great thing about interviewing Joseph Stiglitz over dinner is that you don’t have to ask any questions. You just turn him on and he spits out one zinger after another. And he does this in a kibitzing, wizened, grandfatherly manner like one would expect from a character that just walked off the set of Fiddler on the Roof.

The unfortunate thing is that you also don’t get to eat. The Columbia University professor and former World Bank Chief Economist animatedly talked the entire time, and I was too busy feverishly taking notes to ingest a single crouton.

Stiglitz argued that for 30 years after the end of the Great Depression there was no financial crisis because a newly empowered SEC was on the beat, and everything worked. A deregulation trend that started under Reagan began stripping away those protections, with the eventual disastrous repeal of Glass-Steagle in 1999. The philosophical justification adopted by many economists, including Fed chairman Alan Greenspan, was that unfettered markets always lead to efficient outcomes.

This belief was based on simplistic models assuming that markets were always perfect, always open, and that everyone had perfect information. Stiglitz?s own work on ‘information asymmetry’, which earned him a Nobel Prize in economics in 2001, pulled the rug out from under this theory, because it showed that one party to a transaction always has more information than the other, often the seller.

The banks used this window to introduce super leveraged derivatives that had never been regulated, studied, or even understood. They then clawed open accounting loopholes that were so imaginative that not only were shareholders and regulators deceived about how much risk was involved, senior management was clueless as well. Instead of managing risk, they created risk.

A 2006 GDP that was 80% derived from real estate transactions and a savings rate that fell to zero meant that a severe crash was a sure thing. President Bush’s response was to unleash an extreme form of ‘trickledown economics,’ with the banks given $700 billion with no conditions attached. Intended to recapitalize the banks so they could resume lending to the mainstream economy, much of the money ended up being paid out in bonuses and dividends. Of the $180 billion used to rescue AIG, $13 billion went to Goldman Sachs, and much of the rest went to German and French banks. No wonder Main Street feels cheated.

The financial system is now more distorted than ever, with major institutions wards of the state, and smaller banks that actually lend to consumers and small businesses going under in record numbers, because the playing field is so uneven. There are too many structural conflicts of interest. The ?once in a 100 year tsunami? argument is merely a justification for changing nothing. Banks would rather maintain the fiction that the loans on their books are good, than make adjustments, meaning there will be more foreclosures in 2012 than in 2011 or 2010. No financial system has ever wasted assets on this scale, and the end result will be a national debt many trillions of dollars larger.

The $787 billion stimulus package was too small, and should have been at least $1.2 trillion, but there was no way Obama was going to get more out of this Senate. The 40% of the stimulus that was tax cuts was saved or put into Treasury bonds and created no immediate beneficial effects on the economy. More money should have gone to the states, which unable to deficit spend, are now a huge drag on the economy. But even this meager package was able to prevent the unemployment rate from rising from 10% to 12%, as it was set to do. Any major spending cuts will produce ‘Hoover’ outcomes.

The outlook for the economy is bleak, at best.

Well, I don’t get to chat at length with a Nobel Prize winner every day, so I thought I’d give you the full blast, even though I had to leave a lot out. For a dinner that I could actually eat, I walked next door for a Big Mac meal and supersized the fries.

Joseph Stiglitz

December 16, 2014

Global Market Comments
December 16, 2014
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