Posts

September 27, 2018

Global Market Comments
September 27, 2018
Fiat Lux

Featured Trade:
(HOW TO GAIN AN ADVANTAGE WITH PARALLEL TRADING),
(GM), (F),
(TM), (NSANY), (DDAIF), BMW (BMWYY), (VWAPY),
(PALL), (GS), (RSX), (EZA), (CAT), (CMI), (KMTUY),
(KODK), (SLV), (AAPL),
(TUESDAY, OCTOBER 16, 2018, MIAMI, FL,
GLOBAL STRATEGY LUNCHEON)

How to Gain an Advantage with Parallel Trading

One of the most fascinating things I learned when I first joined the equity trading desk at Morgan Stanley during the early 1980s was how to parallel trade.

A customer order would come in to buy a million shares of General Motors (GM) and what did the in-house proprietary trading book do immediately?

It loaded the boat with the shares of Ford Motors (F).

When I asked about this tactic, I was taken away to a quiet corner of the office and read the riot act.

“This is how you legally front run a customer,” I was told.

Buy (GM) in front of a customer order, and you will find yourself in Sing Sing shortly.

Ford (F), Toyota (TM), Nissan (NSANY), Daimler Benz (DDAIF), BMW (BMWYY), or Volkswagen (VWAPY), are no problem.

The logic here was very simple.

Perhaps the client completed an exhaustive piece of research concluding that (GM) earnings were about to rise.

Or maybe a client old boy network picked up some valuable insider information.

(GM) doesn’t do business in isolation. It has tens of thousands of parts suppliers for a start. While whatever is good for (GM) is good for America, it is GREAT for the auto industry.

So through buying (F) on the back of a (GM) might not only match the (GM) share performance, it might even exceed it.

This is known as a Primary Parallel Trade.

This understanding led me on a lifelong quest to understand Cross Asset Class Correlations, which continues to this day.

Whenever you buy one thing, you buy another related thing as well, which might do considerably better.

I eventually made friends with a senior trader at Salomon Brothers while they were attempting to recruit me to run their Japanese desk.

I asked if this kind of legal front running happened on their desk.

“Absolutely,” he responded. But he then took Cross Asset Class Correlations to a whole new level for me.

Not only did Salomon’s buy (F) in that situation, they also bought palladium (PALL).

I was puzzled. Why palladium?

Because palladium is the principal metal used in catalytic converters, which remove toxic emissions from car exhaust, and have been required for every U.S. manufactured car since 1975.

Lots of car sales, which the (GM) buying implied, ALSO meant lots of palladium buying.

And here’s the sweetener.

Palladium trading is relatively illiquid.

So, if you catch a surge in the price of this white metal, you would earn a multiple of what you would make on your parallel (F) trade.

This is known in the trade as a Secondary Parallel Trade.

A few months later, Morgan Stanley sent me to an investment conference to represent the firm.

I was having lunch with a trader at Goldman Sachs (GS) who would later become a famous hedge fund manager and asked him about the (GM)-(F)-(PALL) trade.

He said I would be an IDIOT not to take advantage of such correlations. Then he one-upped me.

You can do a Tertiary Parallel Trade here through buying mining equipment companies such as Caterpillar (CAT), Cummins (CMI), and Komatsu (KMTUY).

Since this guy was one of the smartest traders I ever ran into, I asked him if there was such a thing as a Quaternary Parallel Trade.

He answered “Abso******lutely,” as was his way.

But the first thing he always did when searching for Quaternary Parallel Trades would be to buy the country ETF for the world’s largest supplier of the commodity in question.

In the case of palladium, that would be Russia (RSX) followed by South Africa (EZA), which together account for 74% of the world’s total production.

Since then, I have discovered hundreds of what I can Parallel Trading Chains, and have been actively making money off of them. So have you, you just haven’t realized it yet.

I could go on and on.

Do this for decades as I have and you learn that some parallel trades break down and die. The cross relationships no longer function.

The best example I can think of is the photography/silver connection. When the photography business was booming, silver prices rose smartly.

Digital photography wiped out this trade, and silver-based film development is still only used by a handful of professionals and hobbyists.

Oh, and Eastman Kodak (KODK) went bankrupt in 2012.

However, it seems that whenever one Parallel Trading Chain disappears, many more replace it.

You could build chains a mile long simply based on how well Apple (AAPL) is doing.

Suffice it to say that parallel trading is an incredibly useful trading strategy.

Ignore it at your peril.

 

 

 

 

 

It’s a Long and Winding Road to Get Here

My Briefing from the Joint Chiefs of Staff

I have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals.

So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, who is known as ?Hoss? to his close subordinates.

Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes.

As he spoke, I was ticking off the stock, ETF and futures plays that would best capitalize on the long term trends he was outlining.

The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO) and (PANW). Peer nation states, like Russia, are no longer the main concern.

Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off a 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.

The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general.? However, the 30,000-man surge there brought a dramatic improvement on the ground situation.

Iran is a big concern and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.

Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.

Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites.?

We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.??

The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI).? The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.

I left the dinner with dozens of ideas percolating through my mind, which I will write about in future letters.

CGW
PHO
RSX
GOOGL
CSCO
General James Cartwright

The Case for Europe

I have been to Greece many times over the past 45 years, and I?ll tell you that I just love the place. The beaches are perfect, the Ouzo wine enticing, and I?ll never say ?No? to a good moussaka.

However, I don?t let Greece dictate my investment strategy.

Greece, in fact, accounts for less than 2% of Europe?s GDP. It is not a storm in a teacup that is going on there, but a storm in a thimble. Greece is really just a full employment contract for financial journalists, who like to throw around big words like bankruptcy, default and contagion.

I have other things to worry about.

In fact, I am starting to come around to the belief that Europe is looking pretty good right here. Cisco (CSCO) CEO, John Chambers, announced that he was seeing the early signs of a turnaround.

Fiat CEO, Sergio Marchionne, the brilliant personal savior of Chrysler during the crash, thinks the beleaguered continent is about to recover from ?hell? to only ?purgatory.?

Only a devout Catholic could come up with such a characterization. But I love Sergio nevertheless because he generously helps me with my Italian pronunciation when we speak (aspirapolvere for vacuum cleaner, really?).

What are the two best performing stock markets since the big ?RISK ON? move started last Thursday? Greece (GREK) (+5%) and Russia (RSX) (+7.5%)!

And here is where I come in with my own 30,000 foot view.

The undisputed lesson of the past five years is that you always want to own stock markets that are about to receive an overdose of quantitative easing.

Since the US Federal Reserve launched their aggressive monetary policy, the S&P 500 (SPY) nearly tripled off the bottom.? Look how well US markets have performed since American QE ended 18 months ago.

Europe has only just barely started QE, and it could run for five more years. Corporations across the pond are about to be force-fed mountains of cash at negative interest rates, much like a goose being fattened for a fine dish of foie gras (only decriminalized in California last year).

Mind you, it could be another year before we get another dose of Euro QE, which is why I just bought the Euro (FXE) for a short-term trade.

A cheaper currency automatically reduces the prices of continental exports, making them more competitive in the international markets, and boosting their economies. Needless to say, this is all great new for stock markets.

Get Europe off the mat, and you can also add 10% to US share prices as well, as the global economy revives. The Euro drag dies and goes to heaven.

Buy the Wisdom Tree International Hedged Equity Fund ETF (HEDJ) down here on dips, which is long a basket of European stocks and short the Euro (FXE). This could be the big performer this year.

Praise the Lord and pass the foie gras!

 

HEDJ

 

GREK

 

RSX

 

Foie Gras

 

It?s all a Matter of Perspective in Greece

Why All Shares Are Now Oil Shares

After the market closes every night, I usually don a 60 pound backpack and climb the 2,000 foot mountain in my back yard.

To pass the time, I listen to audio books on financial and historical topics, about 200 a year (I?ve really got President Grover Cleveland nailed!). That?s if the howling packs of coyotes don?t bother me too much.

I also engage in mental calisthenics, engaging in complex mathematical calculations. How many grains of sand would you have to pile up to reach from the earth to the moon? How many matchsticks to circle the earth?

For last night?s exercise, I decided to quantify the impact of this year?s oil price crash on the global economy.

The world is currently consuming about 92 million barrels a day of Texas tea, or 33.6 billion barrels a year. In May, at the $107.50 high, that much oil cost $3.6 trillion. At today?s $53.60 low you could buy that quantity of oil for a bargain $1.8 trillion.

Buy a barrel of crude, and you get one for free!

This means that $1.8 trillion has suddenly been taken out of the pockets of oil producers, and put into the pockets of oil consumers. Over the medium term, this is fantastic news for oil consumers. But for the short term, things could get very scary.

$1.8 trillion is a lot of money. If you had that amount in hundred dollar bills, it would rise to 180 million inches, 15 million feet, or 2,840 miles, or 1.2% of the way to the moon (another mental exercise).

The global financial system cannot move this amount of money around on short notice without causing some pretty severe disruptions.

For a start, there is suddenly a lot less demand for dollars with which to buy oil. This has triggered short covering rallies in the long beleaguered Japanese Yen (FXY) and the Euro (FXE), which are just now backing off of long downtrends. The fundamentals for these currencies are still dire. But the short term trend now appears to be an upward one.

The US Federal Reserve certainly sees the oil crash as an enormously deflationary event. The use of energy is so widespread that it feeds into the cost of everything. That firmly takes the chance of any interest rate rise off the table for 2015. The Treasury bond market (TLT) has figured this out and launched on a monster rally.

Traders are also afraid that the disinflationary disease will spread, so they have been taking down the price of virtually all other hard commodities as well, like coal (KOL), iron ore (BHP), and copper (CU). For more depth on this, see yesterday?s piece on ?The End of the Commodity Super Cycle?.

The precipitous fall in energy investments everywhere will be felt principally in the 15 US states involved in energy production (Texas, Oklahoma, Louisiana, and North Dakota, etc.). So, the consumers in the other 35 states should be thrilled.

However, the plunge in energy stocks is getting so severe, that it is dragging down everything else with it. ALL shares are effectively oil shares right now. In fact, all asset classes are now moving tic for tic with the price of oil.

Throw on top of that the systemic risk presented by the ongoing collapse of the Russian economy. The Ruble has now fallen a staggering 70% in six months, and there is panic buying of everything going on in Moscow stores. The means that the dollar denominated debt owed by local firms has just risen by 70%. Any foreign banks holding this debt are now probably regretting ever watching the film, Dr. Zhivago.

Russian interest rates were just skyrocketed from 10.50% to 17%. The Russian stock market (RSX) is the world?s worst performing bourse this year. How do you spell ?depression? in the Cyrillic alphabet?

And guess what the new Russian currency is?

IPhone 6.0?s, of which Apple is now totally sold out in Alexander Putin?s domain!

Thankfully, this is more of a European than an American problem. But nobody likes systemic risks, especially going into illiquid yearend trading conditions. It?s a classic case of being careful what you wish for.

Of the $1.8 trillion today, about $430 billion is shifting between American pockets. That amounts to a hefty 2.5% of GDP.

Money spent on oil is burned. However, money spent by newly enriched consumers has a multiplier effect. Spend a dollar at Wal-Mart, and the company has to hire more workers, who then have more money to spend, and so on. So a shifting of funds of this magnitude will probably add 1% to U.S. economic growth next year.

Unfortunately, we will lose a piece of this from the obvious slowdown in housing. Deflation means that home prices will stagnate, or even fall. This is a major portion of the US economy which, for the most part, has been missing in action for most of this recovery.

Ultimately, cheap energy as far as the eye can see is a key element of my ?Golden Age? scenario for the 2020?s (click here for ?Get Ready for the Coming Golden Age? ).

But you may have to get there by riding a roller coaster first.

 

WTIC 12-15-14

USO 12-15-14

TLT 12-15-14

FXY 12-15-14

KOL 12-16-14

RSX 12-16-14

roller_coaster_monksOil at $53?

The Return of Peter the Great

Peter the Great is back!

That is what the latest rumblings out of Russia confirm, with President Vladimir Putin demanding no less than $18 billion in payments from the Ukraine for its natural gas purchases. Never mind that this is more than the beleaguered country could possibly ever use.

?Pay up, or we invade? seems to be the message. The Dow Average promptly sold off 267 points.

This is so 19th century. It reminds one of when England seized the Suez Canal from Egypt in 1875 after that hapless country?s failure to pay interest on its bonds. A perennially mismanaged Egypt practically invented the concept of sovereign debt default.

I remember it like it was yesterday.

The big problem for we stock traders is that the Russian public has been eating up Putin?s recent actions in the Ukraine, and are egging him on for more. Many are still bitter over the collapse of the old Soviet Union, and are lusting for payback. A partial reconstitution of the old Soviet Union under Russian tutelage would fit the bill nicely. Putin is simply delivering to the people want they want, as does every good politician.

Vlad certainly has a strong base on which to build. During his first premiership and presidency (1999?2008), real incomes increased by 250%, real wages more than tripled; unemployment and poverty more than halved, and standards of living rose dramatically. Putin's first presidency was marked by high economic growth. The Russian economy grew for eight straight years, seeing GDP increase by a heady 72%.

Russia's has a flat income tax of 13%, a rate libertarians here in the US would kill for. As Prime Minister, Putin oversaw large scale military and police reform. His energy policy has affirmed Russia's position as a superpower. Putin supported high-tech industries such as the nuclear and defense industries. A rise in foreign investment has also contributed to a boom in the automotive industry.

Putin is so popular that he has become a pop cultural icon in Russia, with many commercial products named after him. All of this means that he has the domestic political support to push the envelope further. The Ukraine could just be his opening gambit.

You would think that Russia would not be interested in pursuing a second cold war, as the first one drove them broke. However, he is no doubt interested in expanding his country?s power and influence.

Hitler followed a similar course, gobbling up the Rhineland, the Sudetenland, Denmark, Holland, Belgium, Norway, and eventually France, until he vastly overstretched himself and his resources. Let?s hope that Putin doesn?t try the same. The problem is that this time, the aggressor country has 8,500 nuclear weapons with our address still on them.

You can count on Putin?s antics to keep S&P 500 market volatility (VIX), (VXX) at a permanently higher level. You don?t know what he is going to do next, but you know he will do something.

If he confines his visions of grandeur to Ukraine, we might just be able to skate by with a textbook 10% market correction. If he starts to make moves on the Baltic nations of Latvia, Lithuania, and Estonia, all NATO members, then we are really back to another cold war. That would hit us with a massive recession as the ?Peace Dividend? gets returned to sender, and stock markets dive 25% or more.

That is a very sobering thought. Thank goodness I have huge short positions on.

RSX 4-10-14

Peter the GreatBack for the Comeback Tour

Charts to Watch For an End to the Crisis

Bad China data?.Russia threatens the Ukraine?.more bad China data?.maneuvers at the Russia-Crimea border. The bull has been punched out with a market that was down every day last week, China and Russia both taking turns thrashing investors, like tag team wrestlers. When will it end?

The canaries in the coal mine will be found in the charts below. This is where you will first hear the all-clear signal, when it is safe to return with an aggressive ?RISK ON? posture.

As always, watch the bond market. If the current rally in the (TLT) fails anywhere short of $110, it?s a sign that traders are fleeing the safety of the Treasury bond market and are happy to return to riskier assets, like equities. That equates to a ten year Treasury bond yield of just over 2.50%. A breakout of prices above this, and yields below suggest that more trouble is coming.

Keep close tabs on the Chinese Yuan (CYB). After an unrelenting five-year appreciation, it started a swan dive two weeks ago. That is when a banking crises in the Middle Kingdom started picking up steam. This prompted currency traders to unload Chinese renminbi for more stable dollars. The collapse of copper mirrors this. New signs of life in the Yuan and copper will hint that trouble there is over for now.

The Japanese yen is another big one to monitor. Most hedge funds borrow yen and sell them to finance long positions around the world. This is why the yen has been perennially week for the past two years. But when they dump these positions and hide under their beds, the reverse happens.

They buy back their yen shorts, pushing it up. That?s why the latest round of jitters has the Japanese currency probing four-month highs. If the yen fails here, it?s because investors are going back into the market for other assets.

Of course, the Russian stock market (RSX) is a no brainer to watch. Thanks to the antics of Vladimir Putin, it is down 28% so far in 2014, making it the world?s worst performing market this year. Invading your neighbors and threatening to incite WWIII is not good for your equities. I doubt he cares, but emerging market investors do.

Gold (GLD) is certainly earning its pay as a flight to safety instrument. It has been flying like a bat out of hell all year and is now testing major resistance. If the barbarous relic suddenly loses its luster, the memo will go out to buy paper assets once more.

Finally, keep the chart for the Volatility Index (VIX) planted on the top of your screen. Recent tops have been around the $21 level, only $3 higher than the current level. When cooler heads prevail, the (VIX) will collapse once again. Puts on the (VXX) are the way to play this move.

The interesting thing about these charts is that they are all moving to the extreme edges of multi month ranges. So we could be one more flush away from the end of this move.

That?s unless Russia really does invade Crimea in force. Then all bets are off.

SPY 3-14-14

TLT 3-14-14

CYB 3-14-14

COPPER 3-13-14

RSX 3-14-14

FXY 3-14-14

VIX 3-14-14

GOLD 3-13-14

Atomic BombThis a Sell Signal

The New War in the Ukraine

It was another one of those midnight calls from my old KGB friend.

Yuri was assigned to tail me in Tokyo during the 1970?s. He even came to my wedding as the official TASS correspondent. We have stayed in touch ever since. After the fall of the Soviet Union, he landed on his feet (as did his buddy, Vladimir Putin), eventually ending up in the hedge fund industry.

Yuri told me that Moscow had just dispatched another 6,000 heavily armed troops to its naval bases in Crimea, part of the Ukraine, and more were on the way. There, Russia has long-term leases; much like the US still has a presence in Guantanamo, Cuba. It is a crucial defensive arrangement that gives Russia access to its only all year, warm water ports.

The markets certainly voted with their feet, belying Russia?s important role in the global economy. A shooting war in the Ukraine would block the oil terminals for Russia?s largest export, choking off a principal source of revenue for the government, prompting Brent to pop $2.50. This is why Hitler invaded the region in 1942. It was all about energy, as it always is.

That will certainly be welcome news in Moscow. Indeed, boosting the price of Russia?s largest earner is seen by many as the principal impetus for the aggressive military move. That?s good for Putin, but bad for us.

You also saw higher prices for natural gas, another huge export from Russia to Europe, where the pipelines also cross the Ukraine. But gas is not an internationally traded commodity, just a collection of disparate local markets, so the impact in the US will be minimal. The coming spring is the big issue for this market.

Wheat, however, is another story. The Ukraine is one of the world?s principal grain exporters. This is why Napoleon invaded Russia in 1812. Take Ukraine out of the market, and several Middle Eastern countries quickly go hungry.

They certainly figured this out quickly in the Chicago pits, where prices (WEAT) rocketed by 5%. The move caught many traders short, who were anticipating a continuation of the three-year bear market.

Of course, stocks everywhere were trashed, especially the Market Vectors Russia ETF Trust (RSX), which dove by 17% since the crisis began two weeks ago. Normally, the (RSX) rises in tandem with appreciating oil prices. But nobody cares, as emerging markets (EEM) have been out of favor for some time, and once again are one of the worst performing asset classes in 2014.

Knowing that my friend has a strong history bent, as I, I asked if we were heading into a second Crimean War, Russia having won the last one in 1856 (remember the Charge of the Light Brigade?). Worse, is World Way III on its way? Russia still has 8,800 nuclear weapons, compared to our 3,500 (we bought their other 6,000 to run our nuclear power plants after the fall of the Soviet Union).

Not a chance, he replied. There is a reason why Russians are Grand Master chess players. The entire reason behind the crisis was to preserve Russia?s interests in any new Ukrainian government, the last one having just scampered off to collect on their Swiss bank accounts.

Be nice, and the troops go home. Be not so nice, and there will be a massacre, with Russia the overwhelming winner. Ukrainian troops are wisely confined to base, and there is no movement of Russian ships whatsoever. The signs of escalation are nowhere.

All of my contacts in Russia tell me that the chances of war happening are nil. Russia has such an overwhelming military advantage that this is a conflict that will be solved by writing checks, and not pulling triggers.

Remember, Russian leaders are all about projecting strength and are great at bluffing. (During the 1962 Cuban missile crisis, Nikita Khrushchev possessed only four operational atomic bombs). This is why Clint Eastwood is such a big movie star there.

Unfortunately, the Ukraine traded off all of its nuclear weapons in exchange for European security guarantees, which today are not worth the paper they are written on.

It all amounts to a storm in a teacup if you live anywhere but the Ukraine. The real concern is what Putin will do next. Thus emboldened, he may pick off another former Soviet Republic. This goes down very well with his domestic, nationalist base, which is still angry over their loss of the cold war.

If Putin continues his expansionist military policies, it could eventually lead to a return of the cold war. That would be a huge buzz kill for our bull market in stocks, as the peace dividend goes up in smoke and our economy returns to a war footing. At the end of the day, that would come straight out of corporate earnings, and your pockets.

Fortunately, a new cold war is highly unlikely. The last one drove the Soviet Union into bankruptcy. In the end, we outspent them to death. Our credit card was bigger than theirs. A much smaller Russia isn?t going to rejoin a losing game. America?s military has grown dramatically since then, with the increase almost entirely financed by China. Russia?s military virtually no longer exists, and no one anywhere is willing to bankroll a new one.

What this means for out markets is that no matter how ferocious today?s action, it is only a temporary event. It is curing an overbought condition is risk assets everywhere. After the usual over leveraged stop loss selling, it won?t take long for stocks to resume the upside, and bonds to take another dump. For more detail on how and why this is going to play out, please read yesterday?s letter.

I told my friend, Yuri, thanks and said I owed him another bottle of Stolichnaya vodka. By the way, how is the weather in Crimea in August? I hear beach house rentals there have suddenly gone begging.

RSX 3-3-14

USO 3-3-14

WEAT 3-3-14

SoldiersA Clever Chess Move?

 

Stolichnaya Vodka

My Briefing from the Joint Chiefs of Staff

I have always considered the US military to have one of the world?s greatest research organizations. The frustrating thing is that their ?clients? only consist of the President and a handful of three and four star generals. So I thought that I would review my notes from a dinner I had with General James E. Cartwright, the former Vice Chairman of the Joint Chiefs of Staff, and known as ?Hoss? to his close subordinates.

Meeting the tip of the spear in person was fascinating. The four star Marine pilot was the second highest ranking officer in the US armed forces, and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes. As he spoke, I was ticking off the stock, ETF, and futures plays that would best capitalize on the long term trends he was outlining.

The cycle of warfare is now driven by Moore?s Law more than anything else (XLK), (CSCO), and (GOOG). Peer nation states, like Russia, are no longer the main concern. Budgeting for military expenditures is a challenge in the midst of the worst economic environment since the Great Depression.

Historically, inertia has limited changes in defense budgets to 5%-10% a year, but in 2010 defense secretary Robert Gates pulled off 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.

The war on terrorism will continue for at least 4-8 more years. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. ?We?re not going to be able to kill our way or buy our way to success in Afghanistan,? said the general. However, the 30,000-man surge there brought a dramatic improvement on the ground situation.

Iran is a big concern, and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.

Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.

Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites. We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of ?voluntarism.? General Cartwright said ?Anyone in business will tell you that they?re losing intellectual capital on a daily basis.?

The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI). The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.

I left the dinner with dozens of more ideas percolating through my mind, which I will write about in future letters.

CGW 6-24-13

RSX 6-24-13

CSCO 6-24-13

GOOG 6-24-13

General James Cartwright