Before the Storm

I just read Bob Herbert's swan song Op-Ed "Losing our Way". He touched a nerve which has been pulsating under the surface, has recently been exposed and now is being prodded. Specifically he states that "The current maldistribution of wealth is also scandalous. In 2009, the richest 5 percent claimed 63.5 percent of the nation’s wealth. The overwhelming majority, the bottom 80 percent, collectively held just 12.8 percent."

In 2004 Thomas Frank published a book called "What's the Matter with Kansas" which was an attempt to explain how the conservatives in America were able to get a majority of Americans to vote "against" themselves.

The wealth statistics quoted above say all that needs to be said, or perhaps not. The group representing the 15% of the population between the top 5% and the bottom 80% controls 23.7% of the nation's wealth. Their focus is on joining the top 5%-not sliding down to the bottom 80%.

So they throw their weight of numbers in with the elite, and presto, the 20/80 rule appears as if by magic. For those of you who aren't familiar with the rule it basically states that 20% or whatever resource you are discussing will generate/receive 80%-or more- of the pie.

And in the US, the top 20% gets over 87%. In business, this calculation is the root of redundancies and revolving door employment practices. If you can get over 80% of your revenue from 20% of the group, why have the other 80%.

I believe this logic has been applied to the US as a whole. Political strategists are caught in a symbiotic relationship in which they either focus on or are driven by the top 20% who are united in their goal to keep their position which must come at the expense of the rest.

This is why we have developed gated communities, red lined areas, homelessness next door to affluent communities and every other manifestation of what is essentially an America made up of haves and have-nots. The trouble is that this combination of unbridled greed and unrestrained/unregulated corporations comes at our peril.

Mr Herbert paints a bleak picture of America. He tells us that only 1 in 5 job seekers will find employment (note the 20/80 ratio), and that even those that find work will be less well off than their elders. He is correct when he says this is unsustainable even if his figures appear to be inverted. An unemployment rate of 20%is murder on the remaining 80%- and that might just be what we get.

In one of my previous posts I mentioned that Glen Beck threatened that America would "go Egypt" on him if he didn't toe the line. Of course Glen Beck is a populist demagogue masquerading as the voice of the people while clearly representing the top 20% if not the top 5%.

His threats of creating civil unrest along the lines of the Middle East uprisings reflect a poor understanding of revolutions. Be it the "rising expectations" of the French which resulted in formation of a Republic, or the complete and utter despair of the Russians in joining the Bolsheviks, both were followed by bloodshed and terror.

So the answer to Mr Frank's question: the top 20% play the music. And they play it loudly. And they keep reciting how America is the land of endless opportunity to the 80%, the top of which is striving to join the ranks of the elite, and so on and so on. We have become a nation that believes its own rhetoric despite the fact that it is no longer relevant.

What about Mr Obama you might ask. Isn't he different. Didn't he represent a change from the previous group? Well he too is aspirational. Harvard, US Senator, he was already on his way to the upper echelons. But as soon as he entered the White House he crossed the threshold into the real elite.

He is now part of the machine. And the machine is in trouble. The nation is in trouble. Unskilled unemployed are a problem. They are highly susceptible to being manipulated by the mouthpieces of the elite. And,if their despair reaches epic proportions, they are prone to violence.

But we are entering a phase where even the educated are un(der)employed. They are even more dangerous.

They will flock to the populist banner which is most likely to provide them with a future. That means jobs. That means industry. And in the US that means the military-industrial complex.

Watch out for anyone wishing to reintroduce the draft. Watch out for those who advocate military action as the solution to our problems. Bush went into Iraq to secure oil. It appears to me that our entry into Libya is energy related-despite the PR blitz to the contrary.

And the term blitz might not be so far afield. The scent of wars of conquest is in the air, and as Mr Herbert said, we are addicted to foreign oil and I don't have to outline the extremes to which an addict will go for their fix...

Reflections on Greed

I returned to work last week and so went from a comfortable life style of pursuing my interests, managing a portfolio, reading and writing to the center of capitalism in one of its cruder forms.

I entered this realm knowingly after a two and a half year hiatus although my timing was somewhat precarious. The Middle East was in turmoil-the decision to enforce the no-fly zone was just being agreed bringing to light a myriad of geopolitical thrusts under crisis conditions. Japan was reeling from the devastation of an earthquake, tsunami and the spread of radiation. And the fate of the Euro was again being thrown into the balance with the next round of insolvency surfacing in the form of Portugal.

Obviously as part of trading my own portfolio the macro component meant that I was constantly following world events in terms of what I thought the medium to long term effects would be. My daily micro focus however was somewhat limited to market movements and trying to pick entry and exit points.

Once comfortable with that I would then step away from the financial aspect and reflect on the political, environmental and philosophical meaning of world events.

Now in reentering the work world I suddenly find myself analysing events strictly on a financial basis. Either something is deemed to have an immediate effect on the economy and will be pursued accordingly, or it is dropped.

There is no time for philosophical reflection during the trading day. The focus is on the next trade. Execute and move on. As we primarily facilitate clients transactions with very little principal risk the longer term ramifications of events are only interesting in terms of how they will impact various economic sectors and how will we as a firm position ourselves with respect to the affected areas.

And when I say position I mean the future (re)allocation of human resources, not the purchase or sale of securities in a proprietary book.

It doesn't really come as a surprise given that this was the world in which I had spent 30 years before retiring. In that world one has little time for reflection. The market is all encompassing and so the financial dimension is not just the most important aspect, one could say it the only aspect.

I am purposefully painting a black and white picture. Of course outside of work one could reflect on the broader implication of events beyond the financial realm. Now however with the benefit of hindsight I see how much that was the exception, and not the rule.

In retirement one has the time to indulge one's interests regardless of the financial implications. To do so at work would be construed to be "fluffy" or "woolly", and certainly not relevant to the work at hand.

I believe this is not just the case in the world of finance. I think it takes place in almost every commercial endeavour. It is the explanation, to a degree, as to why reactors are built on fault lines or on coastlines which are susceptible to tidal waves. It explains how sub-prime spun out of control; how disasters like Bhopal occur. It is the driver behind the Nestle "white ladies" programs, the BCE outbreaks, and, my pet peeve, GM crops to name but a few calamities that have befallen us.

It is why we need regulation. So every time someone complains about red-tape and unwarranted costs and bureaucracies, we have to point out that almost all or our disasters are man made, in pursuit of financial gain, whatever the cost.

It doesn't stop commerce. It stops catastrophe.

And For My Next Trick.....

Despite my many concerns about the state of the world in general and the dog's breakfast which makes up the moral and legal cesspool of much of the financial industry I have been coaxed out of retirement by an offer to build a Fixed Income business for a newcomer to the European markets.

I will admit I was somewhat ambivalent given that I am throughly enjoying myself and the freedoms granted me by retirement so the decision was not an easy one.

That being said being retired put me essentially in the position of being in the "Opposition". Now I will be "back in power" as it were which will bring more opportunities, and of course challenges.

I will endeavour to write albeit most likely less frequently in the first instance. In any event I will certainly bring a closer focus to the markets while trying to maintain a socio-political perspective, so please do keep reading.

The Chickens Come Home to Roost. Part III: Self Determination, Religion and Energy.

While in Cuba the Middle East decided to try and overthrow their governments. Tunisia succeeded with the result that there are now more Tunisian immigrants trying to enter Europe than ever before. The Egyptians got rid of Mubarak only to replace him with a group of military officers so no real change there. The Libyan "rebels" suddenly find themselves hung out to dry as Qaddafi's military is finally unleashed and the West realises that it doesn't really want to get drawn into a civil war.

But the real battle is in Bahrain. Iran and Saudi Arabia find themselves in their own proxy war. The conflict between Shia and Sunni, between Iran and the Saudis is reaching the critical stage. Back in the UK I read reports comparing the uprisings in the Middle East with the "Velvet Revolutions" of 1989 as the Eastern Bloc came unravelled. Personally they smell much more like 1936/7 in continental Europe.

And then the earthquake in Japan, the Tsunami, and the nuclear crisis. Without any question the physical destruction in Japan has been made significantly worse by the damage to the reactors at Fukishima. The combination of a massive earthquake and a Tsunami-they were called tidal waves when I was a kid and we all thought they were specific to Japan-obviously wasn't in the calculations of the nuclear plant security planners and that can be seriously questioned.

But the furore which has broken out in many western countries, most specifically Germany is reaching the heights of hysteria.

The reactors at Fukishima withstood an earthquake even stronger than the worst-case scenario for which they were designed. They did not survive the Tsunami. As mentioned, why you would build a reactor on the coast in a region known for earthquakes and Tsunamis without planning for the latter is beyond me. But that is not the discussion in Germany.

The risk of earthquakes in Germany is significantly lower than in Japan. None of the German reactors are in coastal regions which alleviates the risk of Tsunamis. Some are built close to earthquake faults, but the Japanese experience shows that that can be planned for.

No, the discussion in Germany is that some of the reactors were built before the risk of terrorists using airplanes as "flying bombs" was recognised and so they are not safe against crashing airplanes!

So Frau Merkel suggests that the 7 oldest nuclear facilities in Germany should be taken off the grid while safety checks are carried out given the new concerns of reactor safety following the Japanese crisis.

The opposition screams that she is doing this because of the regional elections currently taken place although it is what they have been clamouring for. Three months ago after much rancour all the parties agreed that over time Germany would exit from nuclear energy but because there is a law blocking the construction of new plants-the last German Nuclear Plant was built in 1989-the current plants operational lifespans would be extended 8 to 14 years depending on their age.

Now Merkel is hounded for deciding to review the 7 oldest plants. The opposition has even accused her of acting illegally in this decision as a means of trying to force her to resign.

Regardless of one's view on nuclear energy I am astonished at the hypocrisy of the political classes and the ignorance of the electorate.

Everyone gives lip-service to the needs of the environment but few actually are willing to accept the short to medium-term sacrifices that will be required before we can truly rely on renewable energy sources.

In the interim in addition to worries about nuclear energy no one wants coal-fired plants; no one wants next-generation high tension electrical lines or storage stations near their homes; no one wants windmill farms near them; no one wants new hydroelectric dams; and no one wants to remain dependent on oil.

I think everyone wants to go to heaven, and nobody wants to die.

The Chickens Come Home to Roost. Part II: The Need For Social Democracy

After a week in Cuba we flew to California. We have a German friend there who we join on an early morning walk in the foothills of the Santa Monica Mountains. The walk is with an eclectic group of anthropology, sociology and psychology professors who were all very interested in our trip to Cuba.

In trying to put my impressions into context I described myself as a Social-Democrat. When pressed to define what that was I explained that it meant that although I was a capitalist economically I believed in democracy politically, and more specifically in the need for (relatively) high taxes and the need for regulation in almost every facit of life.

There are more people in the Greater Los Angles area than in Cuba. In California even the riverbeds are covered with concrete. The amount of traffic is overwhelming, as is the number of homeless people. Driving from Central LA to Pacific Palisades on Sunset Boulevard the chasm between rich and poor is breathtaking, and this doesn't even take into account truly depressed areas of the city.

Cuba has free health care for all. And free education. The literacy rate is 90%. In California the literacy rate is 75% and the poverty rate is over 15%. Travel to Montecito, one of the most expensive towns in America, and then to its neighbour Santa Barbara which just suffered it's seventh homeless death in 2011.

Cuba is ranked 117th in the world economically. California is 8th.

But again I get ahead of myself.

As much as I appreciated what Castro had achieved-if nothing else he rid Cuba of a brutal and corrupt military dictatorship intimately interwoven with organised crime-he demonstrated that even under a somewhat benevolent and honest communist dictatorship it was still a dictatorship. The flip side of the social welfare provided by the communist state is that there is essentially no ambition, no real progress, and no growth. This is not paradise.

And yet when compared to California, that part of the USA which epitomizes the American Dream, when confronted by the blight of an incongruent mishmash of gated communities and abject poverty as the result of unregulated captialism and failed social policies, I am left nostalgic for the mythical past of my childhood as presented by the Cuba of today.

The Chickens Come Home to Roost. Part I: Der Klassenfeind

I apologise for my negligence in writing recently but I was overwhelmed by a number of circumstances which made it almost impossible to sit down and coherently put my thoughts together.

To begin with, in addition to my trip to California which I mentioned in my previous post, my wife son and I also visited the last remaining Worker's and Farmer's Paradise of Cuba. I was torn as to how to address it in the first place and I will admit it was very disconcerting to be in a country where you have no consular support-but that is a different story.

To get the timing right, on the second or third day there we woke to the earthquake in New Zealand. Cuba and New Zealand are about the same size and surprisingly (to me) there are more Cubans (~11 million) than there are New Zealanders (~4 million).

But I get ahead of myself.

My son is a student of Political Science who has moved around quite a bit on the left-right axis. He has somewhat followed Mark Twain's axiom that if you aren't a communist by the time you are sixteen you have no heart, and if you aren't a capitalist by the time you are 25 you have no brain.

I say somewhat because his path has not been so straight forward. A staunch Republican at the age of 12, as a 20 year old he spent last summer going door-to-door raising funds and garnering signatures for the American Family Workers Party in the harsh environs of Bridgeport, Connecticut, so I'm not sure where he is on the spectrum currently although he is definitely leaning towards capitalism.

But he is not the real focus here other than it was his burning desire to see how Communism/Socialism works in practice which took us to Cuba in the first place. We supported his interest. My wife and I fit Mark Twain's view of human evolution so we were especially interested to see how Socialism worked in a warm climate given that our previous exposure was to East-Bloc Socialist States.

This last point is important. A lot of recent anthropology discussions have revisited the ideas of the energy and determination of those inhabitants of the northern climes in contrast to the relative indolence and lack of ambition of those in southern climes.

So there we were suddenly in Cuba. For me it was a weird mixture of my childhood in eastern Tennessee in the Fifties and of trips to Spain, southern Italy and Yugoslavia in the Sixties. For my wife it was post-war Germany followed by similar reminiscences of southern Europe in the late Sixties and early Seventies. The cars were from my youth, as was the (lack of)traffic density. The horse and ox-carts in the city as well as on the major highway were straight from a bygone era in our western culture, albeit 90 miles from the US mainland.

It was a land stuck in time, or perhaps better said, stuck in various times. Arriving at Jose Marti Airport my son and I were singled out for an interview by some immigration officers. It was uncomfortable, unorganised and somehow what I expected/feared from a communist state.

But then you get into a cab to Old Havana, and as you dodge potholes, street sellers, dogs and the ever present throngs of people looking for a ride the backdrop of Cuban music starts to take over and you just sit back and take it all in.

Our expectations were unclear for although we had done a reasonable amount of research beforehand about the only thing friends had told us who had been (almost uniformly) was how bad the food was. As part of our preparation we read "The Old Man and the Sea" and "Our Man in Havana" so we were prepared for the old cars, rum, cigars and unfortunately prostitution. We were not however prepared for the crumbling infrastructure, nor however, the calm almost tranquil feel which either despite or perhaps because of the organised chaos pervaded the place.

Havana is amazing. First it is much larger than I imagined. Our hotel had a rooftop terrace where we sat looking out over the cityscape drinking the first of many daiquiris. There are few streetlights and no advertising so as the sun settled over the bay the city slowly darkened but for the headlights of cars and buses.

This too is important. Cuba's demand for energy is quite low. They drill their own oil which is apparently not of good enough quality to sell profitably on the open market but sufficient for their needs.

In every neighbourhood there is a state store where Cubans go to get their basic foodstuffs. Either everyone, relatively speaking, or no one goes hungry. After 1989 and the collapse of the Soviet Union malnutrition had stalked the land as the loss of Soviet support in conjunction with the ongoing embargo by the United States was devastating. The economy didn't really stabilise until the turn of the century. Since then it has bounced along above a subsistence level but not overwhelmingly so. Housing, food, education and health are all provided by the state.

This has the benefit that although no one appeared to be wealthy, in a week I only saw 1 or 2 apparently destitute people, and they were in Havana. It also has the disadvantage that there was no room for ambition and growth reflecting some grafitti I once saw in Leipzig proclaiming that security and comfort makes one fat and lazy. I didn't see many signs of obesity, but there was a distinct lack of drive which translated into a very slow orderliness.

The tool of choice in the countryside was the machete be it in a sheath on a saddle or just stuck in someones belt. But in 7 days I never felt threatened despite getting lost many times in back alleyways or country roads.

I mention this only in passing as a week later we were driving in Palm Springs one night after dinner and inadvertently crossed a border into a part of town where I felt extremely uncomfortable.

But far more important was the contrast encountered when I left Cuba and entered that other paradise, California, but that is for Part II.