Wall Street's No Hitter

For those who think there is a "free market" represented by the DOW and other national exchanges, think again. Simply, it does not exist. High-speed computers programmed with software by the most brilliant mathematical minds alarming amounts of money can buy that track the market nanosecond by nanosecond and trigger automatic buy/sell orders, proximity to central trading floor computers and tiny details and massive data files only insiders and armies of analysts can know tilt the floor so severely in favor of the biggest and baddest boys, it's difficult for an average human being to stand upright. Yeah, we know the "flash trading" (instant computer trades) have been banned – without any penalties, by the way – and everyone knows "insider trading" is a felony (just ask Martha Stewart), but Wall Street is the master of walking the fine line and finding the loophole. Wall Street now relies on "high frequency trading" where numerous transactions, back and forth, squeeze the value out of every market movement.

On May 6^th, the Dow plunged – some say because a trader at a large bank erroneously made a trade but moved the decimal point a few notches over (from "million" to "billion") and all the "movement sensitive" computer programs kicked into automatic mode. Others point to the reactions of the Greek populace to new austerity measured required as a condition of IMF and European economic assistance; images of rioters burning cars flashed onto the screens at trading desks all over the world. These visuals, some claimed, underscored the uncertainty of any so-called "recovery" in the global economy. Maybe it was "everything." The government wants to know, to find a way to put the brakes on such precipitous volatility. The Los Angeles Times (May 12^th): "The SEC and the Commodity Futures Trading Commission are sifting through records of the 66 million trades 17 million during the most volatile hour alone [May 6^th], when the Dow Jones industrial average plummeted 700 points in just 15 minutes." They still haven't figured it out.

Representative Brad Sherman (Democrat, California) thinks a small "trading tax" would make such high frequency movement uneconomic; Republicans responded that Wall Street should not be punished for using better technology to address the marketplace. Others favor halting trading automatically (now reserved only for market changes of 10% or more), starting at the 5% level, and that is where SEC Chairperson Mary Shapiro and the various national exchanges are set to go at this time. Battles are being fought everywhere, with stiff resistance from the industry.

As legislation that would tighten regulations on financial institutions moves through the Senate, the requirement that derivatives be regulated and traded on an exchange with default coverage is still in the bill despite the stringent opposition of the Street: "Trading in derivatives is dominated by the nation's five biggest banks, JPMorgan Chase, Goldman Sachs, Bank of America, Citigroup and Wells Fargo, and by one count, the banks had enlisted a cadre of more than 130 lobbyists to help reshape the legislation." May 13^th NY Times. Trading derivatives these days is looking more and more like a cadre rich and fat spectators making side bets on the many horse races – laughing at the outcome. Folks – like New York's Attorney General, Anthony Cuomo – are asking why credit agencies were rating junky derivative bundles of subprime mortgage debt generated by major financial institutions – notably Goldman Sachs Group, Morgan Stanley, UBS AG, Citigroup, Credit Suisse, Deutsche Bank, Credit Agricole and Merrill Lynch (now a part of B of A) – as A, AA or even AAA? What exactly did these banks provide to the credit rating agencies that could possibly have generated such a favorable review? Was this the banks' fault… the rating agencies' fault… both… or – "unlikely" – none of the above?

Whatever they do, these mega-institutions seem to have the system down (or properly tilted in their favor), even as everybody else in the country has to pay for their excesses that brought the entire economy down. And that is a much, much bigger problem. Try this little observation reported in the May 11^th New York Times and see if you get any more sleep at night: "Despite the running unease in world markets, four giants of American finance managed to make money from trading every single day during the first three months of the year." Their remarkable 61-day streak is one for the record books. Perfect trading quarters on Wall Street are about as rare as perfect games in Major League Baseball. [On May 9^th], Dallas Braden of the Oakland Athletics pitched what was only the 19th perfect game in baseball history… But Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase & Company produced the equivalent of four perfect games during the first quarter. Each one finished the period without losing money for even one day." Morgan Stanley missed the cut; it had four net loss days during the same period.

Think of all of the volatility in the last few months. Still believe this is a "free market"? If you do, please be aware that the hallucinogens you are consuming are probably illegal; you may be prosecuted even as larger and darker mega-forces operate "freely" in the marketplace – wreaking havoc on many occasions – and knowing that they will never face an angry prosecutor; their lobbying efforts have sanctified their villainy.

I'm Peter Dekom, and I really have no problem with folks who earn billions in profits when they really create the values that justify that level of compensation or upside.

A Retiring Approach

Most of us – particularly if we live in cities and towns – interface with local government as a part of our daily lives – constantly, from driving on city streets, depending on fire and police protection or taking our kids to school. We read about federal policies and decisions, but other than paying our taxes and either getting annoyed by decisions in Washington or hoping a loved one in the armed forces is okay, direct one-on-one contact with the feds is not that frequent. The feds can print money (really by raising money supply, buying their own debt instruments, etc.) and state issues are nasty, but they don’t tend to hit the average American urban dweller nearly as hard as potholes, terrible schools, and dangerous neighborhoods – all local issues.

But cities are also the least likely to be able to generate the kinds of revenues they need to sustain their old and often spendthrift policies. As consumers spend less, a city’s share of sales tax revenue drops. As homes go into foreclosure and property values plunge, the property tax base erodes. With fewer new homes being built, fees from permits fall. The majority of American cities are in fiscal hell, building deficits, watching their credit ratings erode (increasing the interest rates they have to pay on all forms of debt) and being forced to cut services and face both angry residents and angrier and often powerful unions. The federal government doesn’t have enough money to bail out all of these deficit cities and most certainly isn’t going to keep funding unrealistic pension practices that are dragging these urban centers down.<>

Conventional and pre-financial-meltdown wisdom has always held that people worked for the government at lower rates than the private sector knowing that they would have fixed-benefit retirement benefits (with cost of living increases built in), limited work hours, earlier retirement and full benefits. This was the deal when these workers signed up, the contract they made through their civil service status or union collective bargaining agreement. I am reminded of “Depression Babies” with college degrees opting to be mail carriers because they could depend on the job, the pay and the benefits regardless of the economy. Today, it is just as likely that a government employee is actually making more than his or her private sector counterpart… and he/she often has a tenured job.

Unfortunately, the money to support these economic promises – made in very different times – simply does not exist… and is not likely to exist anytime in the foreseeable future. I live in a city facing a currently-estimated massive $485,000,000 shortfall next year – Los Angeles, California. Former conservative mayor, now 80-year-old Richard Riordan (he left office in 2001), thinks that unless all of the above practices and assumptions are changed radically and immediately, Los Angeles and cities like Los Angeles will have no other choice but to file bankruptcy under federal municipal bankruptcy law (a so-called Chapter 9 filing).

He strongly believes that local government has to raise the retirement age, and the required years in service, to 65 instead of frequently permitted retirement at 50 or 55. He challenges the practice of the above defined benefit retirement plan – where a retiree gets a set amount per month (with cost of living increases) regardless of the underlying pension funding account – and wants government to fund such retirement benefits by creating a series of individual private 401(k) investment accounts (where the contribution is defined, but the benefits are not). Basically, the retiree would get no more in the way of retirement benefits than what that account would support. As an aside, police and fire retirees in Los Angeles can retire with 90% of their pay, at age 50, benefits passed during Riordan’s tenure as mayor (the number had previously been 70%). And he challenged the practice of getting rid of employees by allowing early retirement – this may reduce the payments required from the operating budget (so it looks better), but it simply increases the deficit in an under-funded pension account. The city wanted to transfer city workers from the main city budget to the Department of Water and Power, which has a separate budget but creates only the most elusive cosmetic “savings” for the city.

Every one of the above policies and practices can be found in most municipal and local governments. If the economy were not (i) going through a paradigm-shift of getting rid of underperforming industries, (ii) permanently redesigning the workforce and (iii) figuring out how to repay or otherwise deal with massive governmental deficits that cannot be repaid for decades at best, then all we have to do is wait for the economy to “recover” to its previous level, and we can adjust slightly for the “bad years” we have faced. Unfortunately, every significant economic study I have seen is projecting more than a decade for the housing market to be restored to 2007 level, high levels of unemployment to continue for years beyond any recession we have faced and a decline in the relative economic strength of the United States when compared to ris ing nations like China and India.

So what do we do? Break our promises to government workers? They may have elected to work for the government, giving the upside in a private sector job, precisely for the benefits we are threatening to reduce or remove. What if civil servants sue at any reduction in their benefits, claiming either a contract breach or an unlawful “taking” of vested property rights? What if unions “just say no”? The alternative of Chapter 9 bankruptcy is the appointment of a federal trustee who has the power to terminate all contractual benefits, eliminate jobs by the thousands, take away programs and services that residents have come to rely upon and decimate all pension obligations. Everyone in this mix has a powerful reason to sit down at the bargaining table to get real. It won’t be fun, there will be anger… forget that… rage… at the broke n promises and the disrupted lives, but it is necessary. If any group of employees that is large enough resists, that one faction could force the entire city into Chapter 9…and they will lose anyway. The time to act is now.

I’m Peter Dekom, and we all have to face some tough economic choices these days.

A Loan Again, Naturally

Writing about complex financial matters is never easy, but awareness of what’s going on in this arena just might be the most import knowledge you can have. Put a couple of facts together and see where you come out on the overall vectors of our “recovery.” One of the key “missing ingredients” in rebuilding small and mid-sized businesses (the largest body of employers in the U.S.) and getting the middle and higher levels of the housing market in a stable and perhaps even nascent appreciation phase is restarting the credit markets. After Lehman Bros. collapsed in the fall of 2008, the credit markets began to freeze, and as 2009 rolled along, the markets turned to ice. Funny how statistically, the financial companies we funded with TARP money to get credit rolling again reduced their lending practices, tightened credit requirements and gave their senior managers higher levels of compensation than institutions that the taxpayers did not bail out.

Some – like perennial bad boy Goldman Sachs – actually signed on to become federally-insured “banks” … not mainly because they wanted to help in this credit impaired marketplace but because they wanted to borrow money from the government at some of the lowest fed fund rates in U.S. history in order to invest the proceeds of such taxpayer-funded loans into their own portfolios! I’d sure like to be able to borrow money at almost zero percent interest and, using my supercomputers with automatic trading (buy-sell) triggers that would get me in or out of the market before almost anyone else, make fortunes while minimizing any possible risk. Exactly why do we even allow this to happen? Oh, I forgot, the voters elect politicians who in turn report to Wall Street. Silly me.

Add to the above mix is the question of exactly how much borrowing can take place on this planet? If there is a pile of global cash (or virtual cash if you prefer… M1 money supply) and lots of borrowers are taking from the pile, what happens? Governments try to keep loan rates low, especially when they are the primary borrowers, and by increasing the money supply (what most refer to as printing money), make sure there is enough money to borrow. The bigger and more economically rich the government, the better the chances that some of these policies might work. But in the end, demand for money to borrow inevitably – under a simple application of the supply-demand curve – raises the interest rates in order to attract lenders and contracts the funds available to other new borrowers (like small and medium businesses). And if there aren’t enough lenders, increasing the money supply without any increase in underlying values inflates currencies… which also serves to raise interest rates. Sooner or later. The U.S. has borrowed plenty as its deficits have risen to record levels in an attempt to fix the economy; several European nations (notably the U.K.) have also incurred huge new debt loads. And now there is the latest round of mega-borrowing.

What’s been saving the U.S. from sinking relative to the rest of the world is the fact that Europe is borrowing a whole pile of money to lend out again to failing European economies. The stock market saw that move – an infusion of almost a trillion dollars by a combination of the EU and the IMF – as a stabilizing factor, which sent stock prices soaring on May 10^th. But that “sooner or later” hasn’t gone away. By May 11^th, the markets began to sputter, and the Asian market began to fall. The May 11^th Los Angeles Times: “Now, with fresh commitments to lend potentially huge sums to struggling borrowers, ‘it does seem li ke you're just giving the addict another fix,’ said Paul Kasriel, chief economist at Northern Trust Co. in Chicago… But Kasriel and other analysts said policymakers had little choice. With last week’s plunge in global markets — including one of the wildest trading sessions in Wall Street history — it was clear that Europe’s government-debt woes posed a growing threat to the world’s nascent economic recovery.

“Late last week the talk on Wall Street was that stresses were rising in the European banking system. The eroding value of government bonds put banks worldwide at risk because financial institutions hold huge amounts of that debt… By [May 7^th], interest rates were rising on short-term loans between European banks, suggesting that some banks were becoming leery of lending to others — similar to what followed the failure of brokerage Lehman Bros. in September 2008.” Will European voters reelect the governments that approved these loans? Will the austerity measures imposed on the debtor nations ease? The fact remains that the global financial markets, particularly on both sides of the North Atlantic, remain very weak, susceptible to another fall. There’s been a lot of national slorping at the global debt trough. And it seems we are not only living on borrowed funds; we are living on borrowed time. What’s your opinion?

I’m Peter Dekom, and I wonder if all these band aids will hold.

A Euro-Tract Infection

Was it a clerical error, an error in a programmed trading account or sheer panic at the “possibilities” of a Europe with serial national insolvencies to deal with? Whatever the cause, after a three day 600 point loss, for 30 minutes on May 6^th, the world watched the Dow plummet a further thousand points. While there was a partial recovery, the markets continued their downward slide the next day. One thing’s for sure, the markets were so completely unsure that at the slightest sign of instability, “traders around the world simultaneously pushed the ‘sell’ button as they watched live video of baton-wielding riot police wading into a crowd gathered outside the parliament in Athens to protest the passage of austerity measures foisted upon their government by their European neighbors and creditors.” Washington Post, May 6 ^th.

Is the European experiment – a unified Europe mostly under a single currency – a failure? Will the euro vaporize as national interests, particularly as the rich economic drivers like Germany and France are being asked to bear the heaviest burden in restoring the economic stability in the PIIGS countries – Portugal, Ireland, Iceland, Greece and Spain. Or is the “I” for Italy as it was originally or “G” for Great Britain? Those pictures on the telly, those were Greeks burning cars and rioting as their rich citizens shipped values overseas, continued to avoid paying taxes (they always have), and as Germans, frustrated with their spendthrift Greek brethren, demanded and got severe austerity measures in exchange for German and IMF economic support for the ailing Greek economy. Who wants to reduce their standard of living for three o r more years – by thirty percent or more – while the rich avoid any burden at all? The Germans are pissed. The Greeks are pissed. And the world markets are not taking the news particularly well. It seems that Europe may be leading us all back into “recession, part deux.”

With Greece being in the spotlight, the remaining PIIGS have their unresolved economic issues and will need massive capital infusions as well. When will the German or French voters cry “enough,” and press their governments to withdraw from a unified currency that seems to bring nothing but financial loss for the stronger economies? Will the euro die and be replaced by… the French franc, the German mark, etc.? “[U]nder the financial umbrella of the euro, the smaller, poorer countries at the periphery found they could borrow and attract enough capital to bootstrap themselves into the ranks of wealthy nations… But as C. Fred Bergsten of the Peterson Institute put it this week, the fundamental problem is that even with a single currency and a unified political and bureaucratic structure, the arrangement is only a ‘halfway house’ on the way to genuine political and economic integration, and a rickety one at that. While capital and goods and tourists can move relatively freely across borders, workers and services cannot, and national governments continue to jealously protect their regulatory and fiscal prerogatives. Although the political and economic elites continue to swear allegiance to the European project, their top-down strategy continues to meet strong resistance from voters.” The Post. Greeks most certainly borrowed to live far beyond their means.

Europe dithered, denied the problems at first, as such seeming indifference to collapsing economies actually worked to accelerate the fall of these weaker nations because of the “too little, too late” attitude of the European Central Bank (their equivalent of our Federal Reserve). The euro will fall, how far is not certain. It may die as well. As politicians continue to support the EU and the centralized currency, their electorate seems to be expressing extreme disenchantment with the whole mess. Even in non-euro-based England, even though the recent election gave no party the clear majority, the long-standing leadership of the Liberal Party appears to be at an end; Conservative leader David Cameron made it very clear in his campaign that he would never allow the U.K. to succumb to a Euro-currency and pledged his own version of austerity for England that will slow any recovery accordingly.

EU ministers are working to hammer out a bigger plan, one that covers Greece as well as the expected near-term needs of other weak European euro-economies that will need shoring up: “Rushing to finalize an agreement before Asian markets officially open Monday, the ministers were discussing an aid plan that would have the EU Commission make euro60 billion ($75 billion) available while countries from the 16-nation eurozone and the IMF could combine with a promise to back bilateral loans and guarantees for up to euro440 billion ($570 billion).” Washington Post (May 9^th). The American markets remain skittish, and we feel Europe’s pain in every facet of our economic world. Our exports to Europe face new challenges, American holdings on the Continent are falling in value and our markets will reflect our revived fears of what may well become part two of this global recession.

I’m Peter Dekom, and this would be whole lot more interesting to witness from a vastly greater distance.

Dinner at 11 PM

For Americans, a trip to Spain often entails eating dinner with other Americans – for those who can still afford to travel – at 7:30 or 8 in the evening. Spaniards eat late, snack in the afternoon, and for those who have not been forced into an internationally-based workday, take a very long post-lunch break that can involve an afternoon nap (the infamous siesta). But more internationally recognized business hours have crept into the traditionally slow-paced Spanish lifestyle; the post-Franco Spanish economy stayed well behind the standards of neighboring European nations.

Because of heavy support during the Spanish Civil War from Italy’s Mussolini and Germany’s Hitler, Generalissimo Francisco Franco, the dictator who led Spain from 1939 until his death in 1975, kept Spain “neutral” in World War II, resulting in post-War isolation from the rest of Europe. The economy and the culture stagnated under Franco’s leadership. In 1975, Prince Juan Carlos de Borbón became king and nominal ruler of Spain, but he opted for transitioning his country into a pluralistic democracy. Although the transition hit a few bumps along the way, Juan Carlos instituted a peaceful transition from dictatorship to democracy; a new constitution was ratified in 1978.

Spain was forced to play catch-up as its citizens wanted to accelerate their previously repressed and economically stagnant standard of living into the high-growth universe of neighboring Europe. Blessed with a Mediterranean coastline and a moderate climate, Spain seemed to have a lot going for it, although the ravages of over three and a half decades of oppression were a mountainous challenge to overcome. In 1986, Spain joined its neighbors in the European Union, and when the Euro became available to European states in 1999, Spain happily melded its “still behind the rest of Europe” economy into a world with powerful economic forces like Germany and France (the U.K. opted out of joining in the Euro-based economy but still remained an EU country).

Leverage was the primary tool for growth, and both public and private borrowings were already excessive before the high-debt period that plagued the rest of the Western world in the 1990s. Spaniards were just trying to mimic the lifestyle of their neighbors, making up for lost time. Borrowing was the shortcut, and real estate speculation in this sunny nation became a “road to riches” in the eyes of many. Real estate development exploded. Local lenders funded the excess.

To make matter more complex, the country is very regionalized, and local pride often outweighs national interests. Spain places a very emphasis on relative local autonomy – where regional governments account for 57% of all government spending, and it is very difficult to organize national policies when local governments are not on board: “Federal and regional interests diverge on crucial issues, notably labor legislation, the overhaul of which is seen by economists as essential to reducing unemployment and increasing productivity. For instance, the regions of Andalusia and Extremadura in the southwest apply looser rules on eligibility for unemployment assistance than those in the rest of Spain. That assists the seasonal work forces that underpin their large but fragile farming sector.” New York Times, May 4^th.

When the global economy crashed and burned, Spain’s excessive debt load hit this country (along with Portugal, Ireland, Iceland and Greece – other PIIGS nations that borrowed heavily and lagged the rest of Europe’s growth and lifestyle standards) particularly hard; the recession lingers with little sign of abatement. Business and bank failures abound. The national deficit shot upwards; in the first quarter of 2010 alone, the government spent 8% more than it generated in revenues. Unemployment skyrocketed to 20%. And a governmental austerity program aimed at cutting government spending by 2.5% of the GDP next year seems to be too little, too late.

As the central Spanish government struggles to take the increasing numbers of bad banks out of the mix, unable to force obvious and necessary mergers of banks to reconfigure the entire financial sector, the inability of the federal government to take the hard steps necessary to begin a road to stability has become a glaring concern to other EU nations… and has resulted in a downgrade (from AA+ to AA) by Standard & Poor of Spanish government debt instruments. Will this rating be further eroded as the financial mess continues? “Among the reasons for its decision, S.& P. highlighted Spain’s private sector indebtedness of 178 percent of G.D.P. and an inflexible labor market that was likely to leave Spain with a jobless rate of 21 percent this year.” The Times.

Is Spain the next Greece? “Investors and analysts say the lack of progress in tackling the banking issue underscores the Spanish government’s shortcomings in addressing its broader problem: crushing fiscal deficits arising from high unemployment and a persistent recession… Spain risks falling into the same trap as Greece, these investors say, unless it takes more forceful action. It could find itself unable to raise money on the private markets at acceptable interest rates — even though its government debt burden, as a share of the overall economy, is only half what Greece carries… ” The Times.

Clearly, the European Union is going to have to take action – probably with IMF help – but the EU also has to prepare for similar infusions, and parallel austerity programs, for the other PIIGS countries that have not already received support. But exactly what is an austerity program in a country with double-digit unemployment; what sacrifices will be required? Spain has found itself in the middle of an economic bull ring… but right now, Spain is the wounded bull. As Europe reacts to shore up its weaker nations, the Euro is likely to remain weak, perhaps grow even weaker, against the dollar. And that means that U.S. exports to Europe – what the administration hoped might be a boost to our efforts to recover – won’t be the bargain we hoped they’d be... one less source of revenue for our own cash-strapped nation.

As I have said many times before, we are all in this mess together.

Follow the Leader

Indonesia has the largest Muslim population of any nation on earth; over 200 million of its total 240 million plus population practices Islam. Ethnic Chinese, representing less than 4% of the total population, have always held an uneasy place in Indonesian society, increasingly “losing” their Chinese names, taking on local ones instead, because of their rather consistent unpopularity – based primarily on their disproportionate wealth and mostly non-Muslim practices. The “unpopularity” has often resulted in strong governmental restrictions, the use of ethnic Chinese as political scapegoats for failed policies and outright persecution and murder. Their preeminence in ownership of corporate shares also led to past laws that restricted the percentage of companies they were permitted to own.

Wikipedia: “Political pressures in the 1970s and 1980s restricted the role of the Chinese Indonesian in politics, academics, and the military. As a result, they were thereafter constrained professionally to becoming entrepreneurs and professional managers in trade, manufacturing, and banking. In the 1970s, following the failed alleged Communist coup attempt in 1965, there was a strong sentiment against the Chinese Indonesians, who were accused of being Communist collaborators… Various government policies banned Chinese language teaching, speaking, and publication. Established schools and colleges run by Chinese Indonesian foundations were nationalized and their facilities seized without compensation…

“In 1998, preceding the fall of Suharto's 32-year presidency, large riots targeted the Chinese Indonesians in another series of pogroms. Chinese homes were looted and burned, and many Chinese people were raped or killed [around 1,000 such murders are reported]. The events in 1998 were significant because unlike earlier pogroms against Chinese Indonesians, due to the Internet, this incident spread worldwide in real-time, and aroused the interest and feelings of the ethnic Chinese around the world, leading to demonstrations against Indonesia in many countries with significant Chinese populations and protests to the government of Indonesia. After the tragedy, a large number of Chinese Indonesians fled to other countries, such as the USA, Australia, Singapore, and the Netherlands.” While most of these laws were repealed at the end of the Suharto regime in 1998 and ethnic Chinese are now active in Indonesian life at the highest political and economic circles again, anti-Chinese sentiments seemed to have been deeply embedded in the Indonesian psyche.

On the other side of this equation, Communist China has been a particularly inhospitable place for organized religion since Chairman Mao Zedong founded the nation in 1949. Churches and temples have been demolished, religious practices banned, priests and religious leaders imprisoned and believers persecuted. The plight of Muslims within China has been particularly harsh, whether they faced a temporary travel ban following the September 11, 2001 attacks on the United States (the Chinese too feared terrorism) or faced violent police action like the Uyghurs in China’s Western Xinjiang Province after civil disturbances in the city of Ürümqi in the summer of 2009, leading to the death of 197 people and the injury of s cores of others. Many Muslim leaders have decried the “Godless” Peoples Republic of China, but that was before China became the new big kid on the block, the one with all the money and the best long-term growth prospects.

When the regent (like a governor of a smaller geographical area) of Lamongan, a “sub-region” (kabupaten) on the south-eastern part of the large island of Java in Indonesia, took a trip to China as a part of an Indonesian delegation in 2005, he was blown away by the modernity, power and grandeur of the new Chinese state, the vast highways, the incredible factories as well as the shining skyscrapers and cutting-edge architecture. He saw the future. And if there were the slightest vestige of anti-Chinese sentiments to be found, the regent’s actions may have changed those for all time, starting with this policy, begun in 2007: “Now, the regent… has begun trying to move his Indonesian region toward that future: he has mandated that all the schools in Lamongan, population 1.5 million, teach Mandarin Chinese to prepare the youth for doing business with China… In classrooms here, girls in white head scarves and boys in button-down shirts are haltingly reciting from Chinese textbooks and scrawling characters on blackboards. The local government has held Mandarin speech contests the past two years… As China’s economic power grows, the study of Mandarin is surging around the world. Its rise in Indonesia may be one of the most telling examples of how China’s influence is overflowing even the steepest of barriers…

“Last December, the Chinese Ministry of Education opened a Confucius Institute to teach Chinese in Jakarta, the Indonesian capital. The ministry operates 554 Confucius programs — what it calls institutes and classrooms — in 90 countries and regions. The United States has the most, with 68… The ministry sent about 380 teachers to Indonesia between 2004 and 2009, most on three-year contracts. But perhaps because of the recent anti-Chinese history, China prefers to play down any soft-power influence. In Jakarta, the Confucius Institute has done little to advertise itself, and it refused to grant this [NY Times] reporter an interview.” New York Times, May 2^nd. While Lamongan is the only Indonesian region mandating this educational direction, the handwriting is on the wall. There do not appear to be any parallel movements to mandate the teaching of English, by the way, although English has been a language option for many students along the way.

I’m Peter Dekom, and this is but one more example of the maxim that “money talks.”

Outsourced and Automated

During the last political campaign and particularly following the collapse of Wall Street, you heard echoes of “Americans just don’t make anything anymore.” Sure we export high-tech electronics, avionics, military gear, software, agricultural products and entertainment, but we don’t manufacture much else on a mass scale that creates a viable export business. And while there may be mega-tons of agricultural products, less than 2% of Americans are still involved in agriculture, the entertainment sector is relatively small, and we have lots of competition everywhere. The tough reality is that the labor required to make stuff that the world really wants is either the precise manufacturing we have come to expect from German carmakers or the cheap labor we see in China and India for most everything else.

So naturally, our service sector has grown much more rapidly than the manufacturing base, which production-based sector is almost a vestige of the “industrial revolution” that has long past the American economy. We’re in the information age. We are financiers to the world – and you can see the trouble that has created. We create social networks, creative content and software that controls everything to analytics to robotic manufacturing. Think robots are only for manufacturing? Think again. How about the new da Vinci surgical robot that has four remote control arms and a very elegant camera system? It allows surgeons to operate less invasively with much greater precision and much better visibility. The surgeon sets the robot and triggers the procedure, all the time under the doctor’s watchful eye, but it works incredibly well.

Computers are not only changing our business lives, they also provide ways to extend our very lives. Ian Ayres – author of a must-read Super Crunchers (Bantam 2007) – illustrates how “evidence based medicine” and software packages like the diagnostic program “Isabel” can increase patient illness evaluation from an average of 67% to 96% accuracy. Many doctors still believe that they can outguess the computer, but that is increasingly a myth that will die hard, especially as the press for more doctors that the new healthcare reform will mandate creates new demands for efficiency.

The kinds of detailed analysis that young MBA are required to do when they join financial institutions is becoming computer-routinized and/or outsourced to mathematically-trained experts in places like India. Simple legal documents are being offered by self-help sources like LegalZoom.com, clearly impacting the lower levels of legal practice, but India offers specialized companies that can write a U.S. patent or perform the most tedious legal research once reserved for young associates at the most prestigious firms in the United States. The world is definitely changing. And with the horrific economy teaching companies to resist hiring back for fear of recession part two, many of these convenient efficiencies will become a necessary part of corporate existence on a permanent basis. The need to be competitive will take us there and require use to remain in this lean, mean automated and outsourced world.

My friend Dennis Duitch (www.duitchconsulting.com ) notes in his weekly report what this trend holds for us in the future: “FAIRLY DISTRIBUTING SOCIETY’S WEALTH may be the most pressing unrecognized necessity now facing the U.S… As computers become more powerful, they can take over more jobs that now require human input and, within ten years, will be capable of carrying out almost any task… Manufacturing already is all but lost to human labor. Service, management, and even many research jobs are next… This trend is inevitable – the U.S. (and other developed lands) will become essentially jobless societies within the lifetimes of today’s younger adults… The only questions left are of timing… Within ten years, the U.S. will begin to follow Europe’s lead, reducing the workweek so that jobs and income can be divided among more people. Implications are a more severe decline in living standards than many people recognize, eventually making it necessary to scrap the current system (the ‘jobs for wages’ model adopted during the Industrial Revolution) in favor of some other means… so that the majority of people have at least the opportunity to provide a secure life for themselves and their families.” A distressing forecast. [THE FUTURIST – May-Jun 10]

It is easy to blame the economy for the changes we see, but even when the economic climate reaches a more positive plateau, clearly, almost every facet of the lives we took for granted in earlier times will have changed. The economic collapse didn’t cause these changes; it simply accelerated their implementation. Our new mission is learning to live within the new rules.

I’m Peter Dekom, and this isn’t going to be an easy transition.

Vendetta-ism

Ancient societies, separated by harsh topography, bad roads and primitive communications = tribalism. Early Islam exploded with militant (and military) fury through vast portions of the Middle East, North Africa and Spain and rolled with conquerors across central and southern Asia, but it also blended with tribes, some sedentary, many nomadic. Much of what we believe about Islam is actually tribalism practiced under the guise of strict adherence to Muslim principles. The religion “united” these peoples under a common belief system, but the topography, roads and communications didn’t improve much for many practitioners, particularly in the central Asian communities facing the harshest environments; tribalism was the only realistic governance for small communities far from any semblance of central authority.

And so it is with Afghanistan, a “nation” marked not so much by its international boundary than it is for the schisms of tribal control that truly govern most the country outside of the capital city, Kabul. We think of the Taliban – literally Islamic “teachers/students” – as a unifying fundamentalist form of Sunni Islam pushing an ancient and arcane form of literal Islam born in the 7^th century. But the Taliban in Afghanistan understand that the country is and will probably remain fractured by tribalism regardless of the “ruling” force that governs the national body politic.

At the root of tribalism is the notion of “getting even.” A village raids your village, and a vendetta is born. War lords gain strength when they serve this basic tribal value of getting even or taking advantage of weakened communities. Back and forth since as far back as anyone can remember. It’s just the way it is, has been and will be. Families themselves often fractured when one “uncle” thinks his uppity cousin needs to learn a lesson. Festering open wounds kept open and bleeding to allow those seeking new adherents to promise the one benefit that an angry villager understands: the means to extract revenge. The Taliban seem to know that very few of the people they are trying to recruit are attracted to a drab and strict version of religious abstinence, but they also know that the angry and the powerless can see the Taliban as giving them power… and weapons… to extract their revenge.

The April 19^th Washington Post: “In the rough borderlands between Pakistan and Afghanistan, the global war against the Taliban often boils down to a family feud, pitting tribe against tribe, son against father, brother against brother… While the Taliban leadership professes devotion to a 7th-century interpretation of Islam, many insurgents have far more parochial interests. They want revenge for an old grievance against their neighbors, or to settle a score with relatives… The local passions enveloped in the broader conflict help to explain why the United States and its allies have struggled for more than eight years to end the insurgency, without success. The tribal and familial infighting is not new, but now it has the veneer of a civilizational clash, with more weapons, money and recruits to keep the enmities fresh.”

When the Taliban support a vendetta with their superior military power, those who join win; those who do not often find their ranks decimated. The Taliban can practice their tortured ways at the micro-village level; this is their land, and they have been here for centuries. They know the feuds, the family schisms, and the local vendettas. Americans and their Kabul allies often do not. Taliban leaders know how to press for the advantage, buying loyalty often not born of ideology but of blood feuds. When the very notion of “Afghanistan” as a nation – “Pakistan” too in the Tribal Districts – has little relevance for the day-to-day existence of local villagers, isn’t it futile to fight for such national interests when the people really don’t care? Is there any realistic way for American policy interests backing a corrupt and unpopular government to prevail in a world of fractured loyalties and communities who cannot see beyond their visible horizon?

I’m Peter Dekom, and really looking at the situation can produce some very interesting and obvious conclusions.

It’s Rigged

“It turns out, by the way, that oil rigs today generally don’t cause spills. They are technologically very advanced.” President Obama on April 2^nd after announcing an expansion of off-shore oil exploration. “After a similarly unrelenting spill from an oil rig near Australia last year, oil companies went before Congress and promised that this couldn’t happen here in America. In September, David Rainey of BP [British Petroleum] testified before the Senate that their offshore technology was ‘safe and reliable.’ He pledged that ‘any release from our operations is unacceptable.’ Eight months later, the Coast Guard has set the ocean on fire in an unsuccessful bid to stop the spread of BP’s oil in the Gulf.” FastCompany.com (May 3^rd).

Try these recent “exciting moments in energy exploration” as well: “A $60 million project to extract renewable energy from the hot bedrock deep beneath Basel, Switzerland, was shut down permanently on Thursday after a government study determined that earthquakes generated by the project were likely to do millions of dollars in damage each year.” New York Times, December 10, 2009. “The company in charge of a California project to extract vast amounts of renewable energy from deep, hot bedrock has removed its drill rig and informed federal officials that the government project will be abandoned.” New York Times, December 11, 2009. It was right in the middle of California earthquake country, which made the project to viable (the cracks in the surface made it easier for heat to rise from the earth’s core).

Add this story from the January 10, 2009 Time Magazine: “The ‘clean coal’ campaign was always more PR than reality — currently there's no economical way to capture and sequester carbon emissions from coal, and many experts doubt there ever will be. But now the idea of clean coal might be truly dead, buried beneath the 1.1 billion gallons of water mixed with toxic coal ash that on Dec. 22 [2008] burst through a dike next to the Kingston coal plant in the Tennessee Valley and blanketed several hundred acres of land, destroying nearby houses. The accident — which released 100 times more waste than the Exxon Valdez disaster — has polluted the waterways of Harriman, Tenn., with potentially dangerous levels of toxic metals like arsenic and mercury, and left much of the town uninhabitable.”

Mother’s Day approaches, but one mom – Mother Nature – is pretty much not in a celebrating mood, at least not as far as her children’s attempt to extract energy from her bounteous body. The U.S. government temporarily halted – as best they could – off-shore oil drilling, called for a moratorium on new off-shore drilling, and set a 10 day ban on recreational and commercial fishing from Pensacola, Florida to the Mississippi Delta. Eleven oil-workers are still missing and unaccounted for and more than 200,000 gallons of oil leak into the Gulf each day. The President labeled the Gulf oil rig (BP’s Deepwater Horizon, located about 50 miles off-shore) explosion and ensuing environmental havoc “a massive and potentially unprecedented environmental disaster.” Wildlife was destroyed in incalculable numbers, the stench of the floating body of oil enveloped the region, the entire Gulf fishing industry may be so decimated that it is no longer commercially viable and miles of coastline may suffer long-term if not permanent damage, wreaking havoc on real estate values and tourism alike. It was Katrina, part two, in the Gulf.

While BP is taking full responsibility for the cost of cleaning up damage, BP CEO Tony Hayward cast the real blame for the explosion with a Swiss company – Transocean Ltd. – which owns the giant Deepwater Horizon platform that BP leased. The process to seal the hole that is spewing oil is painfully difficult: “Officials from the Obama administration and oil giant BP say it may take up to three months to seal off a leaking oil well 5,000 feet below the surface of the Gulf of Mexico ... Hayward said [on May 3^rd] that ‘the worst-case scenario is that we would need to contain this for two to three months whilst a relief well is drilled.’” Washington Post, May 3^rd. A safety valve – known in the industry as a “blow-out preventer” – failed. President Obama, obviously remembering the slow-to-react federal response to the after-effect of Hurricane Katrina, pledged: “We're going to do everything in our power to protect our natural resources to compensate those who have been harmed… to rebuild what has been damaged and help this region persevere like it has done so many times before.”

Is our quest for energy turning us into heroin addicts willing to do anything for a fix? Picture Gulf shrimpers sitting on the docks, for months and maybe years if the shrimp have been killed, unable to work, idle and frustrated… waiting for someone to process their financial claims while their livelihood has come to an abrupt halt. Imagine a seagull in a death struggle enmeshed in a gooey mess or brown-black fish carcasses floating lifeless in an ocean of sludge. Clean coal and safe off-shore drilling are two expressions that really need to be purged from the lexicon.

I’m Peter Dekom, and I am deeply saddened by it all.

Oily Warning Alert

We know that there is a finite supply of oil on the planet, and while there are probably massive reserves yet undiscovered, the likelihood of easy extraction is no longer a reasonable expectation. Arctic reserves, oil under the turbulent ocean or petroleum embedded in oil sand are what we are likely to find. In late March, the President formally opened formerly restricted areas to oil exploration: “The plan, which Mr. Obama said would balance the need to produce more domestic energy while protecting natural resources, would allow drilling along the Atlantic coastline, the eastern Gulf of Mexico and the north coast of Alaska. It would end a longstanding moratorium on exploration from the northern tip of Delaware to the central coast of Florida, covering 167 million acres of ocean.” New York Times (March 31^{s t}). The announcement drew criticism from many Democrats, speaking of the environmental impact, and Republicans, who felt the plan did not go far enough.

A government report, issued on February 23^rd by the United States Joint Forces Command, offered a military assessment on the risks to our oil reserves, a pronouncement that sent the price of oil upwards. DailyFinance.com (4/16) summarizes the essence of the study: “The report speculates that by 2012, surplus oil production capacity will dry up; by 2015, the world could face shortages of nearly 10 million barrels per day; and by 2030, the world will require production of 118 million barrels of oil per day, but will produce only 100 million barrels a day… Although this is hardly a scientific prediction -- a preface to the report clearly states that it's ‘speculative in nature’ -- it still raises the provocative question of how the U.S. will proceed when oil runs out.”

Will our efforts to increase automotive and power-generating efficiency – in light of massive population increases and accelerating demand for cars in developing nations – combined with finding new reserves be enough to create stability? Will the escalation in prices at the pump – reflecting greater demand than supply – serve as a deterrent to excessive use of petroleum-based fuel or will economies and growth be crushed by reason of this cost? Can we harness alternative energy sources, manage efficient new electrical power generation, and find a vastly more efficient way to store electricity than the current toxic and inefficient system of battery technology that exists today?

But the biggest question of all is how reliable are the estimates of the earth’s oil supply? DailyFinance.com explains: “Some of the signs that would supposedly precede an oil peak are volatile pricing, lower oil reserves and a lack of excess production capacity. Although the U.S. has certainly experienced ‘overheated’ oil prices and pricing volatility, it’s been recession-related… As for oil reserves, many industry watchers have expressed concern about an oil glut over the last couple of years. [In the week of April 12^th], however, oil prices climbed on news that oil reserves dropped by 2.2 million barrels, while analysts had expected a 1.1 million barrel increase, according to a Dow Jones survey.) A Guardian report published late last year claimed the International Energy Agency was bullied by the U.S. to overstate the world's oil supply, and that low reserves may be a real concern.” Specifically, the Guardian November 9, 2009 article said: “The world is much closer to running out of oil than official estimates admit, according to a whistleblower at the International Energy Agency who claims it has been deliberately underplaying a looming shortage for fear of triggering panic buying.” It’s frustrating thinking that we may have been lied to and manipulated, but what else is new. The harsh reality is that we will, sooner or later, run out of oil.

I’m Peter Dekom, and that’s just the way it is.

Slipping in Greece

What’s it like living in a country that is running out of time, choices and, most of all, money… facing the possibility of national bankruptcy? I’m not talking about what the European Union and the International Monetary fund are doing to shore up an economy or the impact of a “junk” rating on the national debt, just what is life like in this Mediterranean country of spectacular islands, historical treasures and a place on some of the most beautiful coastlines on earth?

A series of tax hikes, governmental spending cuts and austerity measures that have been required by EU and IMF lenders have changed the individual lifestyles of ordinary Greek citizens. The April 23^rd Guardian UK: “Greek trade unionists and civil servants who on [April 22^nd] walked off the job to protest the mere presence of the officials in the capital have unanimously proclaimed that further spending cuts and tax hikes will lead to a ‘social explosion’ – a threat that inevitably will pile the pressure on a government that has been forced, against its will, to implement the cost-cutting policies...The average Greek has suffered a 30% drop in income since the measures were announced. Anger over the IMF – whose intervention has been widely derided by Greeks – is already running high.” Pensions are frozen or being cut, civil service pay is sliding downwards, and many are losing their jobs.

The April 30^th New York Times sets the priorities in overall cuts and tax increases: “Union and government officials said Greece … pledged to raise its value-added tax to 25 percent, to freeze civil servants’ wages and to eliminate public sector bonuses amounting to two months’ pay. They said the government intended to increase taxes on fuel, tobacco and alcohol… Among the most significant features of the plan, a Greek government official said, would be a measure making it easier for the government to lay off some of the many thousands of public sector workers, whose low levels of productivity and high wages are a big contributor to Greece’s debt problem. Until now, the government has not been able to lay off civil servants, whose employment rights are in effect constitutionally guaranteed…. Another reform high on the list is removing the state from the marketplace in crucial sectors like health care, transportation and energy and allowing private investment.”

The April 29^th New York Times provides a typical example of how this financial crisis is impacting small business owners: “Vicki Apostolopoulou, 38, the manager at a costume jewelry store on a busy shopping street, said customers had stopped buying months ago. ‘They come in,’ she said. ‘But they don’t open their wallets anymore.’” Pay cuts and lean living follow years of careless borrowings – the government to enact populist social programs (while hiding the real cost and deficit realities from the voters) and the private sector to catch up to the European lifestyle (now that Greece was a member of the EU) they saw next door – have tanked this fragile economy. The global economic crisis ripped apart the assumptions that growth would take care of it all.

And of course, the pièce de résistance – the annoying habit that made some German members of Parliament (Germany is the richest EU “Euro” nation and the bastion of loans needed to save Greece) tell Greece to sell-off some of its islands to raise money – is the Greek proclivity not to pay taxes. “‘There has always been this way of thinking in Greece that the thieves ar e the clever ones and the ones who don’t steal are the patsies,’ said Petros Anagnostou, 46, a book dealer. ‘We have to develop a conscience as a community, to see ourselves as a collective society. If it is a jungle out there, then we will eat each other and end up in a place like we are today.’” The Times.

Yet the Greek populace knows that the burden of “paying taxes” will fall on the middle and lower income groups. The rich – who keep massive wealth off-shore (and lots of wealth has moved off-shore since this financial crisis began) – just don’t pay taxes much at all, and there is absolutely no sign that they are ready to start anytime soon. The February 7^th Guardian UK: “Traditionally, the country's super-rich, not least ship owners and mercantile elite, have favoured the Swiss bank and off-shore account. But now huge sums are also being spirited away to banks in Cyprus. ‘Very big transactions are going through [neighboring] Cypriot banks,’ [said analyst, Kostas] Pana­gopoulos. ‘Greeks feel that Cyprus is not only close, but safe.’… In the 29 years since Greece entered what was then the European Community, it has increasingly become divided between the very rich, who live in Hollywood-style opulence in the outer suburbs, and the poor, who are forced to survive on pensions of €500 a month.

“While a fifth of the population lives beneath the poverty line, some 20% of Greeks are believed to earn more than €100,000 annually – even if, according to income tax records, 90% declare salaries of less than €30,000 a year… ‘Greece has a lot of rich people who are not being taxed properly because there is so much tax evasion,’ finance minister Giorgos Papaconstantinou, told the [British newspaper] Observer. ‘If you look at the actual numbers, you will see that the number of people declaring over €100,000 a year is roughly 15,000,’ he said. ‘I don't think that there is anyone in this country who believes there are only 15,000 Greeks earning more than €100,000 a year.’… The growing flight of funds from Greece has whipped up much resentment among the public. ‘It's revolting,’ said one popular radio chat-show host last week. ‘After pillaging the country, they flee with their ill-gotten gains at the very mention of the word tax.’”

No wonder ordinary Greek citizens blanche at the thought of bearing the burden on their own, why protests, even riots, have exploded in reaction to austerity measures that impact ordinary people, while the super-rich completely avoid any of these social costs. But someone is going to have to pay the piper… and unless the Greek government figures out how to make those at the top cover their rightful share of his burden, it will in fact be the ordinary Greeks who suffer alone. “For Paul Koptides, who works in a car rental agency here… [he sadly laments:] ‘We did this to ourselves… It is our problem. It’s not Germany or Europe’s fault. We did this to ourselves.’… The financial crisis has left many Greeks worried about what kind of a year they are heading into and where they can safely save their own money…

“Some like Costas Papadakis, an air force pilot taking the day off in Athens, said he was working on not panicking because that would only make things worse….He said he did not think the Germans had behaved well toward Greece. But he shrugged, saying he would have done the same thing in their position… ‘We will have to learn to pay taxes,’ said Mr. Papadakis, 27, who was enjoying a frothy coffee at an outdoor cafe. ‘It will be all right. Other people do it.’” The Times. Getting used to living with 30-50% less income for at least the next three years – for those who still have a job – is staggeringly difficult. It is a financial crush that most Americans would find impossible to deal with, but it defines Greece’s future if it in fact can convince the IMF, the EU t o extend a financial lifeline. If Europe and the IMF don’t do enough, things will get worse… much, much worse. Germany (the obvious EU leader in this mess) dithered, facing popular pressure at home and demands for super-austerity concessions, and the European Union leadership faltered… which only accelerated the ratings plunge and the cost of a Greek recovery; the IMF may be the last man standing. And then there’s Portugal, Spain, etc., etc., etc.

I’m Peter Dekom, and if you think this chaos won’t impact us here, think again.

35 South Koreans a Day

Stress, a recession, strict parents imposing a Confucius-laden ethic to work hard and succeed plus a country that has succeeded beyond its wildest dreams in becoming a financial success on a global scale appear to be a deadly combination. The April 18^th Washington Post: “Before South Korea got rich, wired and worried, its suicide rate was among the lowest in the industrialized world. But modernity has spawned inordinate levels of stress. People here work more, sleep less and spend more money per capita on cram schools than residents of the 29 other industrialized countries that belong to the Organization for Economic Cooperation and Development… The suicide rate in this prosperous nation of about 50 million people has doubled in the past decade and is now the highest in the industrialized world.” Losing face has its price; failure or a fall from grace carries a steep penalty of social stigma.

Mired in a corruption scandal, former president Roh Moo-hyun jumped committed suicide by jumping off a cliff, leaving a note that read: “I can't begin to fathom the countless agonies down the road.” As Korea’s depressed “nation’s actress,” Choi Jin-sil, “hanged herself in her bathroom in October 2008, a wave of sympathetic suicides swept South Korea and 1,700 people took their lives the following month.” The Post. Her 39-year-old brother, unable to find enough work as an actor, followed suit last month, hanging himself with an electric chord.

Korean families don’t talk about the deceased, making the kind of detailed analysis that psychologists would like to make near impossible. Indeed, seeing a mental health professional is virtually forbidden in Korea (and many other Asian nations) under a Confucianitic ban against talking about personal feelings; going to a shrink is viewed as an admission of severe mental illness, itself a stigma which represents an extreme loss of face. Thus, despite the entry into the modern business world, people in Korea are denied some of the most basic coping mechanisms available in the West.

How bad is it? “The rate of suicide in most other wealthy countries peaked in the early 1980s, but the toll in South Korea continues to climb. Twenty-six people per 100,000 committed suicide in 2008 (the most recent year for which data are available). That's 2 1/2 times the rate in the United States and significantly higher than in nearby Japan, where suicide is deeply embedded in the culture.” Indeed, dying for a higher cause – like the Japanese Kamikaze pilots in World War II – is a form of sacrifice that is antithetical to most Westerners. The vision of Muslim suicide bombers seeking a shortcut to the land of 72 virgins is held in particular disgust by Europeans an d Americans, just as it is revered by many fundamentalists in the Middle East.

In South Korea, suicide has become a plague: “Incidents of suicide are increasing most rapidly among the rural elderly, government figures show, driven among other things by isolation, illness and poverty. Suicide among the young has been abetted by the long hours South Koreans spend online. Police investigators say the Internet enables young people to meet and plan group suicides, even when they are strangers to one another and live in different cities… Suicide is the leading cause of death among South Koreans in their 20s and 30s, and it is the fourth leading cause of death overall, after cancer, stroke and heart disease.” The Post. Pain is as much a cultural phenomenon as it is personal. In these difficult times, maybe it might be good to hug someone today.

I’m Peter Dekom, and people in pain need love too.