You know how these days, magazines that used to cost hundreds of dollars per year, or those that came from overseas sometimes cost over $1000 per year, are now free? If you’re a rational participant in business, you’d understand this “free” readership was so advertisers see a large circulation number. Sadly, they don’t care whether the circulation pays or not. They seem too stupid to realize those that don’t pay are HIGHLY unlikely to even open the magazine, let alone read a single article.

There’s this one trading magazine written and printed in Australia. They’ve sent me over 12 “this is your last issue” warnings, which all end in the trash, but the magazines just keep on coming, where it also ends up in the Recycling Bin (this is Cali. It’s law). I must admit though, I am curiously attracted to articles about  the late great WD Gann for reasons I couldn’t even begin to get into.   Back before the robots took over market-making, the magazine YTE, which stands for “Your Trading Edge”, was actually pretty cool. There was one ENORMOUS PROBLEM though, which they still have. By the time it reaches their American readers receiving it Gratis, it’s been in transit for weeks because they’re too cheap to pay for overnight delivery. (Hey, it’s free)

This results in all of their examples and articles  being “slightly” outdated. It’s cool though in a way to see how their predictions fared out by the time the magazine arrives.  Unless they go bankrupt first,  which seems to be a strong possibility suddenly with the direction their going. They’re trying to look more like “Active Trader” or the “Online Trading Expo”. You know, the magazine and convention for trader wannabes and failed 2nd careerers(no offense).  Or Technical Analysis of Stocks & Commodities (another one of those “this is your last free issue of TAS & C unless you send back this card” but they just won’t stop sending them no matter how many cards I trash!)

Getting to the point, be patient…..  I saw this name on the front page of the current edition. This guy, whose name I will not  mention for I will have to wash my mouth out with soap if I mention anything that identifies him or the firm he works for, owns, and is controlled by, but here’s a clue:  It’s  another one of those 3-letter trading companies out of NY, but their main office is in a building I’m familiar with, or so I saw, but one learns after being in this business for many years, that things are never what they seem.

Let’s back up a second, I’m not talking down on the magazine’s WD Gann expert that writes things like “without sharing the Gann Secrets” he says something like “Saturn is aligned with Jupiter, and the Virgo constellation is perpendicular to Orion’s belt so Corn is about to make a huge move”. Not kidding. Not entirely irrational either. I don’t understand the astronomy aspect of Gann’s work, but there are less sophisticated and easier to decipher parts of his work dealing with mathamatical formulas and Geometry.  Gann wrote in code, and as you learn this code, it’s like opening the door to the next level, and it keeps going  deeper and deeper until you become lost.  In the past, and even in the present to some, WD Gann is a market God or something.  We have become enlightened enough to know by now that planetary alignments affect gravity and light and solar storms and therefore the weather, and hence commodities. Simple logic.  We’ve pretty much accepted by now that a full moon and its proximity to Earth can cause massive gravitational disturbances on the planet as well as with people. It’s a fact that crime jumps during a full moon. 

What’s not a fact is the correlation. A great deal of Scientists go out of their way to try and  disprove this theory. Maybe they’re just Werewolves; or Vampires just keeping the Werewolves at bay. Whatever the supernatural aspect, or lack therof, we all have experienced  in our own selves how a full moon makes people a little less “rational”.  The sun and the moon rule the oceanic tides but the correlation with humans was pure folklore.  But every now and then when there’s a full moon, you’ll notice a big move in the markets. A move probably thriving off the irrationality of humans. But since black boxes have no concern for the cycle of the moon, good traders learn to fade these moves. As the market reverts to its’ mean depending on where that mean is, above or below, so starts a new Lunar cycle. 

I digress, just a tad.  As for the free magazine, the little article in the back that’s written by their in-house Gann voodooist, is actually the only part that’s “long cycle” enough, sometimes focusing on the Kondratiev Wave or “Grand Super Cycle”,  that makes the lag in transit irrelevant. WD Gann worked on this Super Cycle quite a bit. But I’m getting off subject again.

Back to this outdated magazine that arrives at my house on Friday or Saturday and low and behold, on the front page I see the name of this guy whose office is based in a building I’m, let’s just say familiar with. He runs one of the thousand or so 3 letter trading firms in NYand  works out of “a beautiful building with views of the Statue of Liberty” like a good view has any relavence on one’s performance. Nevertheless, this guy is the subject of an interview about Proprietary Trading, how it’s “evolved”, what’s “changed”, how to react to the various environments, andwhat to expect in the “future”, like he knew. The best hedge fund managers in the world are lost right now. And the head of a retail daytrading arcade knows?  Oh man.  That had me laughing for a while. I admit, I  actually read the interview. Aside from the two times I almost hurled, by the time I was done, my stomach felt like it was doing jumping jacks. 

As a “self-proclaimed”  child prodigy of the markets, I’ve seen em all after 10 years. But the things this guy says, and the representations he makes are borderline unnatural (note to self, avoid libel or slanderous terms). These “prop firms” with their multi thousand dollar training fees, software fees, over-rides disguised by intermediaries withAlien names like “Firm58″, are nothing more than modern versions of early 20th century bucket shops where people would sit and watch a blackboard with symbols and numbers being changed by a kid on a ladder and a real Wall Street ticker tape printing off trades done minutes or hours ago depending on where you were. Then came this guy that decided to monopolize the wires and invented Western Union, who then proceeded to ban bucket shops from using their service. If you really wanna know, just google the term ”bucket shop” or read this, on me: It’s a pre-req. Reminiscences of a Stock Operator    

The crooked ones would delay the public tape and get ahead of the trade by seeing the real tape a few minutes earlier, and would wipe their customer out by over-leveraging them and just cleaning up. Never even putting the trade through. That’s why it’s wise for all retail traders to check their confirms in order to check who or what the contra party was for the trade. It was either an ECN or another MMID, or it was  their own firm or a clearing house owned by the firm. For example, Fidelity owns National Financial. When you see this, it technically means your firm is taking the other side of your bets because it believe the odds are your gonna lose on that trade according to their multi-billion dollar super computers.  The firm never  takes your trade to market but always gives you the NBBO so you have no reason to complain.  But in reality, the firm is trading against you. Conflict of interest?  Maybe.  But remember the four cycles of a stock. If you don’t know what this means, you shouldn’t even be trading.  When you’re in a margin call, the firm closes you out as fast as possible and wipes out any remaining equity when a margin call is generated. Why? Because they were on the other side of the trade and were just licking their lips at their computers telling them which customer accounts are likely to blow up, so they can keep doing this for eternity, kind of like blood-sucking vampires (hey, that’s two mentions of the super-natural in one blog post, maybe I’m watching too many episodes of True Blood on HBO).  If I was you, I would stay away from any online trading firm that names itself after honesty (e.g. Fidelity) and is private (e.g. Fidelity). 

Let’s return to what’s written in the article.  And I’m writing this because it goes against everything I believe in and why I hate this business to the point where I’d rather go to Law School and return armed and ready with a passion to shut every single one of these blood thirsty, borderline legal firms down. They’ve hurt my friends, my cousin, myself, people who I never met that trusted me. These firms won’t stop until someone stops them. Seems the SEC is giving a crap recently but it will fade from the public and institutional memory and with it, the SEC’s investigation. Undermanned and broke, the agency is lucky to even be alive. With the SEC or not, I will take great pleasure in crushing every single one like the cockroaches they are.

Living and breeding on deception, the weaknesses of human beings, their ambitions, counting on their propensity to be ignorant and closed minded (otherwise know as tunnel visioned), especially the younger ones because  they could convince mommy or daddy to pay via credit card, promising to only give it the summer or just 1 year.  Their ignorance and naivety; sucking out the inspirations of the young and their ambitions, torturing them to waste their real Golden Years sitting in front of an array of monitors, in full hyper-tension, trying to make a couple bucks a day.  Instead of being out partying, hooking up with girls, learning, meeting the most amazing professors and just immersing themselves in something totally interesting to them, they instead end up with empty promises and bank accounts, having to work a cheap job without a college degree, then trying to do it again, until the gap in their education has gotten so big that their 4.0 gpa doesn’t even matter anymore.  They’re screwed, hook, line, and sinker.  A young mind is full of ambitions that will go to waste if they choose this path over a real education.  To me, that’s just plain wrong and writing crap that instigates and propagates this is wrong and the SEC is coming after them one by one.

Listen carefully now. If everything I’ve written to this point is a bunch of garbage, heed my advice on this one point:  If you still have money at any unregistered, non broker/dealer firm that is allowing you to trade firm capital and requiring a risk deposit to do so is breaking the law unless they are PROVIDING YOU WITH A SALARY, which would make you an employee of a hedge fund. If the firm is neither a hedge fund, nor a CBSX registered Broker/Dealer, and your are not licensed or getting your education FOR FREE,  or the firm is in fact structured as a hedge fund but doesn’t pay you a salary while at the same time dictating how you work, when you work, and provides the equipment for you to do that work on, and also makes you sign a non-compete/non-disclosure agreement, is an EMPLOYER. And you are an EMPLOYEE, which means at the VERY LEAST, you are owed minimum wage, and if you’re full time, they owe you health benefits.  Anything less and they’re breaking many laws. These firms want to have it both ways. Hopefully soon, they’ll all go down. The thing I love about New York law is that there is no corporate veil when fraud is involved. In other words, you can go after the owners personal assets. What a wonderful state!

In this YTE article, I read the kind of crapola that would inspire a 3.7 or 4.0 gpa student that just crushed his or her LSAT’s, GMAT, MCAT or GRE’s to skip school and try the short-cut to becoming rich. He mentions over and over that “with the proper training and mentors around you, you will succeed in our beautiful office overlooking the Statue of Liberty”, as if view has any relevance on your performance. In fact, after trading for 10 years, I’ve come to learn that the best environment to trade in is one that is totally dark, silent, perhaps you have your iPod on listening to music that pumps you up, standing up with at least 16 to 24 monitors surrounding you like a circle, and trading with a little device in your hand that goes from brain to trade in nanoseconds, like Nintendo WII.  And if I’m at home trading, no matter what area of the planet I’m on, I’m at my desk, showered, having just finished a healthy meal, and before me is AT LEAST TWO TO THREE hours before the US equity markets open. 

What happens overnight is more important than what happens during most of US trading hours.  Trades put on overnight are settled or closed in New York because that’s where they’ll find the liquidity. A currency trader can put on a Kiwi/Aussie trade, or a Yen/Kiwi trade overnight, but can only close that position in New York because of liquidity. The only time the US equity markets are relevant are during the first 40 minutes and the last 75 minutes. That’s it.  The rest is churning noise. Noise designed by very deep pockets via sophisticated algorithms to eat your equity a few hundred dollars at a time all day long, forcing you into a corner, where you have to make a high risk trade near the end of the day just to cover your equity loss because, like the rest of them you gotta eat too and unless you kill, you don’t eat, even though you’re making your full-time employer a fortune whether you profit or not. Eventually, if you enter a losing streak, guess what, under the guise of good “risk management”, an algo starts to trade against you, because the firm has placed your accuracy ratio at around 30%, which means that you’re wrong 70% of the time.

An algo with  a success ratio of 70% is printing money.  And if you start to make money again, the algo stops fading you because it wasn’t programmed to fade you, but to hedge against your trades on the basis that you were wrong 70% of the time. It’s not a conspiracy, but rather good risk management.   But you know what is devilish?  If you, as one of the firm’s full time traders, enter into a drawdown and their algorithm in-house starts to do what it was programmed to do and manage the risk of the firm, if you make money, they’ll lose money in a sick way. So say you get offered 70% of your profits and pay a commission of $6.50 per 1000 +/-.  The sooner you get into a hole, the sooner the firm can start paying you a fraction of that 70%.  Because until you come out of the hole, they’re not entitled to pay you a dime, but just to keep you hooked by a rope, they’ll give you 25% or 40% if you have a profitable month, they don’t care, they have a natural hedge as a prop firm, which is what made them such good businesses in the past. But not anymore.  If you’re a retail prop trader (you know you’re a retail prop trader when you have a daily stop loss limit under $25,000), you will constantly hit your limit and will never make a dime. It’s a behavioral thing. Again, for another article.

So back to the YTE article… As much as it was written to not appear like an advertisement which I assume would have been pretty expensive, it’s really written in a way where us “Yank’s” here in the US see it as nothing but an advertisement. The truth about the Proprietary Trading business in its present form is that there is none. The Volcker Rule has pretty much made it impossible to make money from proprietary trading without breaking the law or paying a huge amount of money for an infrastructure that abides by the law. So be very wary of those hole in the wall firms that are actually Hold Brother’s affiliates, offering you 99% or even 100% of the profits. Who offers you 100% of your profits? A firm that is assuming from day 1 that you won’t make a dime and all their revenue will come from your trading.  This is why the big boys are shutting down their Prop Desks, and I’m talking the top 10 banks in the world, which doesn’t mean there’s a huge new talent pool to choose from. Because the guy used to pulling the trigger on billion dollar trades because his trading line was a few hundred million, cannot and will not adapt to a trading line of $250,000 or $1mm or even $5mm.  They’re used to seeing equity swings that would cause a coronary for the owners on day two of this new traders employment. These are guys that manned desks and got paid 7 figure base salaries plus a huge bonus at the end of the year from their firms, not quite how the “other” prop side works is it?  They saw their “daily” equity, which they were trained not to watch, oscillate $200,000 for example.   

Nonetheless, this dude was pitching in this article that “kids out of high school, with the right training and education, would succeed”. WRONG. All they want is to be able to mark-up your commissions. Let me blow the roof wide open on this business since I’m safe in Cali and attending a Top 5 Law School. The company’s cost to trade is approximately $0.00027/share. That means, it costs 27 CENTS to execute a 1000 share order withtheir clearing firm, give or take a few cents. Their so called in-house traders are being charged around $.0065/share to trade, which equals about $6.50 cents to execute a 1000 share order. The mark-up is 2,500% per share and sometimes more, not to mention the huge chunk of your profits they take on top of that mark-up that costs you at least 5 figures a month, admit it. Then there are the pass thru’s for taking liquidity or getting paid for adding, but none of their training programs teach anything about the market’s micro structure.

For one thing, the partners are clueless themselves. Number two, the micro-structure is so fluid and dynamic that it’s pointless to try and teach an 18 year old kid, or a 24 year old young adult about it unless they’re studying it on their own. You can’t tell someone how to become a good trader, or teach someone how to find the right strategy. Or how to execute in the markets without leaving a trace; how to create baskets and customized algorithms that spray the NBBO and all the MMID’s on the inside to make sure you get your fill, even if it’s for 100 shares from each MMID; or that witha 2 second “fill or kill” instead of a market or IOC order, the trader can outsmart these automated market making algo’s and beat them at their own game.  Or how to use ”order remainder allocation” to go to the highest paying ECN for adding liquidity. Or when ECN’s flip and actually pay for liquidity like EDGE/X was doing. I don’t know if they still are.  Labor Day is today, and I won’t be returning to the markets for another few weeks.  This allows for order flow arbitrage if you’re fast enough. You take from the paying ECN and post on another paying ECN maybe at the same price. If both orders get hit, you make like 25 cents on that 1000 for playing “infrastructure arbitrage”.  This is all Chinese to the partners, to the teachers, to the traders. It’s quite sad really, and I only got to witness it because I ”did my time” in New York. If I ever trade from somewhere, it’ll be further east, like London, Spain, Italy, France, Montenegro, Croatia,  etc… The number of edges one gains is another article in an of itself. So we’ll leave it alone. But remember, the one with the most information wins. And sadly, those in NY have the least info in a 24 hour period. 

You can’t give someone a daily trade sheet, and expect them to trade off that sheet, unless you’re running a real hedge fund, like Stevie Cohen at SAC, or Millennium, where they love the term risk and being the one on the other side of any trade. Instead of spending even a penny on any seminars, trading schools, or online webinars, or anything of that sort, use your money to continue your education, get your MBA or PhD or JD, or JD/MBA, andthen get hired by one of the top 50 firms in the world. Don’t go working for one of the bottom feeders of this business just because you don’t want to go to school anymore. Think of school as a bridge to get to a more advanced, and significant trading arena, where you don’t have to worry about eating what you kill or starving to death. Remember that NY is a tough place, and not everyone can make it there, not even this writer. So use your wits, and avoid firms with either 3 letters in their name or the number 3.  But more importantly, remember there are no shortcuts in this world, and even a trader with the most impeccable track record that dates back 5 years, say without a single losing week, constantly earning an avg. of 50% per year, on a line of no more than $5 million, will NEVER get hired by the real big firms.  Because they START their traders with $25 or $50 million lines and expect them to produce immediately. A trader used to trading a few million is nothing but shark bait. Good luck and throw the article where it belongs.

ABOARD THE USS GEORGE WASHINGTON — Nothing projects U.S. global air and sea power more vividly than supercarriers. Bristling with fighter jets that can reach deep into even landlocked trouble zones, America’s virtually invincible carrier fleet has long enforced its dominance of the high seas.

China may soon put an end to that.

U.S. naval planners are scrambling to deal with what analysts say is a game-changing weapon being developed by China — an unprecedented carrier-killing missile called the Dong Feng 21D that could be launched from land with enough accuracy to penetrate the defences of even the most advanced moving aircraft carrier at a distance of more than 1,500 kilometres (900 miles).

The USS George Washington supercarrier recently deployed off North Korea in a high-profile show of U.S. sea power. AP Tokyo News Editor Eric Talmadge was aboard the carrier, and filed this report.

Analysts say final testing of the missile could come as soon as the end of this year, though questions remain about how fast China will be able to perfect its accuracy to the level needed to threaten a moving carrier at sea.

The weapon, a version of which was displayed last year in a Chinese military parade, could revolutionize China’s role in the Pacific balance of power, seriously weakening Washington’s ability to intervene in any potential conflict over Taiwan or North Korea. It could also deny U.S. ships safe access to international waters near China’s 11,200-mile (18,000-kilometre) -long coastline.

While a nuclear bomb could theoretically sink a carrier, assuming its user was willing to raise the stakes to atomic levels, the conventionally-armed Dong Feng 21D’s uniqueness is in its ability to hit a powerfully defended moving target with pin-point precision.

The Chinese Defence Ministry did not immediately respond to the AP’s request for a comment.

Funded by annual double-digit increases in the defence budget for almost every year of the past two decades, the Chinese navy has become Asia’s largest and has expanded beyond its traditional mission of retaking Taiwan to push its sphere of influence deeper into the Pacific and protect vital maritime trade routes.

“The Navy has long had to fear carrier-killing capabilities,” said Patrick Cronin, senior director of the Asia-Pacific Security Program at the nonpartisan, Washington-based Center for a New American Security. “The emerging Chinese antiship missile capability, and in particular the DF 21D, represents the first post-Cold War capability that is both potentially capable of stopping our naval power projection and deliberately designed for that purpose.”

Setting the stage for a possible conflict, Beijing has grown increasingly vocal in its demands for the U.S. to stay away from the wide swaths of ocean — covering much of the Yellow, East and South China seas — where it claims exclusivity.

It strongly opposed plans to hold U.S.-South Korean war games in the Yellow Sea off the northeastern Chinese coast, saying the participation of the USS George Washington supercarrier, with its 1,092-foot (333-meter) flight deck and 6,250 personnel, would be a provocation because it put Beijing within striking range of U.S. F-18 warplanes.

The carrier instead took part in manoeuvers held farther away in the Sea of Japan.

U.S. officials deny Chinese pressure kept it away, and say they will not be told by Beijing where they can operate.

“We reserve the right to exercise in international waters anywhere in the world,” Rear Adm. Daniel Cloyd, who headed the U.S. side of the exercises, said aboard the carrier during the manoeuvrs, which ended last week.

But the new missile could undermine that policy.

“China can reach out and hit the U.S. well before the U.S. can get close enough to the mainland to hit back,” said Toshi Yoshihara, an associate professor at the U.S. Naval War College. He said U.S. ships have only twice been that vulnerable — against Japan in World War II and against Soviet bombers in the Cold War.

Carrier-killing missiles “could have an enduring psychological effect on U.S. policymakers,” he emailed to The AP. “It underscores more broadly that the U.S. Navy no longer rules the waves as it has since the end of World War II. The stark reality is that sea control cannot be taken for granted anymore.”

Yoshihara said the weapon is causing considerable consternation in Washington, though — with attention focused on land wars in Afghanistan and Iraq — its implications haven’t been widely discussed in public.

Analysts note that while much has been made of China’s efforts to ready a carrier fleet of its own, it would likely take decades to catch U.S. carrier crews’ level of expertise, training and experience.

But Beijing does not need to match the U.S. carrier for carrier. The Dong Feng 21D, smarter, and vastly cheaper, could successfully attack a U.S. carrier, or at least deter it from getting too close.

U.S. Defence Secretary Robert Gates warned of the threat in a speech last September at the Air Force Association Convention.

“When considering the military-modernization programs of countries like China, we should be concerned less with their potential ability to challenge the U.S. symmetrically — fighter to fighter or ship to ship — and more with their ability to disrupt our freedom of movement and narrow our strategic options,” he said.

Gates said China’s investments in cyber and anti-satellite warfare, anti-air and anti-ship weaponry, along with ballistic missiles, “could threaten America’s primary way to project power” through its forward air bases and carrier strike groups.

The Pentagon has been worried for years about China getting an anti-ship ballistic missile. The Pentagon considers such a missile an “anti-access,” weapon, meaning that it could deny others access to certain areas.

The Air Force’s top surveillance and intelligence officer, Lt. Gen. David Deptula, told reporters this week that China’s effort to increase anti-access capability is part of a worrisome trend.

He did not single out the DF 21D, but said: “While we might not fight the Chinese, we may end up in situations where we’ll certainly be opposing the equipment that they build and sell around the world.”

Questions remain over when — and if — China will perfect the technology; hitting a moving carrier is no mean feat, requiring state-of-the-art guidance systems, and some experts believe it will take China a decade or so to field a reliable threat. Others, however, say final tests of the missile could come in the next year or two.

Former Navy commander James Kraska, a professor of international law and sea power at the U.S. Naval War College, recently wrote a controversial article in the magazine Orbis outlining a hypothetical scenario set just five years from now in which a Deng Feng 21D missile with a penetrator warhead sinks the USS George Washington.

That would usher in a “new epoch of international order in which Beijing emerges to displace the United States.”

While China’s Defense Ministry never comments on new weapons before they become operational, the DF 21D — which would travel at 10 times the speed of sound and carry conventional payloads — has been much discussed by military buffs online.

A pseudonymous article posted on Xinhuanet, website of China’s official news agency, imagines the U.S. dispatching the George Washington to aid Taiwan against a Chinese attack.

The Chinese would respond with three salvos of DF 21D, the first of which would pierce the hull, start fires and shut down flight operations, the article says. The second would knock out its engines and be accompanied by air attacks. The third wave, the article says, would “send the George Washington to the bottom of the ocean.”

Comments on the article were mostly positive.

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Seeing this as a narrow struggle between corrupt clerics and revolutionary hard liners is a sad and unacceptable disregard for the hundreds of thousands of young and old protesters, religiously conservative and socially liberal clerics, and those students that have died for want of basic and inalienable rights and civil liberties. The 1979 revolution was started by the students at Tehran’s “elite” universities. It took them two months to elevate their chants and slogans to include “death to the Shah”. This time around, it took only nine days for the chants to elevate to “death to Khamenei” by name.

Iran will always be an advanced culture and civilization that places great emphasis on moral and ethical standards and beliefs. From the first declaration of human rights in the history of the world by Kurosh the Great circa 539 BC, which is the founding principle of the United Nations and is on display for all to see, to America’s founding fathers referencing Cyropedia vs. Machiavelli when drafting America’s constitution (Jefferson kept two personal copies with him at all times, one for himself and one to share DOWNLOAD FULL TEXT HERE), Iranian influence upon the collective minds and hearts of civilized societies, including its own people, has always prevailed, and will continue to prevail. The clerical establishment’s historical role is to provide “spiritual guidance” and to protect society against the corruption of political leaders. That the past 30 years has turned this concept on its head, with the clerical establishment becoming corrupt after becoming the governing body does not alter a tradition dating back over 2500 years, with the role the Magi played during Zoroastrian Iran. A tradition continued even by Alexander’s brief conquest, throughout the Sassanid Dynasty, and even the post-Islamic Safavid Dynasty, which was founded in 1502 and ruled Iran during one of its most prosperous cultural renaissances until 1752. Throughout Persian history, every ruling faction that deviated from the spiritual guidance of a devout and humble supervisory body empowered to protect the people from the corruption of politicians once they tasted the opium of power ultimately failed. That in the 21^st century, the corrupt class is the same body entrusted to protect the people from political corruption, does not change the dominant ideology in Iranian minds: When the people fear their government, there is tyranny. As Thomas Jefferson stated, “The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”

The final outcome will be a complete transformation of Iran’s political structure that will take the shape of ideologies expressed by members of the clerical establishment none-the-less, such as Ayatollah Montazeri, which is more in line with Iran’s constitutional revolution of 1906, the 1952 Mossadegh led uprising which was sadly thwarted by Kermit Roosevelt and the United States, and the white revolution of 1963. See this for what it is: a budding revolution that will ultimately find support from the West. I have read your book “The Next 100 Years” and have extremely high praise for it. However, it is impossible not to notice the glaring lack of foresight regarding the situation in Iran, the outcome of which shall greatly influence the geo-political trends in Central Asia, the Caucuses, Eastern and Central Europe, and ultimately, even the United States. All areas for which you made brilliantly thought out predictions. It is therefore not surprising that you appear to be under the influence of “group think” and are seeing what you want to see because you have your reputation riding on a specific outcome. It is not too late to check your sources in the intelligence community and reassess the situation with more current intelligence from operatives on the ground, as I’m sure you are one of the most resourceful institutions in the world when it comes to geo-political feedback from the international intelligence apparatchik.

By George Friedman
Stratfor.com

Successful revolutions have three phases. First, a strategically located single or limited segment of society begins vocally to express resentment, asserting itself in the streets of a major city, usually the capital. This segment is joined by other segments in the city and by segments elsewhere as the demonstration spreads to other cities and becomes more assertive, disruptive and potentially violent. As resistance to the regime spreads, the regime deploys its military and security forces. These forces, drawn from resisting social segments and isolated from the rest of society, turn on the regime, and stop following the regime’s orders. This is what happened to the Shah of Iran in 1979; it is also what happened in Russia in 1917 or in Romania in 1989.

Revolutions fail when no one joins the initial segment, meaning the initial demonstrators are the ones who find themselves socially isolated. When the demonstrations do not spread to other cities, the demonstrations either peter out or the regime brings in the security and military forces — who remain loyal to the regime and frequently personally hostile to the demonstrators — and use force to suppress the rising to the extent necessary. This is what happened in Tiananmen Square in China: The students who rose up were not joined by others. Military forces who were not only loyal to the regime but hostile to the students were brought in, and the students were crushed.

A Question of Support

This is also what happened in Iran this week. The global media, obsessively focused on the initial demonstrators — who were supporters of Iranian President Mahmoud Ahmadinejad’s opponents — failed to notice that while large, the demonstrations primarily consisted of the same type of people demonstrating. Amid the breathless reporting on the demonstrations, reporters failed to notice that the uprising was not spreading to other classes and to other areas. In constantly interviewing English-speaking demonstrators, they failed to note just how many of the demonstrators spoke English and had smartphones. The media thus did not recognize these as the signs of a failing revolution.

Later, when Ayatollah Ali Khamenei spoke Friday and called out the Islamic Revolutionary Guard Corps, they failed to understand that the troops — definitely not drawn from what we might call the “Twittering classes,” would remain loyal to the regime for ideological and social reasons. The troops had about as much sympathy for the demonstrators as a small-town boy from Alabama might have for a Harvard postdoc. Failing to understand the social tensions in Iran, the reporters deluded themselves into thinking they were witnessing a general uprising. But this was not St. Petersburg in 1917 or Bucharest in 1989 — it was Tiananmen Square.

In the global discussion last week outside Iran, there was a great deal of confusion about basic facts. For example, it is said that the urban-rural distinction in Iran is not critical any longer because according to the United Nations, 68 percent of Iranians are urbanized. This is an important point because it implies Iran is homogeneous and the demonstrators representative of the country. The problem is the Iranian definition of urban — and this is quite common around the world — includes very small communities (some with only a few thousand people) as “urban.” But the social difference between someone living in a town with 10,000 people and someone living in Tehran is the difference between someone living in Bastrop, Texas and someone living in New York. We can assure you that that difference is not only vast, but that most of the good people of Bastrop and the fine people of New York would probably not see the world the same way. The failure to understand the dramatic diversity of Iranian society led observers to assume that students at Iran’s elite university somehow spoke for the rest of the country.

Tehran proper has about 8 million inhabitants; its suburbs bring it to about 13 million people out of Iran’s total population of 70.5 million. Tehran accounts for about 20 percent of Iran, but as we know, the cab driver and the construction worker are not socially linked to students at elite universities. There are six cities with populations between 1 million and 2.4 million people and 11 with populations of about 500,000. Including Tehran proper, 15.5 million people live in cities with more than 1 million and 19.7 million in cities greater than 500,000. Iran has 80 cities with more than 100,000. But given that Waco, Texas, has more than 100,000 people, inferences of social similarities between cities with 100,000 and 5 million are tenuous. And with metro Oklahoma City having more than a million people, it becomes plain that urbanization has many faces.

Winning the Election With or Without Fraud

We continue to believe two things: that vote fraud occurred, and that Ahmadinejad likely would have won without it. Very little direct evidence has emerged to establish vote fraud, but several things seem suspect.

For example, the speed of the vote count has been taken as a sign of fraud, as it should have been impossible to count votes that fast. The polls originally were to have closed at 7 p.m. local time, but voting hours were extended until 10 p.m. because of the number of voters in line. By 11:45 p.m. about 20 percent of the vote had been counted. By 5:20 a.m. the next day, with almost all votes counted, the election commission declared Ahmadinejad the winner. The vote count thus took about seven hours. (Remember there were no senators, congressmen, city council members or school board members being counted — just the presidential race.) Intriguingly, this is about the same time in took in 2005, though reformists that claimed fraud back then did not stress the counting time in their allegations.

The counting mechanism is simple: Iran has 47,000 voting stations, plus 14,000 roaming stations that travel from tiny village to tiny village, staying there for a short time before moving on. That creates 61,000 ballot boxes designed to receive roughly the same number of votes. That would mean that each station would have been counting about 500 ballots, or about 70 votes per hour. With counting beginning at 10 p.m., concluding seven hours later does not necessarily indicate fraud or anything else. The Iranian presidential election system is designed for simplicity: one race to count in one time zone, and all counting beginning at the same time in all regions, we would expect the numbers to come in a somewhat linear fashion as rural and urban voting patterns would balance each other out — explaining why voting percentages didn’t change much during the night.

It has been pointed out that some of the candidates didn’t even carry their own provinces or districts. We remember that Al Gore didn’t carry Tennessee in 2000. We also remember Ralph Nader, who also didn’t carry his home precinct in part because people didn’t want to spend their vote on someone unlikely to win — an effect probably felt by the two smaller candidates in the Iranian election.

That Mousavi didn’t carry his own province is more interesting. Flynt Leverett and Hillary Mann Leverett writing in Politico make some interesting points on this. As an ethnic Azeri, it was assumed that Mousavi would carry his Azeri-named and -dominated home province. But they also point out that Ahmadinejad also speaks Azeri, and made multiple campaign appearances in the district. They also point out that Khamenei is Azeri. In sum, winning that district was by no means certain for Mousavi, so losing it does not automatically signal fraud. It raised suspicions, but by no means was a smoking gun.

We do not doubt that fraud occurred during Iranian election. For example, 99.4 percent of potential voters voted in Mazandaran province, a mostly secular area home to the shah’s family. Ahmadinejad carried the province by a 2.2 to 1 ratio. That is one heck of a turnout and level of support for a province that lost everything when the mullahs took over 30 years ago. But even if you take all of the suspect cases and added them together, it would not have changed the outcome. The fact is that Ahmadinejad’s vote in 2009 was extremely close to his victory percentage in 2005. And while the Western media portrayed Ahmadinejad’s performance in the presidential debates ahead of the election as dismal, embarrassing and indicative of an imminent electoral defeat, many Iranians who viewed those debates — including some of the most hardcore Mousavi supporters — acknowledge that Ahmadinejad outperformed his opponents by a landslide.

Mousavi persuasively detailed his fraud claims Sunday, and they have yet to be rebutted. But if his claims of the extent of fraud were true, the protests should have spread rapidly by social segment and geography to the millions of people who even the central government asserts voted for him. Certainly, Mousavi supporters believed they would win the election based in part on highly flawed polls, and when they didn’t, they assumed they were robbed and took to the streets.

But critically, the protesters were not joined by any of the millions whose votes the protesters alleged were stolen. In a complete hijacking of the election by some 13 million votes by an extremely unpopular candidate, we would have expected to see the core of Mousavi’s supporters joined by others who had been disenfranchised. On last Monday, Tuesday and Wednesday, when the demonstrations were at their height, the millions of Mousavi voters should have made their appearance. They didn’t. We might assume that the security apparatus intimidated some, but surely more than just the Tehran professional and student classes posses civic courage. While appearing large, the demonstrations actually comprised a small fraction of society.

Tensions Among the Political Elite

All of this not to say there are not tremendous tensions within the Iranian political elite. That no revolution broke out does not mean there isn’t a crisis in the political elite, particularly among the clerics. But that crisis does not cut the way Western common sense would have it. Many of Iran’s religious leaders see Ahmadinejad as hostile to their interests, as threatening their financial prerogatives, and as taking international risks they don’t want to take. Ahmadinejad’s political popularity in fact rests on his populist hostility to what he sees as the corruption of the clerics and their families and his strong stand on Iranian national security issues.

The clerics are divided among themselves, but many wanted to see Ahmadinejad lose to protect their own interests. Khamenei, the supreme leader, faced a difficult choice last Friday. He could demand a major recount or even new elections, or he could validate what happened. Khamenei speaks for a sizable chunk of the ruling elite, but also has had to rule by consensus among both clerical and non-clerical forces. Many powerful clerics like Ali Akbar Hashemi Rafsanjani wanted Khamenei to reverse the election, and we suspect Khamenei wished he could have found a way to do it. But as the defender of the regime, he was afraid to. Mousavi supporters’ demonstrations would have been nothing compared to the firestorm among Ahmadinejad supporters — both voters and the security forces — had their candidate been denied. Khamenei wasn’t going to flirt with disaster, so he endorsed the outcome.

The Western media misunderstood this because they didn’t understand that Ahmadinejad does not speak for the clerics but against them, that many of the clerics were working for his defeat, and that Ahmadinejad has enormous pull in the country’s security apparatus. The reason Western media missed this is because they bought into the concept of the stolen election, therefore failing to see Ahmadinejad’s support and the widespread dissatisfaction with the old clerical elite. The Western media simply didn’t understand that the most traditional and pious segments of Iranian society support Ahmadinejad because he opposes the old ruling elite. Instead, they assumed this was like Prague or Budapest in 1989, with a broad-based uprising in favor of liberalism against an unpopular regime.

Tehran in 2009, however, was a struggle between two main factions, both of which supported the Islamic republic as it was. There were the clerics, who have dominated the regime since 1979 and had grown wealthy in the process. And there was Ahmadinejad, who felt the ruling clerical elite had betrayed the revolution with their personal excesses. And there also was the small faction the BBC and CNN kept focusing on — the demonstrators in the streets who want to dramatically liberalize the Islamic republic. This faction never stood a chance of taking power, whether by election or revolution. The two main factions used the third smaller faction in various ways, however. Ahmadinejad used it to make his case that the clerics who supported them, like Rafsanjani, would risk the revolution and play into the hands of the Americans and British to protect their own wealth. Meanwhile, Rafsanjani argued behind the scenes that the unrest was the tip of the iceberg, and that Ahmadinejad had to be replaced. Khamenei, an astute politician, examined the data and supported Ahmadinejad.

Now, as we saw after Tiananmen Square, we will see a reshuffling among the elite. Those who backed Mousavi will be on the defensive. By contrast, those who supported Ahmadinejad are in a powerful position. There is a massive crisis in the elite, but this crisis has nothing to do with liberalization: It has to do with power and prerogatives among the elite. Having been forced by the election and Khamenei to live with Ahmadinejad, some will make deals while some will fight — but Ahmadinejad is well-positioned to win this battle.

Related Link

• The Geopolitics of Iran: Holding the Center of a Mountain Fortress
  

Related Special Topic Page

• Ongoing Coverage and Updates
  

Lawrence Summers, senior economic adviser to Barack Obama, US president, told the Financial Times recently that the Group of 20 countries should agree to boost government demand. On Monday Christina Romer, chair of the White House Council of Economic Advisers, said: “The more that countries throughout the world can move toward monetary and fiscal expansion, the better off we will all be.” (emphasis mine)

Jean-Claude Juncker, chair of the “eurogroup” of ministers, said: “The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking.”

But European ministers are concerned that building up more government debt would threaten the stability of the eurozone and say that they want to assess the effects of spending boosts that have already been passed before considering more. The US Treasury declined to comment on their remarks on Monday.

A new European Union policy paper, due to be approved by finance ministers today, calls the prospects of a return to economic growth next year “highly uncertain”.

Ouch. I do recall hearing this over the audio squawk during market hours, and the market went into a sharp sell-off. These days, that’s more likely to be a bear raid during a vulnerable moment in the tape. Either way, a professional trader should not forget to pay attention to these minor details.

After the powerful bear market rally of the prior two days, gold and bonds are both being bid higher. The Yen is starting to rally. Asian stocks couldn’t pick up on strength in US equities. Market breadth is deteriorating. Watch out below…

THUR-
Heavy volume on the sell-off. Market’s spooked by the lopsided gov’t. As expected, but didn’t exploit.
Monitor airlines for entry levels (see below).  Many charts look like gaps from Tuesday were closed. Only problem is volume expanding across the board. So many charts look terrible, I feel like we’re going to revisit the lows. This is all because the Dem’s came 1 senate seet away from a super-majority. Maybe we will become full-blown, open, French style socialists. Who knows.

Short Looks-

AGU, POT, AMX, BAC (maybe), CRM, FSLR, GENZ, GOOG (monitor), ISRG, PCLN, WLP,

Long ideas-

JPM, QID, SDS, SKF, UNG (lower), UYG (S2 around 7.30/.85), V (inside day on declining volume),

AAPL has huge support at 100. Monitor this for market directional clues.

CHINA:

---

Week of October 20th: The week when SNL signalled a market bottom.

Start accumulating positions:

Daily: logarithmic illustrating cup & handle with dominant raff regress. channels, pitchfork and multiple positive divergences in momentum and money flow. Handle taking characteristics of FLAG consolidation with volume almost totally gone. Expect volatility burst. Long stock. To add some gearing to trade: Sell some puts and buy calls.

AAPL- 123

POT- 115, 124 (SAR), 129/30, THEN to 160 (a.z.)

SDS- 94 to 85 (Fib support 107, 100)

Monday Morning:

Close out long positions, reverse position SDS, LONG SKF. HOWEVER, do not expect gap closing. More like partial retracement then rally to new highs. Looking at a 500-600 point 1 day rally. Calculate fib retrace levels on intraday. Buy size in UYG on retracement into gap.

SKF Fib support levels: 151, 137. MA convergence alpha zone $120

Long QLD a.z. = 54-61, SSO target 40-42

FIG: unwind victim!!

FITB: CALLS

NOV: forced selling done. INCREDIBLE VALUE here. OIH’s could rally 50% (again, maybe wait until Tuesday)

BIDU- High BETA bounce, GOOG could test 400

CE: German chemical co..

ISRG: re-short $270 (?)

SQNM: At 200d-EMA

CRM (should go to new a.t. High), DE &/or CAT (infrastructure plays), GS, JPM, JRCC, MS (last chance under $10?), BBT, BK, BX, WFC

MA (150 is 2/3 retracement but still gap at $75)

C back to $23

DHIL: major oppty or something wrong?

Rally to be led by commodity & financial names. Big Cap tech will also show leadership.

CLF- at major alpha zone (25-30)

FCX

Futures up 29 handles.

Recap prior week- Tough week, amazing numbers on Friday. 1000 point snap back and u were downstairs. It’s ok, you were forgiven for karma errors on Tuesday and you will have a +$75,000 week this coming week. The market is going to bounce from this low we put in, but we probably head lower later in month. This is to be an oversold rally. There will probably be new lows in this downtrend.

During the prior down leg, the TRIN was constantly hitting 4.0 to 5.0. This time, during down leg, TRIN was constantly below 1.0, around 0.35 – 0.75. Bizarre.

INDU: 9750 (a.z). 9400 (50%), 9050 (38.2%)

Dow INDU Fib projections nailed these intraday extreme swing pivots. Lower boundary of d/t channel broken. Prices should and likely will recover this lower boundary and resume longer term downtrend. At a minimum, an attempt will be made.

Trend from 1990 to 2007 Top. A 9 Sigma move which equals the ’99 high projects a downside target for the Dow of 6900 by December or 6830 in November, hitting alpha zone (see monthly chart).

Short Term Target: 10500

Intermediate Term: 11850 (alpha zone)

200m-EMA = 8917

NDX upside 1900. Swing position in 2x Q’s.

OEX has tested 2002 low. Could bounce to 490-500

Oil index could have huge oversold rally. DIG, CNX, AGU, APA, EOG, EP wait until later in the week for all energy plays….

Small cap stocks put in confirmed 1 day reversal. Which ETF???

VAY: Value Line Arithmetic Index: Upside targets = 1750 then 1950

XBD: Broker/Dealer Index. 1-day reversal. Unlikely Monday’s gap will close soon. Find leaders. Could rally 50% or more in a few days.

On Friday, Marc was down $180,000 and in the last hour made a comeback of $320,000. That’s why I’m a trader. That is why I trade.

HANG SENG Target: 11,000 (c.p `14,000). Establish short china when bounce ending…a.z resistance at 20,500 & 24,000

- Barron’s discusses the bottoming process, saying ‘this could end up being one of history’s quintessential buying opportunities.’ Barron’s lists 25 picks in three categories. Big cash rich companies: XOM, MSFT, AAPL, INTC, DELL, EBAY, MOT, YHOO, ERTS, L. Smaller cash rich companies: NVDA, BRCM, NOVL, IACI, KBR, RNWK, NTE. Industrial Stocks on sale: CAT, CMI, DE HON, ITW, PCAR, TEX, UTX.
- Barron’s looks at master limited partnerships as an investment. MLP’s, which invest in sought-after assets such as oil fields and natural-gas processors look inexpensive and carry double-digit yields. Five MLP’s to look at are Enterprise Products Partners (EPD), Energy Transfer Partners (ETP) Boardwalk Pipeline Partners (BWP), Paso Pipeline (EPB), and OneOK Partners (OKS).
- Barron’s Commodity Corner says silver looks ready to rally. The ‘poor-man’s gold’ is off 46% from a mid-July high but it may take off in the wake of safe haven buying in gold as investors look for a cheap alternative.

A moment of reckoning for many hedge funds may come at the end of this month, when their exposure to credit default swaps must be “marked to market” to reflect the increased obligations at the end of the third quarter.

Olivant, the investment group run by former Abbey boss Luqman Arnold, revealed last week that its 2.8% stake in UBS was held through an account at Lehman in London which the firm’s administrators are refusing to release.

Oct. 3 (Bloomberg) — Maverick Capital Ltd., Greenlight Capital LLC and The Children’s Investment Fund Management LLP fell more than 12 percent in September as stock hedge funds posted record monthly losses and braced for client defections. Lee Ainslie‘s Maverick Capital declined 19.5 percent and Greenlight Capital, run by David Einhorn, was down 12.8 percent, according to investors in the New York-based funds. Children’s Investment, overseen by Chris Hohn in London, fell 15 percent, based on a preliminary estimate.

Stock hedge funds fell an average of 8.6 percent in September, the biggest one-month loss since Hedge Fund Research Inc. began collecting data in 1990. While that was better than the 12 percent decline by the MSCI World Index, a benchmark for global stocks, industry analysts expect investors to increase their requests to pull money from funds. The poor performance of certain hedge funds will have repercussions in the allocation processes, and it may lead to substantial shifts between hedge-funds strategies and between hedge funds.”

Other managers with above-average losses for the month included Stephen Mandel, whose main Lone Cypress fund in
Greenwich, Connecticut, fell 14.7 percent. New York-based Third Point LLC, run by Daniel Loeb, dropped 11 percent. Officials for the hedge funds declined to comment or didn’t return calls.

Defensive Doesn’t Work

Funds in all investment categories fell 6.9 percent in September, according to Hedge Fund Research’s Global Hedge Fund Index. That’s the worst month for the $1.9 trillion industry since August 1998, when the Russian debt default triggered the collapse of Long-Term Capital Management LP.

Key Problems:

• LIBOR bid only, no offer.
• Commercial paper market shut down, little trading and no issuance.
• Corporations have no access to long or short term credit markets — hence they face massive rollover problems.
• Brokers are increasingly not dealing with each other.
• Even the inter-bank market is ceasing up

The Treasury Tarp plan is an irrelevance if we are at a major funding crisis.

We are indeed at the cardiac arrest stage and at risk of the mother of all bank and non-bank runs as:

-The run on the shadow banking system is accelerating as: even the surviving major broker dealers (Morgan Stanley and Goldman Sachs) are under severe pressure Morgan losing over a third of its hedge funds clients); the run on hedge funds is accelerating via massive redemptions and a roll-off of their overnight repo lines; the money market funds are experiencing further withdrawals in spite of government blanket guarantee.

-A silent run on the commercial banks is underway. In Q2 of 2008 the FDIC reported $4462bn insured domestic deposits out of $7036bn total domestic deposits; thus, only 63% of domestic deposits are insured. Thus $ 2574bn of deposits were not insured. Given the risk that many banks – small, regional and national – may go bust (as even large ones such as WaMu and Wachovia went recently bust) there is now a silent run on parts of the banking system. Deposit insurance formally covers only deposits up to $100000. Thus any individual, small or large business and/or foreign investor or financial institution with more than $100000 in a FDIC insured bank is now legitimately concerned about the safety of its deposits. Even if as likely the deposit insurance limit will be temporarily raised to $250000 by Congress there will still be a whopping $1.9 trillion of uninsured deposits (or 73% of total deposits); thus, a huge mass of uninsured deposits will remain at risk as even small businesses have usually more than $250K of cash while medium sized and large firms as well as any domestic and foreign financial institution or investor with exposure to US banks has average exposure in the millions of dollars. Particularly at risk are the cross border mostly short term interbank lines of US banks with their foreign counterparties that are estimated to be close to $800 billion.

-A run on the short term liabilities of the corporate sector is also underway as the commercial paper market has effectively shut down with little trading and no issuance or rollover of such debt while corporations have no access to long or short term credit markets and they are therefore facing massive rollover problems (over $500 billion of rollover of maturing debts in the next 12 months). Indeed, the market for commercial paper plummeted $94.9 billion to $1.6 trillion for the week ended Oct. 1 (and down over $200 billion in the last three weeks). Especially banks and insurers were unable to find buyers for the short-term debt: financial paper accounted for most of the decline, plunging $64.9 billion, or 8.7 percent in the last week; but now even non-financial corporations are also experiencing a severe roll-off in the CP market. Discount rates for investment-grade non-financial commercial paper spiked to 599bp for 60 day maturities. More companies are borrowing against or tapping their revolving credit lines. This is largely due to the dislocation caused in the money markets by the failure of Lehman and the subsequent withdrawals from money market funds, which are some of the biggest providers of liquidity in the short term funding/commercial paper. Even the largest corporations are at severe stress: ATT last week was forced to rely on overnight funding for its treasury operations, as lenders were unwilling to provide more long term financing due to fears in money market funds over investor redemption. The CEO said “It’s loosened up a bit, but it’s day-to-day right now. I mean literally it’s day-to-day in terms of what our access to the capital markets looks like,’’ Things are much worse for non-investment grade corporations and for small and medium sized businesses. As reported today by Bloomberg: Almost 100 U.S. corporate treasurers gathered for an emergency conference call yesterday to warn each other that banks are using any excuse to charge
more to renew lines of credit.

-The money markets and interbank markets have shut down as – despite the Senate passing the bail-out bill - yesterday USD Overnight Libor was still at 268bp after reaching an all-time high of 6.88%; the USD 3m Libor-OIS spread widened to record 270 basis points; EUR 3m LIBOR-OIS spread is at record 130bp; the TED spread is at record 360bps (TED was 11bps one month ago); Money and credit markets are dysfunctional also in emerging markets ; and agency bond spreads are also at highs again.

So we are now facing:

- a silent run on the huge mass of uninsured deposits of the banking system and even a run on some insured deposits are small depositors are scared;

- a run on most of the shadow banking system: over 300 non bank mortgage lenders are now bust; the SIVs and conduits are now all bust; the five major brokers dealers are now bust (Bear and Lehman) or still under severe stress even after they have been converted into banks (Merrill, Morgan, Goldman); a run on money market funds restrained only by a blanket government guarantee; a serious run on hedge funds; a looming refinancing crisis for private equity firms and LBOs);

- a run on the short term liabilities of the corporate sector as the commercial paper market has totally frozen (and experiencing a roll-off) while access to medium terms and long term financings for
corporations is frozen at a time when hundreds of billions of dollars of maturing debts need to be rolled over;

- a total seizure of the interbank and money markets.

This is indeed a cardiac arrest for the shadow and non-shadow banking system and for the system of financing of the corporate sector. The shutdown of financing for the corporate system is particularly
scary: solvent but illiquid corporations that cannot roll over their maturing debt may now face massive defaults due to this illiquidity. And if the financing of the corporate sectors shuts down and remains
shut down the risk of an economic collapse similar to the Great Depression becomes highly likely.

So what needs to be done?
Even several hundreds of billion dollars in emergency liquidity support to the financial system by the Fed and other central banks in the last week alone have not been enough to stop the seizure of liquidity in interbank markets and the shut down of financing for the corporate sector as counter-party risk is now extreme (no one trusts any more in this crisis of confidence even the most reputable and trustworthy financial and corporate counter-parties).

Thus, emergency times where we are at risk of a systemic meltdown require emergency measures. These include the following six ideas, which are also the key points to be listening for as potential catalysts for sudden market surges to the upside:

-A temporary six-month blanket guarantee on all US deposits (not just those below $250k) combined with a rapid triage between insolvent banks that should be quickly closed and distressed but solvent – conditional on liquidity and capital injections – banks that should be rescued. To stop the silent run on the banking system you do need now such blanket guarantee on all (insured and uninsured) deposit regardless of their size. To minimize lender moral hazard from such action the blanket guarantee needs to be followed by a very rapid triage and shut-down of insolvent institutions to prevent such institutions from gambling for redemption, i.e. acquiring more deposits and making even more risky loans. To limit such moral hazard distortions one can also limit the extended guarantee only to current deposits: i.e. any new deposit above a $100k limit will not be insured.

- Extension of the emergency liquidity support of the Fed (both TSLF and PDCF) to a broader range of institutions in the shadow banking system, especially those directly providing credit to the corporate sector. The TSLF and PDCF are already available to some non banks (the broker dealers that are primary dealers of the Fed). But two of such broker dealers are gone (Bear and Lehman) and the other three are under stress. Goldman Sachs, Morgan Stanley, the other primary dealers and the banks that have access to the TSLF and PDCF (and discount window) have massively used these facilities in the last few weeks; but they are hoarding such liquidity and not re-lending it to other banks, to the thousands of the other members of the shadow banking system and to the corporate sector as they need such liquidity and don’t trust any counter-party. Thus the transmission mechanism of credit policy (the non-traditional Fed liquidity lines) is completely shut down now.

- Some members of the shadow banking system will not receive such liquidity support of the Fed (hedge funds and private equity funds) as – fairly or unfairly – there is no political sympathy for such institutions. This means that the demise of hundreds – and possibly thousands – of hedge funds will occur as redemptions and roll off of overnight repo financing for leveraged investments will cause a massive liquidity – and thus solvency – crisis for such institutions. If hundreds of smaller hedge funds collapse the systemic consequences would be limited (even if in the aggregate hedge funds provide significant financing to the corporate sector). If larger and systemically important hedge funds were at risk of failing the Fed will have to engineer a massive private sector bail-in of such hedge funds (a larger scale rescue a la LTCM) where the prime brokers of such funds are forced to maintain repo exposure to such funds rather than be allowed to shut off such exposure. This is a radical suggestion but the alternative of a Fed liquidity bailout of systemically important hedge fund is not politically feasible given the little sympathy that such funds enjoy in Congress. The refinancing crisis of private equity firms and their LBOs is a longer fuse run as covenant-lite clause and PIK toggles will postpone such financing crisis but make the harder the fall as zombie corporations that postpone restructuring will have a bigger collapse once the financing crisis eventually occurs. But since many of these LBOs should have never occurred in the first place any financing crisis for such buy-outs should be dealt with in bankruptcy court; no public funds should be used to rescue such LBOs and the reckless private equity firms that designed such schemes.

- Direct lending to the business sector from the Fed via extension of the PDCF and TSLF to the non financial corporate sector. This could include Fed purchases of commercial paper from corporations and other forms of financing of the short term liabilities of the Administration to small businesses secured in appropriate ways. Given the collapse of the corporate CP market and the banking system reluctance to provide loans to the corporate sector (credits lines are being shut down) the only alternative to the Fed becoming directly the biggest emergency bank for the corporate sector would be to force the banking system to maintain its exposure to the corporate sector, possibly in exchange for further Fed provision of liquidity to the banking system. The former option may be better than the latter to deal with the looming illiquidity of the corporate sector.

- Have a coordinated 100bps reduction in policy rates by all major advanced economies central bank and, possibly, even some emerging market economies central banks. While this policy rates may not directly resolve the insolvency issues in financial markets and in the corporate sector it may ease liquidity pressures and it would signal that global policy makers are serious about addressing together this most extreme liquidity and financial crisis. Also, some of the radical policy actions that have been suggested here for the US will most likely need to be undertaken also by European policy makers as the liquidity and credit crisis is now becoming global.
- Radically redesign the Treasury TARP rescue plan – possibly after its necessary approval today – to make it effective, efficient and fair. This implies that in addition to a more limited government purchase of toxic assets, you need: a) an emergency triage between insolvent and illiquid and under-capitalized but solvent banks should be made; b) a sharp reduction of the mortgage debt burden of the insolvent household sector; c) and a recapitalization of solvent banks to be done via public injection of preferred shares and matching contributions by current shareholders of the banks. Financial markets have already voted no to this plan (that is flawed in its current form) yesterday when after its passage in the Senate US and global equity markets plunged another 4% while money markets and credit markets seized up even further.

Bottom Line Conclusion:
This credit crisis is both a crisis of confidence and illiquidity and a crisis of credit and solvency. But while the insolvent institutions should go bust we have now reached a point where many financial institutions and now non financial firms may become insolvent because of pure illiquidity; and this would lead to an extremely severe economic contraction similar to an economic depression rather than a mild recession. At this point the US, the advanced economies (and now likely even some emerging market economies) will experience an ugly recession and an ugly financial and banking crisis regardless of what we do from now on. What radical policy action can only do is preventing what will now be an ugly and nasty two-year recession and financial crisis from turning into a systemic meltdown and a decade long economic depression.

Three former colonial masters of Iran (France, England, U.S.) stare down two rising superpowers (China, Russia) with Iran as their battle ground in a clash of civilizations. As history is any guide, Iran has a notorious track record of dominating regional politics of the Near and Middle East. The west backed Saddam Hussein in his use of chemical weapons against massive waves of unarmed Iranian child soldiers. In the grand scheme of geopolitics, arming the Germans as a way to appease them from the guilt of enforcing a brutal Versailles Treaty was no different than arming Saddam in 1980, when it was him or the Ayatollah. The end of the First World War, which led to a major national humiliation for the German people and a total collapse of the German economy, was a time that required pragmatic thinking by our leaders. Arming Hitler while the concentration camps were filling up with bodies is disgustingly similar to providing military and financial aid to a dictator using chemical warfare on his own people 40 years later.

Have times really not changed since War II? The same families are running the United States but now, we are the most powerful democracy in the world. There is a growing spread of capitalism as globalization profoundly takes root in China. Concurrently, archaic customs and religious beliefs are eliminated in the name of improving overall living standards, creating a reliable labor pool from which to fuel future economic growth. The two-party system creates a balancing act between selfish (i.e. imperialistic, unilateral) policies and utilitarian (i.e. social welfare) policies for the nation as a living organism. A pragmatic approach would see things in a particular light. Forget about the so called “Sunni vs. Shi’a” rift that doesn’t really matter. We must not repeat the same mistakes of the early eighties when America’s “lesser of two evils” strategy compelled the massive arming of Iraq only to have to go in there later and take the weapons out in exchange for the lives of young Americans.

We’ve seen the Orange Revolution in Ukraine, the Velvet Revolution in Czechoslovakia, the Rose Revolution in Georgia, the Saffron Revolution in Burma, and the list goes on. Why not a Peacock Revolution in Iran? To punctuate this point in the current conflict in the Persian Gulf, the US Navy and Air Force are sitting idly by on full tactical alert and readiness, serving as a sharp sword of diplomacy. Persians, which make up the majority of the Iranian population, are a proud type, and that includes their government. This is why a monarchy worked so well for over 2500 years. The current government in Iran can barely manage to unite the people by nationalizing the nuclear issue as a symbol of independence. But take the focus away from this issue, as the American’s have keenly done with the most recent release of the National Intelligence Estimate, and the Iranian people will look inward and see a domestic economy decimated by waste, corruption and decades of sanctions. The cost/benefit analysis will suddenly shift and the Iranian Theocracy will collapse on its own weight, or so we all hope. The ideal scenario is one which Iran is not invaded or bombed, theocracy as a form of government joins its fallen comrades in the same cemetery holding Leninism, Fascism, and Monarchy; and Iranian hegemony in the region is encouraged if not granted through treaty. The last statement has to do with the Iranians’ forgotten role as the founder of human rights, freedom of religion, expression and proud protectors of truth and justice. Even our Founding Fathers based the Declaration of Independence and the Constitution on a deep understanding of ancient text held very dear to every Persian heart: “Cyropedia” by Xenophon is the philosophical opposite of Machiavelli’s “The Prince”.

The Iranian culture “is America’s cultural sibling”, according to Condoleezza Rice. Now that modern fascism in the form of theocracy has overtaken the birthplace for the declaration of human rights, America can make a significant difference by electing a female President. This would empower repressed victims of gender apartheid throughout the Middle East and especially Iran where power is held by the few. The government in power is at best a poor example of Persian fanaticism gone wild and at worst a clash of civilizations: Capitalism and democracy as the beneficiaries and main drivers of globalization versus theocracy and a book to enforce views on the inferiorities of man. This clash of civilizations being fought in Persia (Iran + [Iraq + <any>istan + Yemen + Bahrain + Azerbaijan + Armenia + Syria]) can have a significant impact on the global political order for the next century and beyond. To most expat Iranian “technocrats”, Iran must embrace modern capitalism if she is to realize her true potential. Persians are a very cultured group of people, and understanding them at the core is the best way through this quagmire. With a ruling minority of clerical figures in power which usurped government based on false promises and expectations, the people have moved beyond the religious fanaticism of the 70’s. Brought about by persistent global stagflation and oil shocks, the idealistic resentments that lingered well after the CIA backed coup of Mossadeqh in 1952 have all subsided. The anti-western attitude among the popular masses is history. That part of the world is now experiencing an unprecedented renaissance. The Iranian regime is prepared to pursue a militant path if challenged, while the world is trying to move away from warfare as a form of conflict resolution. Fortunately, Iran is also the only democratic state in the Middle East (albeit borderline) and the people might have their way upon the death of the ailing Supreme Leader Ayatollah Khamenei by abolishing the “Supreme Leader” entirely.

We are at a very similar crossroads today to where we were just prior to World War I when choices made by the foreign majors led to the massive arming of a future enemy. Fascism and theocracy have many things in common, except in the former people hold their leaders accountable by hanging them in brutal revolutions. But in the latter, leaders invoke a higher authority as true bearer of responsibility for conditions in their country. The recent $36 billion arms package to Israel and Saudi Arabia should be raising many concerns. Is not the American government the largest customer for military hardware this world has ever seen? Is it therefore not enough that they must go and shop these older generation arms to the Arabs, who pray five times a day for the destruction of the United States while giving identical gear to the Israelis?

The root of the problem is radical Islam. Islam believes in the spread of a religious theocracy which is superior to national sovereignty. For this reason, I believe arming the Saudi’s under the auspices that it will counter the growing threat of Iranian regional hegemony is disingenuous, equal to a “death by a thousand cuts”. American political diplomacy has a tendency to make a mistake during crucial moments, thus leaving a mess for the next administration. I’ve learned to understand war as a macro-political economic lever to be used during times of economic contraction, and have tried to bring attention to this point repeatedly. America is at a crucial juncture because Iran has put forward the idea that any attack by the United States, or even better Israel, would evoke a transnational storm and Islamic fury the world has never before witnessed. In doing so, Iran would become the symbol and the “raison d’être” of ultra-radical Islamic fundamentalism. By countering one branch of Islam through the arming of another branch, future generations, and certainly American soldiers, will have to deal with a bigger mess. When the petroleum has been depleted and the world is running on hydrogen, the Middle East could be a brewing pot of turmoil, war, death and violence. All of which disrupt modern capitalism when there is no greater macro-economic good.

The 2003 invasion of Afghanistan and subsequent invasion of Iraq were both out of economic necessity. Deep in the midst of a bear market further punctuated by September 11, the stark reality of a deep and protracted recession was frightening. The global macro impediment to bringing aid to the U.S. economy was a stubbornly over-valued US Dollar. The recession was not only becoming unavoidable, but policy makers had less flexibility to deal with it due to artificial currency manipulation by China and Japan. The most efficient way to bring down the value of a currency is to print it. There are several channels to pipe this new money into circulation but each pipeline has a different social cost that must be considered.

Pumping money through loans via the capital markets can cause rapid price inflation in assets such as stocks and real estate as well as some precious commodities. This “hot” money usually goes to the investment funds and does not get to the parts of the economy where it is most needed. Pumping money through tax cuts can work only to a certain extent. When people are unemployed for a long time, the tax cuts don’t reach them. Moreover, the Republican administration thinks it is better at spending the money than the people themselves. The cost of Katrina to American taxpayers was the equivalent of $475,000 for every single man, woman and child in New Orleans, or roughly $1.275 million per family. That would be enough for most families to rebuild their lives rather than the tragic mess that exists today with over 100,000 empty trailer homes sitting on government land somewhere while thousands remaining displaced.

A sharp slowdown in the economy tends to reduce gas prices thus giving people more money to spend. Increasing discretionary income via declining gas prices will only work within the context of a strong dollar policy, counter to what the US needed in 2001. After 8 years of prosperity, the strength of the US dollar was crippling manufacturers. With the plunging value of the US Dollar, American goods are competitively valued, as is tourism to America. With the dollar heading south, the capital markets have gone into reverse, and where a normal trajectory involves dollars flowing out, now dollars are flowing in. Just search for the term {Abu Dhabi + private equity United States} and substitute “Abu Dhabi” for any Arab Emirate.

There are several other routes that can be taken for an expansionary monetary policy, but the one that works fast and is sustainable because it comes with a blank check from Congress: War. Military spending is an untouchable Keynesian dogma which conservatives embrace. Although there would be significant economic costs to war, including oil at the $200 per barrel level, and further damage to an already weakened dollar, any sudden joblessness can be offset by an expansion in military recruiting efforts. With this generation of recruits, the military is focusing on technical education involving satellite communications, robotics, cryptography and programming. When these young adults enter the work force, they will have very unique technical skill sets. The kind of skill sets where companies that are hiring find value. Another benefit is the transference of technology from the military to private companies for commercial exploitation.

With all that said, we must look at the current situation through the eyes of Keynes himself in order to best determine what the likely outcome will be. First and foremost, the Fed has reversed its policy of tightening with several rate cuts in the past 6 months. Therefore, any support for the US Dollar from tight monetary policy has eroded and will continue to erode as long-term trends push the economy into recession. From a fiscal policy perspective, the annual defense bill is approaching $400 billion. With both monetary and fiscal policy now acting to weaken the US Dollar in concert, it appears the necessity of war as an economic tool is no longer required. So it was no real surprise when the NIE report announced Iran had given up the pursuit of nuclear weapons since 2003. Furthermore, a “peace dividend” will surely result from a long-term resolution to the Iranian problem.

In closing, I will defer to the great Karl Popper: Prague lecture, 1994:

I think that all lovers of peace and a civilized life should work to enlighten the world about the impracticability and inhumanity of that famous – or shall I say it notorious? – Principle of National Self-Determination, which now has degenerated into that ultimate horror, ethnic terrorism. We must fight against such horrors. We must not fall prey to the cynical view that history is just violent and horrible, driven by the lust for gold and oil, for wealth and domination. This cynical interpretation of history is not true. European History begins with Solon’s peaceful revolution that reformed the Constitution of Athens. By it, he freed those slaves that had been free citizens but had lost their freedom to their creditors whom they were unable to pay. Solon’s revolution prevented this from ever occurring in Athens again. It was a long way from there to America and to Abraham Lincoln who fell as the last of the 600,000 white soldiers in a most terrible war that succeeded in freeing the negro slaves in the southern Confederate states.

These are not just two exceptions that happened in an otherwise endless history of greed and violence. Rather, these are some of the important successes – admittedly not very frequent successes – among the many defeats and set-backs we have suffered, often through our own mistakes, in our ceaseless struggle for freedom and justice.

And now, when we are again suffering some of these set-backs, we must think of our very latest success: South Africa. And we must keep fresh before our memory such incredible achievements of the spirit of freedom, openness and humanity, as that of Churchill’s seemingly hopeless resistance to Hitler, after the fall of France, and of Masaryk bringing back his valiant soldiers, an army of 60,000 men, through Siberia and Vladivostok, and across the Pacific Ocean and the American continent in order to found a great republic, an open society, strong enough to rise again after many a violent death.

“Ron Paul

Now before you get all emotional one way or the other, it was never my original intention to polarize the message I was trying to convey. I love blogs for many reasons. One of them being you can get immediate feed back and understand the message you were trying to relay can have a polarizing affect when it involves the hearts and minds of Americans. I personally cherish some of the ideals Ron Paul is campaigning for but I am also able to recognize which ones are not realistic.

I believe he has a great deal more knowledge in his head than he leads on for anyone to believe. But you can see it in his eyes. He knows more than you and I and every person in this country can possibly figure out in our life times. And he knows it!

He’s a Texas Republican. Good or bad, he’s one of this country’s “rain makers” at this stage in the political game. And the rainmakers collectively, for this nation always has been one of “govern by consensus” as we have no “king” figure, are busily at work on a single united focus.

Because what comes next is a case where the “ends justify the means”. If the transition from hate-to-love is done in such a way as to set the bar in terms of “bragging rights”, then the past will be forgotten, as it should, and the future will be defined.

This moment in history cannot be undone for generations to come, and will serve as the beacon of “hope and justice”. The nation that was able to ultimately overcome any injustices of the past and weave the lessons from those errors into society. Ron Paul is waking up a lot of people and opening up many eyes to something so obvious that it is disgusting to realize America needed to be reminded of things like “freedom” and “justice”.

The geo-matrix of world politics is changing. What started with the rise of “Reagan Republicanism” and led to the collapse of repressive opposing ideology will culminate with America’s rightful place as the leader for the next five hundred years.

This fundamental reality will forever seal this nations ideologies into the global fabric of society in a new world. A new age.

An age where the people of this planet look up at America for leadership and guidance. A world where people actually “trust” America to do the most justice as long as the pragmatism is genuine.

And Ron Paul, as a crucial figure that comes out of the shadows to remind the world what true, down to goodness, freedom loving, wealthy Republicanism is all about.

Because somewhere along the line, the message got lost and the crown was usurped by a radical ideology intent on a phase of expansionism which could be deemed by many as “American Imperialism”. And lest you forget that “imperialism” is good for the imperialist itself, then you will realize, like me, that the political structure established in early 2000 was successful in achieving many goals. All of which have made America much stronger as a nation, much more experienced and technologically generations ahead of other nations.

These are all long term benefits of many realities facing America. But the worst is not as bad as it appears and can be fixed in such a way that American Imperialism moves from territorial to ideological.