Blue Penguin Report

By Matthew Storey

“The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself. That, in its essence, is fascism - ownership of government by an individual, by a group,”

“There are many ways of going forward, but only one way of standing still.”

“Rules are not necessarily sacred, principles are.”

“One thing is sure. We have to do something. We have to do the best we know how at the moment. If it doesn't turn out right, we can modify it as we go along.”

"(the problem)...is not that the system of free private enterprise for profit has failed in this generation, but that it has not yet been tried.''

Franklin D. Roosevelt (32nd President/1933-1945)

“It's a recession when your neighbor loses his job; it's a depression when you lose yours.”

Harry S Truman (33rd President/1945-1953)

Recession?

Depression?

As Harry Truman puts it, the difference is likely to come down to ones own personal situation - but technical indicators define them differently as well. The easy answer for Recessionary definition is two successive quarters of decline in Gross Domestic Product (GDP), but this is imprecise since so many variables outside of GDP impact upon society - GDP can stabilize (and has) while unemployment continues to rise (it is) and create a situation where the recession is technically 'over' at the same time that more and more citizens are feeling its sting and falling away from prosperity. Economists have responded to this reality by defining recession more broadly as lasting from the moment economic activity peaks to the time it hits bottom, but, again, this has little real world correlation, since recessionary forces begin long before they are registered in markets and job rolls and last long after those begin to recover. Depression is typically seen as a more severe (10 to 20% decline that sustains itself beyond the two quarter rule for recession) version of the same phenomena.

Definitions aside, all Americans, regardless of their personal situation, recognize a dramatically different economic reality than we've known has descended upon us.

Ten years ago, our markets were the envy of the World, our currency was robust, our National balance sheet showed a surplus for the first time in nearly three decades of deficits and America was seen as stalwart economic partner by the World. Today the market (Dow, S&P 500) is rebounding from a 50% decline, but still well off levels of two years ago, technology and entrepreneurial indicators (venture capital, NASDAQ, IPO offerings) are at levels 40% of where they were in 1999. The US Dollar, which was pegged to trade at 1.06 to the Euro, actually drove the Euro to .86 of a Dollar a decade ago, today that Euro will fetch you almost $1.50, the Yen is at record levels relative to the dollar and the international trading consortiums who have dealt in dollars since their inception are drafting new plans to shift to a basket of Yen, Yuan and Euro as the dollar underpinnings further erode behind an American balance sheet drowning in red ink. Unemployment is surging past 10%, vast armies of Americans are living on Government subsistence (Michigan, a state of 10 Million plus has 20% of its population on Government relief). 1/6th of Americans have no Health Insurance. American manufacturing, technology, agriculture are all stagnant and surviving on a mixture of government investment and legacy business, not thriving on new markets and profits.

It is a turning point.

How did we get here?

Let's take a look....

Genesis of the Crisis

In the midst of the great boom of the '90s, Markets, consumers, investors and employees were all thriving in part because of a decision to bring Technology directly to consumers and end users rather than shuffling it through DARPA (Defense Advanced Research Projects Agency), who are the guys in Government suits who show up in your middle school Math class to abduct the brainy kid with bad posture and shuffle her off to secret installations all over the world along with the other million smart kids they've nabbed.

In the '90s, the smart kids were left in the light and sold on the market and ideas and dollars flowed. Defense was still on the cutting edge, but the move towards private sector became more seamless. Clinton Administration Treasury Secretary Robert Rubin believed that high earners and business people would pay modestly higher taxes for greatly enhanced growth and that this growth was already in the system, just needing to be allowed to breathe. President Clinton invoked the word 'Digital' at every economic or educational speech and the administration was happy to work towards commoditizing commodities, meaning they viewed commodities from the demand side - wanting to maintain stability of supply and modest prices that would be used to fuel economic growth in knowledge based industries.

While these goals were met, and wildly successful, they were perceived as negative by several constituencies. In Texas and throughout the Oil Patch, the de-emphasis of Oil (a barrel of West Texas crude sold between $12-24 per barrel during the Clinton years), raw materials and extraction industries did not remove profitability from these industries - which would be destructive to industrial goals, but it DID remove windfall profit at precisely the moment huge fortunes were being amassed by Technology entrepreneurs. To a Houston Oil Man, a staunch Conservative, having coin was not sufficient to account for the indignity of seeing some snot nosed twerp getting paid for something as trifling as an idea!

As my Texas uncle told me in 1971, Texas economics hinge on three things.

1.) Price of Oil (energy)
2.) Defense Contracts (defense)
3.) Price of Cattle (agriculture)

Texas, and much of the heartland, is a net producer of raw materials, which makes its interests run towards higher prices for those materials and towards industrial utilization of them - drill for Oil, align with Saudis and Venezuelans (at least before Hugo) and get an army moving in the Middle East who will be pump - pump - pumping it up the Kazoo while stomping on some party deemed an enemy by BOTH Texas and Riyadh.

The American economy, on the other hand is a net CONSUMER, what generates profits for raw materials producers cannibalizes growth throughout American industry and dramatically reduces buying power for American consumers while destroying savings for both. Rubin sided with America, believing that the producer states would simply re-jigger their economies to take advantage of the knowledge based gold rush, sans the metal.

Meanwhile, on Wall Street, the Bull Market was perceived as very much a mixed blessing. While burgeoning markets and record trading activity are an unambiguous positive, information technology and the Internet allowed more and more investors to do their own research, trade their own accounts and drive the fee and commission based business models that had sustained profitability, ever downwards. The Rubin market was an INVESTOR market, with day traders flourishing in every small town and low-cost brokerage firms chewing away market share and profitability from the banks. When you hear Business reporters refer to the 'Market' - they mean 'The Investment Banks', in the '90s they became decoupled from that status (as is appropriate) and also faced higher taxes on their fortunes. Like the Oil men, everyone was making money but the spread between Oil/Wall Street wealth and the commoners out there working, inventing, investing was undergoing a dramatic democratizing.

Democratic change was occurring in the workplace as well. Decades removed from the 'Organization man' in the 'Grey Flannel suit' ('Mad Men', if you will), the '90s saw a new generation of geeks, nerds and self-starters move into the workplace and bring their teva sandles, high-top chucks and t-shirts with them. Shiny wing-tips with $5,000 business suits, long the uniform of elitism in business and an important bulwark for the established wealth centers of Houston and Manhattan were suddenly becoming the symbol of anachronism. Meanwhile, on the Left Coast, far from Texas or Morgan Stanley, small armies of young professionals toting laptops and cellphones made their way to Silicon Valley corporate parks - first in a Honda, later a Lexus, but always casually dressed and communally focused. And if the kid in shorts and the rock t-shirt felt his job didn't offer enough playtime or an open enough office culture, he could just pop the clutch over the next rise to a new gig with a handsome raise.

Americans read about the goings on in Silicon Valley and the culture became obsessed with the 'New Economy', but the reality was the 'New' was only happening in a fraction of the overall and the 'Old' were planning a counterattack all along. Ironically, it was the engine behind much of the new growth that would hand them their opportunity and subvert much of the positive change.

On Sand Hill Road in Menlo Park, California, an Artichoke heave from Stanford University sit a group of Venture Capital firms whose early investments in companies like NetScape, Sun, Yahoo generated vast fortunes, added to fortunes built upon earlier generations of Silicon Valley winners (Intel, Apple, Silicon Graphics) and validated the Venture Capital math, which essentially worked like this:

*Hire Technology minds and put them next to financial minds.
*Send them in teams amongst smart kids with ideas.
*Seed the best of these ideas with stages of capital investment, while retaining huge percentages of Equity.
*Sort through the winners and losers, cutting off the flow on dead ends and accelerating the progress of triumphs.
*Remove the impediments to progress of the successes by supplying senior management, accounting, legal, manufacturing and marketing through three types of consortiums modeled on '80s Japan:

Types of Keiretsu:
Kigyō shūdan (企業集団): horizontally diversified business groups
Seisan keiretsu (生産系列): vertical manufacturing networks
Ryūtsū keiretsu (流通系列): vertical distribution networks

A continent away from Wall Street, this model was wresting control of business finance towards the West, empowering a generation of Engineering minds and it was WORKING. America was reaping the benefits of this tension between coasts and between old and new manner of business, the Nations coffers were filling up from tax revenue and nobody was barking because everyone was making money.

But Wall Street always makes money, and bypassed industrial giants began to see that their vast resources could be used to buy up what they could not create. Sand Hill Road, who understood the process best of all subverted their own model out of greed and competitive zeal. Instead of seeding a bevy of companies, waiting patiently to see which ones held promise and nurturing them through the stages necessary to becoming first a going concern and THEN a Public Company, through an IPO (Initial Public Offering) - which is the PAYDAY for the venture capitalist, the investment banking firm handling the transaction and the company founders/employees...the firms saw a ravenous market for new companies and decided to eliminate the staging of the process, believing, correctly, that hungry investors and hungrier East Coast investment bankers would drive up the price of anything they got their hands upon. Whereas earlier offerings were legitimate companies with breakthrough products, the new waves amounted to little more than a marketing effort - patch on a logo, a catchy slogan, some theme music and make some commercials...Engineers built a culture of entitlement in record time to match the ones they were seeking to overthrow. The 'Old Boy Network' became the 'New Boy Network', and then the two networks decided their interests overlapped.

Piles of worthless new stock flooded Wall Street, Sand Hill Road cashed in and sought to propagate the scam for as long as possible. Meanwhile, investors, who had read of the miraculous growth of earlier stage, well tended companies flocked to pour their hard earned into the new paper mache, Earnings never arose because most of these companies had no rationale for being publicly traded companies other than a desire by their founders to get paid, get out, and repeat the process...

It was the death of the boom.

The aggrieved industrials pounced on the cash poor companies left in the wake of the sell-off and the 'New Economy' became a wholly owned subsidiary of the Old one. Innovation left and marketing ruled, the Win-Tel (Microsoft - Intel) cartel swept up the remnants of the best and brightest, tightened the reins on pay packages and lifestyle accommodations and the passed over Houston oil man and Wall Street behemoths planned their return to an exalted perch atop the American economy where they could bleed off dollars and get fatter...but they needed a champion.

Enter George W. Bush, son of the President who Clinton took over from, who had done his best to funnel massive public resources towards Bankers, Energy concerns and Defense contractors during his single term with a nifty war on those pesky Iraqis, a super keen bailout of the Savings and Loans who'd stolen everything they could before failing and a nice, stagnant economy for everyone else, which allowed the exalted status quo to thrive.

Dubya had all of his Father's leanings, but was disdainful of concern for the larger economy, being a Midland, Texas kid who saw the world through the lens my Uncle provided all those decades ago. He got elected despite losing by half a million votes and continued to make war on math, and logic. He declared an interest in generating job growth in 'Energy', hired a commodity guy, Paul O'Neill, CEO of Alcoa (Aluminum) as Treasury Secretary and a Oil/Defense guy, Dick Cheney, CEO of Halliburton as Vice President, while his buddy Ken Lay and the boys at Houston based 'Enron' were deep into scamming the previously haughty state of California out of their cash for bogus energy contracts. Bush got elected in the Heartland and his concerns were theirs.

Knowledge was out, extraction was in.

War, of course, was next on the menu to complete the trifecta.

The next time he uses the word 'Digital' will be the first.

Shifting the largest economy in the World 180 degrees is like turning an Oil Tanker in a bathtub. Grinding on top of the tech selloff was bound to lead to recession, but 9/11 offered political cover to complete the plan.

California made money in the '90s while Texas suffered, and they flipped roles in the '00s. New York gets theirs no matter who is calling the tune.

All of that made the following a foregone conclusion.

On August 8, 2007, more than 70 years after FDR and The New Deal, interbank lending spreads became prohibitively wide as individual banks assessed their internal risk exposure and surmised they were in a heap of trouble if things were allowed to go 'too far'.

For the previous half decade, the golden goose of an economic boomlet built had been built upon;

* Laissez faire regulation of institutional Market players, such as Banks, Investment Banks, Insurance Companies, Multi-National Corporations(which Webster's defines as 'a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of peace and property rights'). This was a system favored by Calvin Coolidge (30th President/1923-1929) ('the business of America is business') and continued, with disastrous results, by his successor, Herbert Hoover (31st President/1929-1933).

It was FDR who came in to clean up their mess in 1933.

It was the Bush White House who resurrected Coolidge's approaches to the economy in 2001.

* An emphasis upon Structured Finance 'products' in OTC (Over The Counter) Derivatives (Financial instrument that derives from another financial instrument). Derivatives are regulated when traded on an Exchange, with clearly defined parameters and available to any willing participant. OTC Derivatives, however, are customized to hedge risk and leverage profit on a case by case basis and traded between market principals themselves, each party choosing to price them according to their own internal standards. These products, by themselves, are not a problem, and are traditionally utilized in underlying asset classes that are regulated and well understood by all parties, there are four principal asset classes typically underlying derivatives:

Equities
Commodities
Interest Rates
Currencies

But, in the Bush years, Banks pushed hard for more liquidity in the OTC markets, where profit (and compensation) would not be restricted by the supply/demand realities of actual asset classes. They looked towards Credit/Debt Markets and found deep oceans of cash that could be bundled into loosely defined instruments and traded amongst market players, with each participant adding a 'market multiple' on their balance sheet, despite the fact the underlying instruments had defined terms and profit particulars.

A mortgage (or any debt instrument - even a 'adjustable rate') has a defined amount of interest income associated with the instrument (variable within interest rate movements for adjustable, but still able to be calculated within historical parameters and finite for a 'fixed' rate mortgage).

When a stock is issued, it can be traded in regulated markets for whatever price can be agreed upon between buyer and seller. The stock has a price which is defined by its market multiple, meaning price of the traded security can be a multiple of the underlying companies intrinsic earnings or 'book value'. Buyer and seller have access to the information relating to earnings and book value and can determine for themselves what multiple they are willing to accept for the stock.

The purchaser of a stock selling at a P/E (price divided by earnings = multiple);

Ex: XYZ Corporation has earnings of $1 per share and the stock is trading at $15, that is a P/E of 15 times earnings.

...is willing to pay a multiple because he/she believes the earnings will go UP, which will increase the price of the stock if the market continues to assess a multiple of 15 and the market may also note these increased earnings and assess an even higher multiple, which means the stock has no finite upside limit. Many stocks DO trade without earnings or underlying 'book value', as well, but in all cases, the corporation is a going concern that operates a business, it CAN and often does, generate profits that justify the speculation, and in all cases, the limit of risk exposure is built into the share price (if you pay $5 for a share and the company goes belly up, you are out $5).

A Fund is a bundle of stocks, most of which trades at a multiple of its underlying value, which can contract or expand depending upon market sentiment, but the avenue for increased prices (profit) EXISTS and is well understood.

A CDO or MBS is a bundle of mortgages or debt instruments for which the underlying instruments have a FINITE level of income/profit within tight parameters of interest rate movements. Every time these instruments are sold at a higher price, the purchaser is applying equity-like expectations where they do NOT apply. The mortgage will not earn a dime more than as written, bundling has no impact upon this. The multiple, applied and agreed to between unregulated parties who price it on their balance sheets according to their private determinations of ability to resell the instrument at an even higher multiple has no underlying basis in reality. Add in the fact that the underlying economy was experiencing contractions in employment and compensation, which impacts upon the ability of debtors to make payments and increases the possibility of default.

So you have a finite instrument, multiplied, sold and resold with phantom assumptions and then massive defaults against even the initial finite profit potential of the instrument.

Gee, what could go wrong?

*Real estate gains built upon loose credit, low interest rates and those structured finance products (MBS - Mortgage Backed Securities, CDO - Collateralized Debt Obligations). In this construction, the Federal Reserve, concerned about the collapse of the Technology driven Equity markets in 2000 and the 9/11 attacks of 2001 and prompted by an administration seeking to move away from Technology and knowledge based industry towards a commodity/real estate driven economy, lowered Interest Rates (which is known as 'accommodative'). Realtors were flooded with new brokers (many of whom had made money as stock brokers in the previous decade) who were anxious to cash in on what President Bush called 'an ownership society'. With low interest rates and easy loans for developers leading to increased supply, brokers could push mortgages and with lower regulation and oversight, these mortgages could be extended to lower credit worthy customers and, since the mortgages were then bundled and sold off to investment banks as MBS - you had a Ponzi Scheme to make Bernie Madoff look like a piker!

Inevitably, Banks who built balance sheets on whispy fantasies while draining off the actual C-A-S-H in compensation, threw up their arms in dismay and asked their buds in the White House for a patriotic salvage.

Bear Stearns, Lehman, AIG...you know the rest.

How did it start? You've just read how, the same way it always has. Capitalists have no conception of how much is 'too much' and that is why Government regulates business and re-distributes the gain, to keep the wheels of society properly greased. Since Teddy Roosevelt took on the Gilded Age Robber Barons, the entrenched wealth has bickered and blustered about this arrangement, but John D. Rockefeller, the Wealthiest American of his time, Bill Gates and Warren Buffett, the richie-riches of OUR time all understood that for them to continue flourishing they would have to SPEND their gains and inject capital back into the system - through foundations dedicated to progress, through taxes on property and holdings and through inheritance taxes. It is not the the having of wealth that makes one seek to chisel out, many of the wealthiest are eager to contribute - they understand the model American economics depends upon. It is those with feudal designs on America who are the scourge, the ones who FDR rightly condemned for subverting 'free' enterprise with nefarious constructs greased with mythologizing so intrusive that poor people who lack health insurance, cash, jobs or a future parade around spouting feudal slogans that only serve to further denigrate their OWN lives at the nourishment of those who mean them the most harm.

America's economy, culture and political discourse are broken. We cannot begin to fix that until we restore accountability for the events we have discussed here and create a path that rewards innovation, retires stagnancy and holds back resources for the next wave, the next generation, the next ideas.

Next week, we will discuss how that can work...we know how we got INTO Recession, now we have to discover how we get OUT.

Posted by Matthew at 08:09 AM | Permalink | Comments (3) | TrackBacks (0)

By Red Sox Steve

This week especially, I'm inspired by what I see when I walk around my neighborhood and on TV, what I've experienced living here for the past half-decade (has it been that long?), and what I think of where I live: New York City.

First things first - when I came here, I was a kid. Like everyone who shows up here from wherever they come from, I thought that I was going to make a big splash. Intrepid, well-dressed, professional. It was easy - be ambitious and confident all the time and you can make it here. Uh, actually, it's not that easy - New York City is a huge place, and guess what? Everyone who lives here and everyone who wants to live here, who plans on living here, or who even dreams of living here is in on the secret: this is one special place, a place where lots of hungry people congregate to build their own fortunes, start their careers, and build their lives. It's a place where dreams can be made, and it is a place where dreams come to die.

Don't want to dwell on the philosophical. That's not what this is about. This is about this place. I'm especially inspired this week, of all the weeks I've been here, because of what happened in Flushing and in the Bronx. In the middle of the worst economic crisis since at least WWII, businessmen, politicians and blue-collar workers have come together to create two world-class sports stadiums, with a new football stadium coming our way out in the Meadowlands. Both Citi Field (Mets) and Yankee Stadium hosted their first of many MLB games this week.

Hundreds of thousands of people have been positively impacted by these events - and I'm not just talking about the fans. Iron workers, construction foreman, laborers, architects, landscapers, and stadium workers all have had steady work for the last three years because of the efforts taken to continue with construction of these amazing ball parks. The construction began on Citi Field and (the New) Yankee Stadium in 2006. This means that the start of the project took place in a much different economic and political climate than we have today, which proves how fast fortunes (especially those that are wrongly distributed!) can change. In 2006, cash was easy to come by - Wall Streeters and billionaires (like the Wilpons who own the Mets and the Steinbrenners who own the Yankees) were raking it in, the tax collector was their friend en absentia, property values were skyrocketing, and the New York city economy was booming, just like it had many times before. The municipality was even ready to engage New York's resources further by bidding on the 2012 Olympics, which would have required the spending of over $1 billion to construct an appropriate stadium in Flushing, Queens.

Fast forward to Opening Week 2009. We have a new president, and a multi-layered economic crisis that we have to deal with. Credit was historically easy to get back in 2006. Liquidity was available for any type of mortgage imaginable, and now we are facing the worst housing crisis in over 50 years. Banks grew ever larger by lending money, and insurance companies suddenly turned into hedge funds. Billionaires threw lavish soirees where the champagne flowed and the hangers on congregated; A staple of corporate life, the office holiday party, grew more and more extravagant; nothing was too costly when the bosses showed their appreciation, and, perhaps ultimately the most destructive factor of all, bonuses were bigger than ever. Those one time payouts to employees, aptly named for a time when they weren't relied on for ACTUAL income, became a "wink-wink" part of the white-collar workplace. "Yours is big, mine is big, but are we actually worth that much more to the company? No matter! Let's call our real estate agents!"

Large financial companies have been reduced to nothing but "toxic assets". One ideology has been replaced by another via the voting booth, and all of a sudden the world now sees again, whether any one individual agrees with him or not, what it's like to have a president who listens. The thing about the overall crisis is this: From the economy of the 1990s where fortunes were made and lost, we got the internet, cell phones, and technology for all to consume and make use of. Nations respected us; those that pumped oil truly feared us (look at the price back then); those that shared our goals wanted to work with us. 2000. America lurched back to the right - the technology bubble burst, and gave way to a finance bubble, a credit bubble, a housing bubble, an energy bubble. The danger signs were everywhere that this was a return to feudalism for America - home ownership suddenly became our top economic goal, oil crossed $120, $130, $140, spending in Iraq was up, government tax receipts were down... it was a disaster waiting to happen. 2008. Our governmental ideology changed again - back to a center-left - and now we are again in the midst of reorganizing our national priorities. Clean energy technologies, hybrid autos, military technology, national scientific research initiatives, and international collaboration with our economic counterparts all over the world has once again returned to the forefront of America's goals.

21st century american life has begun and when we hit mid-century the world will be a much different place because of the things happening today. The 2059 world we are heading for will be unrecognizable to someone living in 2009; just as 1959 was incomprehensible when considered in 1909. We are on the dawn of an Asian century - all over the Asian sub-continent, billions are hungry for new technologies, new opportunities, and new lifestyles. America, and most of the western world will watch in awe as both India and China rise and ultimately begin to lead the way. To an American born after 1950, but before 2000, this will be the reality that we will be forced to adapt to, and the old way, the "American" way, will continue to fade for us, like the British empire before it, the Spanish empire before it, the Roman empire before it, and the Egyptian and Persian empires before it. How will you react when you wake up in 2059?

Posted by Red Sox Steve at 04:17 PM | Permalink | Comments (0) | TrackBacks (0)

By Matthew

'Don't start that talking
I could talk all night
My mind goes sleepwalking
While I'm putting the world to right
Call careers information
Have you got yourself an occupation?'

'Oliver's Army' - Elvis Costello

Oliver

There is a place in Texas, called 'Primarily Primates'.

(It's been the source of some conflict between PETA, the State of Texas and its founder. Those issues are murky and are not the subject for this discussion, but I did not want to gloss over the matter.)

They provide habitat for Chimpanzees and Lemurs, including Oliver, the upright-walking 'Humanzee'.

Oliver is genetically similar to Chimpanzees, with 48 Chromosomes (humans have 46) but his genetic code is distinct from Chimpanzees.

He's a mutant.

New life.

How'd he get this way?

That, we don't know. He isn't a Human Hybrid, not entirely...but his features, behavior, posture and cognition are not of chimps. The position of his head, legs and genitals is in line with a walking Human male. He is bald. His ears are positioned higher and shaped differently from Chimpanzees.

He has no interest in Chimpanzee females. He is attracted to Human females. He is not recognized socially within the Chimpanzee group and does not show any interest in their social activities.

Whether from 'Natural Selection' or through some anonymous genetic experimentation, Oliver is FACT.

And he is Fifty One years old.

Life happens and it doesn't make a bit of difference how. There are no barriers to the hybridization of Chimpanzees and Humans, little doubt that it has occurred in some laboratory somewhere or that it WILL happen.

The Science exists.

Oliver MAY be a result of such Science, more than five decades ago. Or he may be an entirely organic mutation, a trial balloon of structure organized by the unseen hand of genetic evolution.

He is a harbinger of new species of Primates. We do not know if Oliver is a blueprint for what we will find with actual hyrbidization, but we DO know that the next Century will feature new classifications of Primates. Human/Chimp hybrids, sub-species mutations.

Perhaps both.

Or more.

Oscar

Oscar Pistorius is a 22 year-old South African. He was born without legs below his knees (Fibula) and had his useless, boneless legs amputated as a child. Fitted with progressively more sophisticated prosthetics, he has grown into a world class runner (missed qualifying for the OLYMPICS by a mere 1.0 second, running 3rd in South Africa's Olympic Trials for the 400 Meters). He dominated the Paralympics instead, winning the 100, 200 and 400 Meters.

He is known as 'The Fastest Man on No Legs'.

As with Oliver, their are layers of political, ethical, cultural and social questions related to Oscar.

And, as with Oliver, those are not of any interest to us here. Oscar is HERE, he is young, his prosthetics are mere prototypes. He will be faster. He will do more.

And he was born with a genetic disposition for this form of hybridization, as Oscar was. With no legs, ever, and no sensation of balance relating to the use of human legs - Oscar is a blank slate for the new balance his prosthetics require. He intuits what is the only locomotion he can know. And then?

He upgrades.

And re-learns.

He too, is a mutant.

More importantly, he is also a Cyborg. A Cybernetic Organism that contains natural and artificial systems. Cybernetics is a HUGE field, and applies to many more interdisciplinary studies in an almost limitless number of applications. These feedback loops between the elements of Oscar are self-perpetuating - he gets new legs, uses them and the information he receives from that usage generates the design of new legs.

His brain and his legs are growing together, becoming accustomed to one another.

Oscar Pistorius is New Life.

Prosthetics evolve in these feedback loops, can be genetically grown in laboratories, can be fashioned artificially and can be linked to the brain and central nervous system.

'Moore's Law', like Oliver, refers to something born in 1958 - the Integrated Circuit.

In 1965, Gordon Moore, co-founder of Intel, observed that the number of transistors that can be placed on an integrated circuit without extraordinary expense increases exponentially and doubles approximately every two years.

All those labs, working on all those body parts, genetics, cybernetics, digital loops that improve exponentially...we don't know the details, they literally will not exist until they develop cybernetically between the various interfaces. But we DO know that the next Century will feature waves of Cyborgs.

Repliee Q1Expo

An Actroid with this name is a Japanese Robot, more precisely - an Android.

A humanoid Robot.

Japan is the global leader in Robotics and is obsessively pushing the science forward, from robotic construction workers, who do not need sleep, or compensation...are many times as strong as a human and cannot be 'hurt' to Actroid Androids - Female Robots with Artificial Intelligences, lifelike human appearances and sensor arrays that allow it to 'feel', react, understand stimuli and respond appropriately - even listen and speak, not from a script - from THOUGHT.

Like the Cyborg, Androids benefit both from the Cybernetic Feedback loops in its systems AND from the exponential increase in computing power, based upon 'Moore's Law'. Instead of an interface between organic and artificial systems, the data exchange is experiential WITHIN artificial systems.

Turn it on, it works, it learns, it reports, it can be improved and can improve on its OWN.

It's Human handlers are simultaneously processing the same data and incorporating it's lessons into later stage designs.

All that digital data, self-perpetuating, driven by both human and artificial intelligences.

This too, is New Life. The new Century will feature an incalculable number of Robots, some Android, others not.

New Life is on the way. New Industries. New lifestyles. New social structures, ethical quandaries, political realities.

Listen to the 'debate' being held about Athletes and Steroids, then contemplate this discussion.

A child born today, athlete or not is more likely to have supplemental improvements that are administered;

*chemically, through drugs...

*genetically, through biological implants...

*cybernetically, through artificial implants or augmentation...

*digitally, through computer processing implementation...

...than not.

There will be those who resist, luddite-like, and they will maintain 'Natural Human Societies', faith systems will follow, cultural conflicts, perhaps even violence between the different life forms.

Unaugmented humans may play 'Natural' Baseball, the way non-Steroid using BodyBuilders are known as 'Natural Bodybuilders', none of that is new, by the way, some guy talked openly about such topics in a movie filmed in 1975.

That guy is now the Governor of California.

Doesn't change the reality of this new Century.

It's called 'The Twenty FIRST Century' and you are living in it now, although for us in America, it is probably best understood as being lived thus far in the last Eight years of the LAST Century with an eight year detour back to the 19th and 20th under 'The Crawford Crusade'.

It's beginning again in America, it never stopped elsewhere and, where even the 20th Century never happened, it won't make a bit of difference.

All the changes of history pale in comparison to the ones that are coming, if not in your lifetime, certainly in your children's, and they will seem antiquated to their own Fifteen year olds.

There is a lesson in all of this - and here it is;

Don't spend TOO much time bemoaning the World that no longer is. That world has actually been gone for longandlong...the new World is HERE and its fascinating.

Dig in!

Posted by Matthew at 06:36 PM | Permalink | Comments (0) | TrackBacks (0)

By Matthew

Remember those old advertisements?

You know the ones...with the sympathetic-sounding narrator saying things like;

'Awwww Schmucky...are you feeling blue? Thing got you down because your dog ran away, your cat went on your pillow, your bird mimics your mom telling you what a disappointment you've been, your ex-wife just hit the lotto and your current wife is on a 6 month vacation to Jamaica...

trying to 'sort things out'.

Awwww Schmucky, is THAT what has you down???'

And then, of course the speakover would explain what headache remedy, new car, TV show or cigarette was certain to cure those ills.

Well...Buhbie, if your Portfolio full of disintegrating Stocks has you down, if your woman (or man) gives you a look when you think you might get lucky - a look that says 'yagadabefuckinkiddinme!', if your dog has been hanging at your best friends house for a week and your cat just ate the Salmon your spouse left on the bottom shelf for your dinner...

Guru has something even BETTER than medicine, autos or tabbacky to help you cope.

An overview.

A strategy.

An approach.

That, if followed, will allow you to make modest coin in '09, stanch the bleeding and position yourself wisely for 2012, or whenever this puppy will walk upright again.

Are you game?

I thought so.

* Overview

Stocks have been halved.

Not good.

But, in reality, the levels they held for much of the Bush 2nd Term (apt phrase, if ever there was one and explains why the first chance for a Bush double was averted by voters...) were entirely illusory. That may not be a source of comfort for you, but the Penguin is going to quote our old friend, Al Swearengen, of 'Deadwood' fame (2nd Quote of the day for Al, he made The Magic Carpet as well!)...

'...Damage don't end the world, or despair...or fucking beatings. The world ends when you're Dead. Until then, stand it like a man (woman, man who stands like a woman, woman who...etc.) and...
...give some back'.

That's the first thing. You have to bring yourself frontally BACK into the mindset of looking forward, if you lost Money - it's gone. It happens. It wasn't all your fault that's true...but;

a.) That doesn't make a fuck of a difference to anyone, for any reason. Fault is meaningless in Finance. If your situation is not litigious, then you were investing on your OWN decision, at your OWN risk, which means the losses...

b.) Partly ARE your fault. See the note above for the reality of such information.

What matters is to understand *What went wrong? Where were the signs? What to do differently now.

Depends on the Stock in question.

a.) If you owned Retail, Auto, Insurance, Investment Banking, Airlines, Banks, Mortgage Lenders, Homebuilders...you were probably allowing your ego and emotions to manage things.

Each of these areas had already seen the best of it's days well before the crisis. IF you owned the shares for a period of time and had profits in them, those are the times when you MUST be disciplined to take money OFF the table and sell. If you had just bought into those sectors, at high prices for some and amidst dramatically declining fundamentals for all - you blew it.

Forgive yourself.

Move on.

b.) If you owned Energy, International Stocks, Blue Chips unaffected directly by the crisis...you made a serious analysis about the path ahead and things went awry.

Again, it happens.

Penguin owned Energy throughout the Bush years and had unwound most of his profits long ago...but I was a buyer in the early stages of Fall, believing the OPEC easing was simply it's Quadrennial push to keep the GOP in the WH and prices would soar, post Election.

Ooops.

Demand got SO squeezed by customers gauged beyond contain for YEARS, customers who had now lost their home value, stock value and/or J-O-B.

Nowhere to drive.

Nowhere to go.

No money for Gas, even cheap Gas and no money for anything anyway, so keep the lights on, the cable paid, cheap food (starches are good in these periods when other humans won't be seeing a lot of you)
a touch of red liquid, green plant and something to schmush (doesn't have to be human, decide how much food you can spare).

SO Energy lost speed and didn't come back, The worm has turned on Fossil Fuels at long last.

Like much of this mess, that overarching POSITIVE has been borne of this short-term negative.

c.) Similarly, the initial take - that America would bear this catastrophe largely alone, and International Stocks were preferable - was understandable. It was also wrong. American demand cratering impacts all. American Banks and Banking IDEAS, infected Global Financial Institutions. They didn't hurt like we got hurt, but they were no safe harbor in THIS storm. A friend worked at BNP Paribas, a French Bank who had limited exposure to the Mortgage Securities market and little debt, they were in the right position and, like JP Morgan and Wells Fargo in America, looked to be the clear 'winner' in Euro Banking.

Enter Bernie Madoff. Exit BNP shares and thousands of workers.

Sometimes, even when you do everything RIGHT, it goes wrong. You cannot linger on such events. All you CAN do is position yourself well based upon the Data, monitor your position with an eye to your risk and constantly enhance your knowledge.

*Which takes us to the Blue Chips...

They come in many types and sorting them out is relatively simple.

a.) Some are parts of industries that are past their viable point. If a company has more history BEHIND it than ahead - and that can be said of the Autos, almost ALL of the Financials and Insurers, Oil & Gas...

..than it is time to write those companies OFF - Don't go there!

If you buy a domestic Airline stock, I will send Scout and Chester to your crib, and the boys don't play, ya dig?.

b.) Others are in trouble, NOT because of their industry but because of some Company-specific reason. In that case, you need to look deeply into the circumstances that ail it and gauge your risks - Penguin will be happy to discuss individual securities with you - send an e-mail.

In General, you want to avoid risk that doesn't have much upside. If you own something that is a solid company in a temporary jam due to the economic winds and a crisis that is resolvable, then avoid watching it dance around the nether regions of its price chart and follow the details. They will give you clues as to when you should look to:

@ Add to your position at a lower price, Dollar/Cost Averaging your purchase price to a lower break-even level - which means, when the stock returns to the price you ORIGINALLY paid for it - you are in a profit position.

@ See the position move forward. If a solid business is dealing with a merger or court case, the stock will fluctuate wildly in the periods before resolution. When a decision is made, one way or other, that uncertainty leaves the picture. Financial impact can be valued and a path back to previous levels can be speculated upon - meaning the Stock is back in play as a 'Buy', such stocks move rapidly upward when the news goes from unknown to known.

c.) Lastly, there are the PREFERRED category...these are Solid companies, with solid balance sheets, 21st Century Businesses with more FUTURE than past. Preferably ones that generate oodles of cash, and, who are we to complain (!) if it pays a Dividend?

We'll tell you WHICH Stocks fit that Preferred Category, in Penguin's view..in Part 2 of this series...

On Sunday.

Posted by Matthew at 03:14 PM | Permalink | Comments (0) | TrackBacks (0)

Were any of your ancestors born in Italy?

In February of 2008, I learned from a coworker that because I have Italian heritage, I may qualify for Italian citizenship - this news has changed my outlook on a great many things. Let's be clear first: gaining Italian citizenship means gaining entry to the EU; I could work, live and travel in any of 27 member countries and join a population of over 500 million citizens.

In my view, the EU is the most modern form of international government on earth. What is well known is that Americans and the rest of the world now deal with EU countries in commercial terms via the Euro, which replaced many other European currencies in circulation as of Jan 1, 2002. What isn't well known, or at least as highly regarded by nations outside the EU, is that the legislative EU which meets in Brussels, has a rotating 6 month presidency... it was Slovenia's turn, then France's turn, now the Czech Republic's turn... you get the point.

Further to that, the combination of economies, languages, histories and cultures which fall under one legislative umbrella give the EU significant bargaining power, especially in trade and energy agreements.

On Jan 1, 2009, Russia turned off the spigot of natural gas that it supplies to much of Western Europe. I read in the FT that Germany gets 30 percent of all natural gas it uses from Russia, and Italy 17 percent, making these the 2 biggest consumers of Russian natural gas by far. So what's the big deal about the Ukraine? Well, first of all, Ukraine serves as the "middle man" for 80 percent of all Russian natural gas destined for the EU. Germany and Italy are the largest and 4th largest economies in the EU respectively (AND have months of reserves along with the capacity to purchase energy in other ways from other sources), and Russia is one of the main trading partners for the EU. Lots of economic heavyweights are involved here.

To make a long story short (too late!), shutting off natural gas supplies to punish the Ukraine and hurting the end-user, who happens to be one of your main trading partners in the process caused a major international "kerfuffle" (yeah, I said it!).

There's a lot going on here - we've seen since the summer that Russia seeks to assert its dominance over its former satellite states... bringing us back to the Cold War era... at least on THAT side of the Iron Curtain. A military invasion of Georgia during the Olympics; just as the world is filled with Hope (capitalized because I think Obama may have copyrighted it) because the world's most powerful nation is getting a new leader... Moscow decides to show Kiev who's boss in the energy delivery business, threatening to deliver natural gas (measured in thousands of cubic meters... that's an SI volume measurement for you non-scientists out there) only if the Ukrainians promise to pay twice the price. Heat in some countries was off for days... in Eastern Europe... in the middle of the winter. Russia knew what it was doing. Just as the Olympics were getting underway in Beijing in August, Russian tanks rolled toward Tbilisi, Georgia. Anything to make a scene,
 right?

As a citizen of the world, I have to remember that this type of thing is a risk to the security and well-being of many powerful nations; it isn't wise for one major world power to be seen to be a threat to another; Sure, the Ukraine was stuck in the middle (look at a map - it really is!), and felt a literal and figurative chill in its relations with Russia, but Russia's actions were also felt in Germany and Italy, who both hold MAJOR sway in the EU.

EU officials at first, tried to play "nice", encouraging the Ukraine and Russia to settle this dispute, but had to deal with the fact that it too, is caught in the middle (question - what color house did the quote below come from? answer below):

"We urge both sides to keep in mind the humanitarian implications of any interruption of gas supply in the winter. The predictable flow of energy to Ukraine and the rest of Europe... is essential for stability and reliability in regional and global energy markets."

Answer: The WHITE House, on Jan 2, 2009.

Russia, by threatening the Ukraine, has also threatened major powers in the EU; all this did not go unnoticed by the United States.

Here's a prediction for 2009: Russia will continue, via either military might or access to natural resources, to be a threat to peace and stability whenever it sees an opportunity.

Maybe I'll wait until summer to go to the EU... it'll be warmer then.

Posted by Red Sox Steve at 01:00 AM | Permalink | Comments (0) | TrackBacks (0)

I've been researching the piece on the steel I just wrote (The Future of Steel) for about 2 weeks; I read a book published in 1999 on the steel industry in China (so many predictions, so many miscalculations), and another book published in the early 1980s on the history of the steel industry in the developed and developing world. At those two points in time, the industry found itself at different points along the same trendline… Chinese steel production was on the upswing and western world steel production was undergoing a downturn.

I just read an interesting piece in the NY Times which dovetails with what we’ve previously discussed: steel production in the US has been long since dead as a serious economic contributor to life here, especially in places like Erie, PA, and Youngstown, Ohio – midwestern places that were reliant on mass manufacturing to remain relevant in a constantly evolving global marketplace.

David Streitfeld's piece in the NY Times on Jan. 8, 2009 (For Pittsburgh, There’s Life After Steel) shows us that what is required is an effort towards "deindustrialization" (That's not a word used often in mass media, but I'm sure we will hear it more and more!) and diversification of local economies. Steel production on a mass scale was prosperous for the United States at a different time, when the world was in a phase of development where developed (f/k/a "first world") countries dominated the economic and political landscape on this side of the iron curtain. The United States had conquered its enemies from sea to shining sea in WWII and then went back for more in Korea in the 50s. Those that opposed the United States were weakened by these events, while the United States began to produce and grow significantly.

To take a quote from the article mentioned above, it is as if Mr. Harold Miller, commenting on Pittsburgh, read last week’s Blue Penguin Report: “The emphasis was on fighting the presumed causes of the decline by getting rid of low-cost foreign imports or providing more subsidies. The assumption was that steel will come back and we’ll go back to the way we were.”

You see, dear reader, we are not going back to how things used to be. Mass-manufacturing industries that have evaporated and have gone offshore are NEVER coming back, and their departure left some of these midwestern towns to become wastelands of poverty, despair, and lacking in opportunity for tens of millions of people.

All around the United States, the areas that are the most prosperous, like New York City, Chicago, Boston, and San Francisco are places where massive amounts of people live, and have very diverse economic bases. Places like Detroit, and smaller places like Bethlehem, PA, and Akron, Ohio need to think very seriously about what Pittsburgh is doing and imitate it as best they can, and if the federal government needs to assist, then so be it – we cannot ghettoize these places because they are shells of what they once were. Smaller midwestern towns where it isn’t practical to consider a NY/SF model of development are much more capable of identifying with – and benefitting from – the transitional model set up by Pittsburgh. What’s more important is that they can learn to cope with the inevitable “deindustrialization” (there’s that nasty word again!) that first needs to occur in smaller places so that they can grow and change in tandem with the modern world as we move into the 21^st century.

What is provided by Pittsburgh’s experience, and is needed in every town up and down the Allegheny, Monongahela and Ohio rivers is a plan for middle America; a plan for the cities and towns that have been so heavily dependent on heavy-industry for growth and prosperity. We must help these towns to do whatever they can to focus on (an important phrase that we will focus on here at vagabondguru.com more and more…) THE FUTURE.

Posted by Red Sox Steve at 02:49 AM | Permalink | Comments (0) | TrackBacks (0)

We have recently been made aware of the fact that the steel industry, like the auto industry before it, and the financial industry before that, is looking to influence U.S. government policy in the hopes that the supply/demand model will shift more strongly in its favor. Industries have lobbied the government for these changes for a few main reasons: 1) domestic job creation (and thus an increase in the political power of the industry), 2) a boost to company profits, and 3) a desire to remain relevant in the US economy of the 21st century, all irrespective of the effect that government spending concentrated in this single area will have on our futures.

The steel industry, like the auto industry, requires that both small and large players compete internationally. Also similar to the auto industry, a majority of steel production happens in Japan, Western Europe and the United States in the developed world, and China, India and Latin & South America in the developing world. In the auto industry, “local” production by foreign companies takes place to the extent that the US subsidiary of a foreign company is able to make a profit. Steel produced anywhere in the world requires a corresponding amount of iron ore (the main component in most kinds of steel) which can come from anywhere in the world. The domestic auto industry, which is relied on very heavily by the steel industry, has attempted numerous times since about 1979 to procure government funds and/or guarantees in an effort to support an unsustainable business model. Unfortunately, in both industries, U.S. companies continue to compete with foreign companies in almost the exact same countries who already have the support of their government – healthcare and worker pensions in countries like Germany, Japan, and even China have been funded by their respective governments for a number of years now.

In 1982, just as the US was coming out of a multi-year economic slump, the chairman of US Steel at the time declared: “Imports are on the rise again… Imports… representing 25 percent or more of the total apparent supply in the domestic market are a damaging burden on the American steel industry and its employees. Each million tons of steel represents around 5,000 jobs per year; and to the extent that these imports reflect subsidization by foreign governments or sales at less than fair value, the jobs of American steelworkers are being stolen. At a time when our industry is operating below half of capacity and a third of our employees are out of jobs, this is an unacceptable state of affairs.”

What we are seeing in both the steel and auto industries is that producers in other countries are figuring out how to be competitive, while at the same time there remains very little that the United States can do to re-create the gap that had previously existed between it and other nations: many countries now are able to either produce what is needed locally or import to cover any excess demand. After WWII, the US was a leading steel industry employer and steel producer; since then there has been a steady erosion of that position because producers in other nations, especially developing nations, have joined these markets.

The United States steel industry has painted itself into a corner in a few different ways: 1) due to the current economic crisis, the demand for steel has decreased, and iron ore producers are now seeing a downward trend in iron ore delivery contracts, 2) imposing any tariffs on imported steel in order to create (this is the exact opposite of the “invisible hand” of the markets) profits for local companies would create negative effects for the buyer, 3) In each of 2006 and 2007, China has led the world in steel production, producing approximately 4 times as much steel per year as the 2nd place country, Japan.

My view is that this provides additional evidence that US policy makers must consider when addressing the domestic needs of this industry. There was a time when the United States controlled the world steel market through economic and diplomatic might, so that our product could be the dominant one both here and abroad; however, in the steel industry and the auto industry that time has come and gone. According to a 2008 World Steel Association report, the U.S. is a net importer of 32 million metric tons of steel, while China is a net exporter of the same amount. Because the U.S. steel industry produces 98 million metric tons of steel currently, it would need to increase capacity by 30 percent just to meet domestic demand. It is hard to see that happening without major costs involved for an already crippled industry, and furthermore, producing any more steel will drive down its sales price. On top of this, in competing with Western Europe and Japan, there is no way that domestic steel companies can continue to be profitable if worker entitlements remain on their balance sheet.

At the Lima Conference for Developing Countries in 1975, it was noted that developing countries had 70 percent of the world’s population, and only 7 percent of the world’s industrial production. The goal set at the conference was to achieve, by the year 2000, 25 percent of the world’s steel production – as of 1992, the figure was 29 percent. It is inevitable that the economic contribution (and political clout) of steel producers will continue to decline here in the United States just as it is increasing in countries like China, India and South Korea; hopefully, our leaders will have the foresight to realize that we must reallocate resources (public and private) towards growth in areas that are oriented towards the 21st century such as science, technology, and alternative energy sources because our steel industry is in a position where it is no longer able to compete with the manufacturing capabilities of countries that are at lesser stages of development than the U.S.

Posted by Red Sox Steve at 12:11 PM | Permalink | Comments (0) | TrackBacks (0)