Relevant and even prescient commentary on news, politics and the economy.

Fafnir on Torture

Quoting Fafblog is becoming a regular feature here of late. They have a knack for exposing the fundamental absurdity of an issue:

“But Fafnir I do not want to read about torture” you say because you are a lazy whining person. “I want to read about gumdrops an rainbows and Presidents who are made of gumdrops an rainbows an use them to blow up the terrorists.”

No you should really read it it is a very important issue now go or I will have Giblets hit you with the waffle again.

… It’s so easy to kind of sweep it all under your brain an think “Well theres nothin more to be said an nothin more to think about it” cause let’s face it nobody wants to think about their government participating in horror. An right now the level of torture talk has gone from “Torture: Bad!” to “Torture: Bad, But Not As Bad As Saddam Hussein” to “Torture: Bad, But What About Ticking Bombs?” to “Torture: Bad, But Not Necessarily Proof That The People Who Ordered Torture Are Bad” to “Torture: We Still Talkin Bout Torture?” to “Torture: Bad?” An before we get to “Torture: Sorta Like Mowin Your Lawn” I think we should try as hard as we can to wake up.

And don’t miss the Fafblog interview of Ralph Nader, in which Ralph says

NADER: Listen: it’s all very simple. When Democrats take dirty corporate money from dirty corporations, it taints them irrevocably. When I take money from the same corporations, I eat it and then excrete it in the form of pure white energy which then is added to my aura of holy goodness which I will than use to fight those corporations.


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Bush Administration fires another critic

OK, this is just a new twist on an old theme on how this White House tries to conceal the truth but…

WASHINGTON (CNN) — One day after she was fired, former U.S. Park Police Chief Teresa Chambers accused the Bush administration Saturday of silencing dissenting views in the rank and file…Chambers said that she didn’t expect to be fired seven months after the Interior Department put her on administrative leave with pay for talking with reporters and congressional staffers about budget woes on the 620-officer force. She was fired Friday, just two and half hours after her attorneys filed a demand for immediate reinstatement through the Merit Systems Protection Board, an independent agency that ensures federal employees are protected from management abuses…The Bush administration says the Park Police budget has increased during its tenure, but critics argue that the increase has not offset inflation and additional duties. According to a study conducted by the nonprofit National Parks Conservation Association (NPCA), the entire park service operates on about two-thirds of the budget it needs

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Tale of Two Cities: Edwards v. Frum

Mario Cuomo’s July 16, 1984 address to the DNC is often compared to Charles Dickens’ “A Tale of Two Cities”. John Edwards is sounding similar themes as evidenced by this excerpt courtesy of David Frum’s Diary on July 7.

Today, under George W. Bush, there are two Americas, not one: One America that does the work, another America that reaps the reward. One America that pays the taxes, another America that gets the tax breaks. One America that will do anything to leave its children a better life, another America that never has to do a thing because its children are already set for life. One America — middle-class America – whose needs Washington has long forgotten, another America – narrow-interest America – whose every wish is Washington’s command. One America that is struggling to get by, another America that can buy anything it wants, even a Congress and a President.

But Frum goes on to criticize Edwards by misrepresenting what Edwards said:

Edwards piles misleading insinuation upon sly manipulation (eg, the hint that low-wage Americans work harder than upper-income Americans, when every statistical study finds just the opposite) until finally he arrives at the stunning conclusion: America is divided between those who can buy anything they want and those who can’t…Once upon a time, deprivation in America meant going hungry or unsheltered.

I hope Frum is not arguing that the only people who go hungry or are homeless are lazy. But if Frum’s former boss, George Bush, wish to engage in a real debate on this issue, I’m sure Kerry & Edwards would welcome that.

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Thomas Brown advises against portfolio diversification

James Glassman provides a review of “My Ten Rules” by Thomas K. Brown of Second Curve Capital. Apparently, these two are motivated by The Global-Investor Book of Investing Rules by Philip Jenks and Stephen Eckett.

The passage in all this that has me wondering if I should even look at the The Global-Investor Book of Investing Rules is as follows:

Concentrate your holdings. Brown argues that “at any given time it’s impossible to have a true knowledge advantage — the investor’s indispensable edge — in more than a couple [of] handfuls of companies. If you diversify away from those few, you’re only diluting your results. What’s the point of that?…We have had as much as 25 percent of our partners’ equity in one position. That will make for highly volatile near-term results. But if you’re a long-term investor, who cares? It will also help assure sizable long-term outperformance.” Remember, however, that academic research shows that while concentrated mutual funds beat diversified funds, focused portfolios carry higher volatility, or risk.

Sure Glassman writes the diversification is important, but wasn’t that part of the received wisdom over 50 years ago when Harry published “Portfolio Selection” in the Journal of Finance?

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The CIA Did It

Or, perhaps the CIA did a little of it and the White House did the rest, but we won’t talk about that until after the election, if ever.

WASHINGTON (CNN) — In a highly critical report issued Friday, the U.S. Senate Intelligence Committee found that the CIA’s prewar estimates of Iraq’s weapons of mass destruction were overstated and unsupported by intelligence.

As far as it goes, the report is correct that a lot of inaccurate intelligence came out of the CIA. Here’s Sy Hersh last fall:

Since midsummer [2003], the Senate Intelligence Committee has been attempting to solve the biggest mystery of the Iraq war: the disparity between the Bush Administration’s prewar assessment of Iraq’s weapons of mass destruction and what has actually been discovered.

The committee is concentrating on the last ten years’ worth of reports by the C.I.A. Preliminary findings, one intelligence official told me, are disquieting. “The intelligence community made all kinds of errors and handled things sloppily,” he said. The problems range from a lack of quality control to different agencies’ reporting contradictory assessments at the same time. One finding, the official went on, was that the intelligence reports about Iraq provided by the United Nations inspection teams and the International Atomic Energy Agency, which monitored Iraq’s nuclear-weapons programs, were far more accurate than the C.I.A. estimates. “Some of the old-timers in the community are appalled by how bad the analysis was,” the official said. “If you look at them side by side, C.I.A. versus United Nations, the U.N. agencies come out ahead across the board.”

But is it really all the CIA’s fault? What about Stovepiping, Doug Feith, and the OSP? Oh, that? Silly voter, we’ll look at it later:

While the report is harshly critical of the CIA, it does not address the role played by the administration of the US president, George Bush.

Following pressure from Republicans on the committee, the report is being published in two phases, with the White House being spared the committee’s scrutiny until phase two begins. The second part of the report may not be published until after the presidential election takes place in November.

Which intelligence failures, precisely, are we not looking at until after the election? From the same Hersh article cited above:

Part of the answer lies in decisions made early in the Bush Administration, before the events of September 11, 2001. In interviews with present and former intelligence officials, I was told that some senior Administration people, soon after coming to power, had bypassed the government’s customary procedures for vetting intelligence.

… The point is not that the President and his senior aides were consciously lying. What was taking place was much more systematic — and potentially just as troublesome. Kenneth Pollack, a former National Security Council expert on Iraq, whose book “The Threatening Storm” generally supported the use of force to remove Saddam Hussein, told me that what the Bush people did was “dismantle the existing filtering process that for fifty years had been preventing the policymakers from getting bad information. They created stovepipes to get the information they wanted directly to the top leadership. Their position is that the professional bureaucracy is deliberately and maliciously keeping information from them.

“They always had information to back up their public claims, but it was often very bad information,” Pollack continued. “They were forcing the intelligence community to defend its good information and good analysis so aggressively that the intelligence analysts didn’t have the time or the energy to go after the bad information.”

The Administration eventually got its way, a former C.I.A. official said. “The analysts at the C.I.A. were beaten down defending their assessments. And they blame George Tenet” — the C.I.A. director — ”for not protecting them. I’ve never seen a government like this.”

…But, Thielmann told me, “Bolton seemed to be troubled because INR was not telling him what he wanted to hear.”…Eventually, [then part of State Department’s Bureau of Intelligence and Research, or INR] Thielmann said, [Under-Secretary of State for Arms Control and noted conservative] Bolton demanded that he and his staff have direct electronic access to sensitive intelligence, such as foreign-agent reports and electronic intercepts. In previous Administrations, such data had been made available to under-secretaries only after it was analyzed, usually in the specially secured offices of INR. The whole point of the intelligence system in place, according to Thielmann, was “to prevent raw intelligence from getting to people who would be misled.” Bolton, however, wanted his aides to receive and assign intelligence analyses and assessments using the raw data. In essence, the under-secretary would be running his own intelligence operation, without any guidance or support. “He surrounded himself with a hand-chosen group of loyalists, and found a way to get C.I.A. information directly,” Thielmann said.

…Greg Thielmann, after being turned away from Bolton’s office, worked with the INR staff on a major review of Iraq’s progress in developing W.M.D.s. The review, presented to Secretary of State Powell in December, 2001, echoed the earlier I.A.E.A. findings. According to Thielmann, “It basically said that there is no persuasive evidence that the Iraqi nuclear program is being reconstituted.”

The defectors, however, had an audience prepared to believe the worst. Secretary of Defense Donald Rumsfeld had long complained about the limits of American intelligence…After he became Secretary of Defense, a separate intelligence unit was set up in the Pentagon’s policy office, under the control of William Luti, a senior aide to Feith. This office, which circumvented the usual procedures of vetting and transparency, stovepiped many of its findings to the highest-ranking officials.

…As the campaign against Iraq intensified, a former aide to Cheney told me, the Vice-President’s office, run by his chief of staff, Lewis (Scooter) Libby, became increasingly secretive when it came to intelligence about Iraq’s W.M.D.s. As with Wolfowitz and Bolton, there was a reluctance to let the military and civilian analysts on the staff vet intelligence.

“It was an unbelievably closed and small group,” the former aide told me … “There’s so much intelligence out there that it’s easy to pick and choose your case,” the former aide told me. “It opens things up to cherry-picking.”

Hersh’s entire report, The Stovepipe, is lengthy and full of many more similar details and episodes. It’s well worth reading again, particularly given the new The CIA Did It strategy. Basically, the CIA came up with all sorts of information, much of it in fact bad (both vetted and unvetted) and some of it accurate. The administration and its agents consciously discarded all of the good intelligence (no WMD in Iraq) and retained all of the bad intelligence (Iraq has WMD). Now they say, having discarded the accurate intelligence, “Look! All the intelligence we have here is wrong. It’s the CIA’s fault.”

Clever, and strongly reminiscent of the administration’s earlier use of the It Wasn’t Me tactic. But will it work?


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Kerry’s Health Care Proposals

Krugman does a nice job of summarizing Kerry’s health care proposals in today’s column. He gives it fairly high marks; while Kerry’s plan is not perfect, it’s a lot, lot better than Bush’s alternative.


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Postcards from Old Europe – Reality Check

I’ve found that it does one good to take a step back from the onslaught of data releases and to focus on what one could call the “big picture”. While decomposing the latest payroll data has its merits one should not forget that every figment of data is but a little thread in a broad tapestry of current events.

I’d like to use this post to share my view of the big picture with you. The major elements that make up my medium term view of the economic situation (and capital markets) are US interest rates, the trajectory China finds itself on, the price behavior of commodities and geopolitics.

Interest Rates

Classical methods of determining the “neutral” Fed Funds rate such as the Taylor rule come to the conclusion that the Fed should remove policy accommodation briskly. The only problem is that the Fed isn’t really buying coventional wisdom at this point in time. I think they are correct. The current US economy is not on a normal recovery path.

Massive doses of fiscal and monetary pump priming have served to resuscitate the economy at the cost of inflating bubbles in asset markets. The current weakness shown by leading indicators are portents of an economic slowdown in the second half. Having said that, I believe that the Fed will not hike by as much – or as fast – as the consensus seems to think.


China watchers fall into two camps at the moment. There are those who believe that the Chinese government will engineer a measured slowdown of economic growth while the other group is looking for the slowdown to turn into a hard landing. The Chinese economy is still for all intents and purposes a beast which is firmly ruled by the hand of the government. Policymakers have flexed their muscles and have engineered a visible slowdown in growth already.

This was mostly achieved by exerting direct controls on capital markets such as credit restrictions on certain industries. The problem is that this doesn’t do much to alleviate China’s real problem: the massive influx of foreign direct investment. So while the US is grappling with unsustainable deficits, China is fighting against unsustainable surpluses. The line between slowdown and crash is rather fine and depends as much on policymaker’s choices as it does on the behavior of foreign investors.


Right now this means “oil”. Simple story here: high oil prices constitute a drag on economic performance. Prices of most other commodities have moderated – a process which was helped along by the slowdown in China and of course by a reduction in speculative long positions (our friend, the carry trade).


The most talked about political event is the US presidential election in November. I’m not all that sure that it is the most important with regard to its economic implications. The next administration will probably not engage in fiscal austerity measures – regardless of the party affiliation. The other thing to keep in mind is that control of the White House does not equate to control of Congress. Even if Kerry should manage to win the election he would still face an uphill battle if he attempts to repeal the Bush tax cuts.

Europe is a different story. Elections in major European countries are still pretty distant and governments have settled firmly into survival mode. The ECB is becoming ever more frustrated by the slow pace of structural reforms while governments seem ever less likely to pursue deregulation or – perish the thought – moderation with regard to spending.

Political Japan has turned somewhat shaky over the past couple of weeks as the ruling LDP has weakened in polls ahead of Sunday’s upper house elections. Markets expect Prime Minister Koizumi to resign if the LDP does very badly and this is taken to mean a slowdown or even stop of reform.

The way ahead

I’m pretty sure that the aspects mentioned above will exert their influence on economic events ahead. The caveat is of course that everyone knows that we could be in for any number of positive or negative surprises from other factors that are not even on the radar screens yet. What do you think the future will bring? I invite you to use the comments to your heart’s content.

See you next week. Remember to visit CurryBlog for regular postings on capital market related issues.

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Dude, Where’s My 9.4 Trillion Dollars?

Ragout has the timeline
of how we got from where we started out fiscally (2001: up $5 trillion over ten years) to where we are now (down $4.4 trillion over ten years). It’s a long, sad, tale.


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Which Way the Dollar?

The dollar has done pretty well this year, compared to what many people expected. The chart below shows the dollar against the euro over the past two years (expressed as euros per dollar). While the dollar fell throughout most of 2003, so far in 2004 it has mostly held steady, despite a fall in demand for US bonds by Asian central banks.

This week’s Economist warns, however, that this may be just a pause before the dollar’s fall resumes. The crux of their argument is the usual one: the US current account deficit is unsustainable, and at some point foreign investors will lose interest and/or confidence in US assets, thus reducing the demand for the US currency.

The argument makes sense, and would probably be evidently true for any other country in the world. But those who say that the US is different have a point. No other country in the world has a currency that is effectively the world’s reserve currency. With any other currency, demand might fall if the world’s investors lose confidence and want a “harder”, more worldwide-acceptable currency. But the US has the most widely accepted currency in the world, and can’t run out of it. That might make a difference, in that it is conceivable that US assets will not become as unattractive as The Economist and others (myself included) have thought. It’s a question that I’m still wrestling with, and probably one that no one in the world knows the answer to.


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The White House Response

The White House has responded to all of the attention that the Democratic ticket of Kerry and Edwards has been receiving this week:

WASHINGTON – The United States is tightening security in the face of a steady stream of intelligence indicating al-Qaida may seek to mount an attack aimed at disrupting elections, the White House said.

The Department of Homeland Security is addressing the threat and has efforts under way to “ramp up security,” White House press secretary Scott McClellan said Thursday.

It’s a tried and true strategy, and we can expect the White House to continue using it until election day.


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