Wednesday, February 29, 2012

Palantir, the War on Terror's Secret Weapon, and main weapon in war on Privacy worldwide....

A Silicon Valley startup that collates threats has quietly become indispensable to the U.S. intelligence community

By and

In October, a foreign national named Mike Fikri purchased a one-way plane ticket from Cairo to Miami, where he rented a condo. Over the previous few weeks, he’d made a number of large withdrawals from a Russian bank account and placed repeated calls to a few people in Syria. More recently, he rented a truck, drove to Orlando, and visited Walt Disney World by himself. As numerous security videos indicate, he did not frolic at the happiest place on earth. He spent his day taking pictures of crowded plazas and gate areas.

None of Fikri’s individual actions would raise suspicions. Lots of people rent trucks or have relations in Syria, and no doubt there are harmless eccentrics out there fascinated by amusement park infrastructure. Taken together, though, they suggested that Fikri was up to something. And yet, until about four years ago, his pre-attack prep work would have gone unnoticed. A CIA analyst might have flagged the plane ticket purchase; an FBI agent might have seen the bank transfers. But there was nothing to connect the two. Lucky for counterterror agents, not to mention tourists in Orlando, the government now has software made by Palantir Technologies, a Silicon Valley company that’s become the darling of the intelligence and law enforcement communities.

The day Fikri drives to Orlando, he gets a speeding ticket, which triggers an alert in the CIA’s Palantir system. An analyst types Fikri’s name into a search box and up pops a wealth of information pulled from every database at the government’s disposal. There’s fingerprint and DNA evidence for Fikri gathered by a CIA operative in Cairo; video of him going to an ATM in Miami; shots of his rental truck’s license plate at a tollbooth; phone records; and a map pinpointing his movements across the globe. All this information is then displayed on a clearly designed graphical interface that looks like something Tom Cruise would use in a Mission: Impossible movie.

As the CIA analyst starts poking around on Fikri’s file inside of Palantir, a story emerges. A mouse click shows that Fikri has wired money to the people he had been calling in Syria. Another click brings up CIA field reports on the Syrians and reveals they have been under investigation for suspicious behavior and meeting together every day over the past two weeks. Click: The Syrians bought plane tickets to Miami one day after receiving the money from Fikri. To aid even the dullest analyst, the software brings up a map that has a pulsing red light tracing the flow of money from Cairo and Syria to Fikri’s Miami condo. That provides local cops with the last piece of information they need to move in on their prey before he strikes.

Fikri isn’t real—he’s the John Doe example Palantir uses in product demonstrations that lay out such hypothetical examples. The demos let the company show off its technology without revealing the sensitive work of its clients. Since its founding in 2004, the company has quietly developed an indispensable tool employed by the U.S. intelligence community in the war on terrorism. Palantir technology essentially solves the Sept. 11 intelligence problem. The Digital Revolution dumped oceans of data on the law enforcement establishment but provided feeble ways to make sense of it. In the months leading up to the 2001 attacks, the government had all the necessary clues to stop the al Qaeda perpetrators: They were from countries known to harbor terrorists, who entered the U.S. on temporary visas, had trained to fly civilian airliners, and purchased one-way airplane tickets on that terrible day.

An organization like the CIA or FBI can have thousands of different databases, each with its own quirks: financial records, DNA samples, sound samples, video clips, maps, floor plans, human intelligence reports from all over the world. Gluing all that into a coherent whole can take years. Even if that system comes together, it will struggle to handle different types of data—sales records on a spreadsheet, say, plus video surveillance images. What Palantir (pronounced Pal-an-TEER) does, says Avivah Litan, an analyst at Gartner (IT), is “make it really easy to mine these big data sets.” The company’s software pulls off one of the great computer science feats of the era: It combs through all available databases, identifying related pieces of information, and puts everything together in one place.

Depending where you fall on the spectrum between civil liberties absolutism and homeland security lockdown, Palantir’s technology is either creepy or heroic. Judging by the company’s growth, opinion in Washington and elsewhere has veered toward the latter. Palantir has built a customer list that includes the U.S. Defense Dept., CIA, FBI, Army, Marines, Air Force, the police departments of New York and Los Angeles, and a growing number of financial institutions trying to detect bank fraud. These deals have turned the company into one of the quietest success stories in Silicon Valley—it’s on track to hit $250 million in sales this year—and a candidate for an initial public offering. Palantir has been used to find suspects in a case involving the murder of a U.S. Immigration and Customs Enforcement special agent, and to uncover bombing networks in Syria, Afghanistan, and Pakistan. “It’s like plugging into the Matrix,” says a Special Forces member stationed in Afghanistan who requested anonymity out of security concerns. “The first time I saw it, I was like, ‘Holy crap. Holy crap. Holy crap.’ ”

Palantir’s engineers fill the former headquarters of Facebook along University Avenue in the heart of Palo Alto’s main commercial district. Over the past few years, Palantir has expanded to four other nearby buildings as well. Its security people—who wear black gloves and Secret Service-style earpieces—often pop out of the office to grab their lunch, making downtown Palo Alto feel, at times, a bit like Langley.

Inside the offices, sweeping hand-drawn murals fill the walls, depicting tributes to Care Bears and the TV show Futurama. On one floor, a wooden swing hangs from the ceiling by metal chains, while Lord of the Rings knickknacks sit on desks. T-shirts with cutesy cartoon characters are everywhere, since the engineers design one for each new version of their software. Of late, they’ve run out of Care Bears to put on the shirts and moved on to My Little Ponies.

The origins of Palantir go back to PayPal, the online payments pioneer founded in 1998. A hit with consumers and businesses, PayPal also attracted criminals who used the service for money laundering and fraud. By 2000, PayPal looked like “it was just going to go out of business” because of the cost of keeping up with the bad guys, says Peter Thiel, a PayPal co-founder.

The antifraud tools of the time could not keep up with the crooks. PayPal’s engineers would train computers to look out for suspicious transfers—a number of large transactions between U.S. and Russian accounts, for example—and then have human analysts review each flagged deal. But each time PayPal cottoned to a new ploy, the criminals changed tactics. The computers would miss these shifts, and the humans were overwhelmed by the explosion of transactions the company handled.

PayPal’s computer scientists set to work building a software system that would treat each transaction as part of a pattern rather than just an entry in a database. They devised ways to get information about a person’s computer, the other people he did business with, and how all this fit into the history of transactions. These techniques let human analysts see networks of suspicious accounts and pick up on patterns missed by the computers. PayPal could start freezing dodgy payments before they were processed. “It saved hundreds of millions of dollars,” says Bob McGrew, a former PayPal engineer and the current director of engineering at Palantir.

After EBay (EBAY) acquired PayPal in 2002, Thiel left to start a hedge fund, Clarium Capital Management. He and Joe Lonsdale, a Clarium executive who’d been a PayPal intern, decided to turn PayPal’s fraud detection into a business by building a data analysis system that married artificial intelligence software with human skills. Washington, they guessed, would be a natural place to begin selling such technology. “We were watching the government spend tens of billions on information systems that were just horrible,” Lonsdale says. “Silicon Valley had gotten to be a lot more advanced than government contractors, because the government doesn’t have access to the best engineers.”

Thiel, Lonsdale, and a couple of former colleagues officially incorporated Palantir in 2004. Thiel originally wanted to hire a chief executive officer from Washington who could navigate the Byzantine halls of the military-industrial complex. His co-founders resisted and eventually asked Alex Karp, an American money manager living in Europe who had been helping raise money for Clarium, to join as temporary CEO.

It was an unlikely match. Before joining Palantir, Karp had spent years studying in Germany under Jürgen Habermas, the most prominent living representative of the Frankfurt School, the group of neo-Marxist philosophers and sociologists. After getting a PhD in philosophy from the University of Frankfurt—he also has a degree from Stanford Law School—Karp drifted from academia and dabbled in stocks. He proved so good at it that, with the backing of a handful of European billionaires, he set up a money management firm called the Caedmon Group. His intellect, and ability to solve a Rubik’s Cube in under a minute, commands an awed reverence around the Palantir offices, where he’s known as Dr. Karp.

In the early days, Palantir struggled to sell its message and budding technology to investors. Big-name venture capital firms such as Kleiner Perkins Caufield & Byers, Sequoia Capital, and Greylock Partners all passed. Lonsdale says one investor, whom he won’t name, actually started laughing on the phone at Karp’s nonbusiness academic credentials. Overlooked by the moneyed institutions on Sand Hill Road, Thiel put up the original funds before enticing In-Q-Tel, the investment arm of the CIA, to invest as well. Karp says the reason VC firms “passed was that enterprise technology was not hot. And the government was, and still is, anti-hot.”

Michael E. Leiter, the former head of the National Counterterrorism Center, recalls being skeptical when Karp arrived to sell Palantir’s system to the NCTC, created by President George W. Bush after the attacks. “There’s Karp with his hair and his outfit—he doesn’t look like me or the other people that work for me,” he says. But Leiter soon discovered that Palantir’s software cost a fraction of competing products and actually worked. Palantir not only made the connections between the data sets but also drew inferences based on the clues and empowered the analysts. Leiter is now a Palantir consultant.

At 44, Karp has a thin, sinewy physique—the result of a strict 1,200-calorie-a-day diet—and an angular face that gives way to curly brown, mad-scientist hair. On a November visit at Palantir’s headquarters, he’s wearing purple pants and a blue and orange athletic shirt. As he does every day, he walked to work. “I never learned to drive because I was busy reading, doing things, and talking to people,” he says. “And I’m coordinated enough to bike, but the problem is that I will start dreaming about the business and run into a tree.”

During the era of social networks, online games, and Web coupons, Karp and his engineers have hit on a grander mission. “Our primary motivation,” Karp says, “is executing against the world’s most important problems in this country and allied countries.” That’s an unusual pitch in Silicon Valley, where companies tend to want as little to do with Washington as possible and many of the best engineers flaunt their counterculture leanings.

Palantir’s name refers to the “seeing stones” in Lord of the Rings that provide a window into other parts of Middle-earth. They’re magical tools created by elves that can serve both good and evil. Bad wizards use them to keep in touch with the overlord in Mordor; good wizards can peer into them to check up on the peaceful, innocent Hobbits of the Shire. As Karp explains with a straight face, his company’s grand, patriotic mission is to “protect the Shire.”

Most of Palantir’s government work remains classified, but information on some cases has trickled out. In April 2010, security researchers in Canada used Palantir’s software to crack a spy operation dubbed Shadow Network that had, among other things, broken into the Indian Defense Ministry and infiltrated the Dalai Lama’s e-mail account. Palantir has also been used to unravel child abuse and abduction cases. Palantir “gives us the ability to do the kind of link-and-pattern analysis we need to build cases, identify perpetrators, and rescue children,” says Ernie Allen, CEO of the National Center for Missing and Exploited Children. The software recently helped NCMEC analysts link an attempted abduction with previous reports of the suspect to the center’s separate cyber-tip line—and plot that activity on a map. “We did it within 30 seconds,” Allen says. “It is absolutely a godsend for us.”

In Afghanistan, U.S. Special Operations Forces use Palantir to plan assaults. They type a village’s name into the system and a map of the village appears, detailing the locations of all reported shooting skirmishes and IED, or improvised explosive device, incidents. Using the timeline function, the soldiers can see where the most recent attacks originated and plot their takeover of the village accordingly. The Marines have spent years gathering fingerprint and DNA evidence from IEDs and tried to match that against a database of similar information collected from villagers. By the time the analysis results came back, the bombers would be long gone. Now field operatives are uploading the samples from villagers into Palantir and turning up matches from past attacks on the spot, says Samuel Reading, a former Marine who works in Afghanistan for NEK Advanced Securities Group, a U.S. military contractor. “It’s the combination of every analytical tool you could ever dream of,” Reading says. “You will know every single bad guy in your area.”

Palantir has found takers for its data mining system closer to home, too. Wall Street has been particularly receptive. Every year, the company holds a conference to promote its technology, and the headcount swelled from about 50 people at past events to 1,000 at the most recent event in October. “I saw bankers there that don’t go to any other conferences,” says Gartner’s Litan. The banks have set Palantir’s technology loose on their transaction databases, looking for fraudsters, trading insights, and even new ways to price mortgages. Guy Chiarello, chief information officer for JPMorgan Chase (JPM), says Palantir’s technology turns “data landfills into gold mines.” The bank has a Palantir system for fraud detection and plans to use the technology to better tailor marketing campaigns to consumers. “Google (GOOG) unlocked the Internet with its search engine,” Chiarello says. “I think Palantir is on the way to doing a similar thing inside the walls of corporate data.”

One of the world’s largest banks has used Palantir software to break up a popular scam called BustOut. Criminals will steal or purchase access to thousands of people’s online identities, break into their bank and credit-card accounts, then spend weeks watching. Once they spot a potential victim purchasing a plane ticket or heading out on a holiday, they siphon money out of the accounts as fast as they can while the mark is in transit. The criminals hide their trails by anonymizing their computing activity and disabling alert systems in the bank and credit-card accounts. When the bank picks up on a few compromised accounts, it uses Palantir to uncover the network of thousands of other accounts that have to be tapped.

A Palantir deal can run between $5 million and $100 million. The company asks for 20 percent of that money up front and the rest only if the customer is satisfied at the end of the project. Typically, it’s competing against the likes of Raytheon (RTN), Lockheed Martin (LMT), Northrop Grumman (NOC), and IBM (IBM), along with a scattering of less prominent data mining startups. “We can be up and running in a bank in eight weeks,” Karp says. “You will be getting results right away instead of waiting two to three years with our competitors.”

Palantir has been doubling headcount every year to keep up with business. To get a job at the company, an applicant must pass a gauntlet of brain teasers. An example: You have 25 horses and can race them in heats of 5. You know the order the horses finished in, but not their times. How many heats are necessary to find the fastest? First and second? First, second, and third? (Answers: six, seven, and seven.) If candidates are able to prove themselves as what Karp calls “a software artist,” they’re hired. The company gives new arrivals some reading material, including a guide to improvisational acting, a lecture by the entrepreneur Steve Blank on Silicon Valley’s secret history with the military, and the book The Looming Tower: Al-Qaeda and the Road to 9/11. They’re also rewarded with a low wage by Silicon Valley standards: Palantir caps salaries at $127,000.

Instead of traditional salespeople, Palantir has what it calls forward deployed engineers. These are the sometimes awkward computer scientists most companies avoid putting in front of customers. Karp figures that engineers will always tell the truth about the pros and cons of a product, know how to solve problems, and build up a strong reputation with customers over time. “If your life or your economic future is on the line,” he says, “and there is one company where people are maybe kind of suffering from Asperger’s syndrome, but they have always been accurate, you end up trusting them.”

The director of these forward deployed engineers is Shyam Sankar, a Palantir veteran. In his corner office there’s a Shamu stuffed animal, an antique Afghan rifle hanging overhead, and a 150-year-old bed frame decorated with a wild, multicolored comforter. The bed comes in handy during an annual team-building exercise: For one week, employees live in the Palantir offices; the bedless make shantytown houses out of cardboard boxes. Sankar celebrates Palantir’s mix of office frivolity and low salaries. “We will feed you, clothe you, let you have slumber parties, and nourish your soul,” he says. “But this is not a place to come to get cash compensation.”

Like many of the young engineers, Sankar recounts a personal tale that explains his patriotic zeal. When he was young, his parents moved from India to Nigeria, where Sankar’s father ran a pharmaceutical plant. One night, burglars broke into their home, pistol-whipped his dad, and stole some valuables. After that traumatic event, the family moved to Florida and started over, selling T-shirts to theme parks. “To come to a place and not have to worry about such bad things instilled a sense of being grateful to America,” Sankar says. “I know it sounds corny, but the idea here is to save the Shire.”

Karp acknowledges that to outsiders, Palantir’s Middle-earth-meets-National Security Agency culture can seem a bit much. “One of my investors asked me, ‘Is this a company or a cult?’ ” he says. “Well, I don’t seem to be living like a cult leader.” Then he begins a discourse on how Palantir’s unusual ways serve the business. “I tend to think the critiques are true,” Karp says. “To make something work, it cannot be about the money. I would like to believe we have built a culture that is about a higher purpose that takes the form of a company. I think the deep character anomalies of the company are the reasons why the numbers are so strong.”

Using Palantir technology, the FBI can now instantly compile thorough dossiers on U.S. citizens, tying together surveillance video outside a drugstore with credit-card transactions, cell-phone call records, e-mails, airplane travel records, and Web search information. Christopher Soghoian, a graduate fellow at the Center for Applied Cybersecurity in the School of Informatics and Computing at Indiana University, worries that Palantir will make these agencies ever hungrier consumers of every piece of personal data. “I don’t think Palantir the firm is evil,” he says. “I think their clients could be using it for evil things.”

Soghoian points out that Palantir’s senior legal adviser, Bryan Cunningham, authored an amicus brief three years ago supporting the Bush Administration’s position in the infamous warrantless wiretapping case and defended its monitoring domestic communication without search warrants. Another event that got critics exercised: A Palantir engineer, exposed by the hacker collective Anonymous earlier this year for participating in a plot to break into the PCs of WikiLeaks supporters, was quietly rehired by the company after being placed on leave.

Karp stresses that Palantir has developed some of the most sophisticated privacy protection technology on the market. Its software creates audit trails, detailing who has seen certain pieces of information and what they’ve done with it. Palantir also has a permission system to make sure that workers in agencies using its software can access only the data that their clearance levels allow. “In the pre-Palantir days, analysts could go into file cabinets and read whatever they want,” says former NCTC director Leiter. “Nobody had any idea what they had seen.” Soghoian scoffs at the privacy-protecting features Palantir builds into its software. “If you don’t think the NSA can disable the piece of auditing functionality, you have to be kidding me,” he says. “They can do whatever they want, so it’s ridiculous to assume that this audit trail is sufficient.”

Thiel, who sits on the board and is an avowed libertarian, says civil liberties advocates should welcome Palantir. “We cannot afford to have another 9/11 event in the U.S. or anything bigger than that,” he says. “That day opened the doors to all sorts of crazy abuses and draconian policies.” In his view, the best way to avoid such scenarios in the future would be to provide the government the most cutting-edge technology possible and build in policing systems to make sure investigators use it lawfully.

After Washington and Wall Street, Karp says the company may turn its attention to health care, retail, insurance, and biotech. The thinking is that Palantir’s technology can illuminate health insurance scams just as well as it might be able to trace the origin of a virus outbreak. Despite all this opportunity, and revenue that is tripling every year, Karp insists that Palantir will remain grounded. An IPO, while not out of the question, “dilutes nonmonetary motivation,” he says.

One higher purpose in the coming year will be rescuing strapped companies and government bodies from the brink of financial ruin. Karp lists fraud, Internet security issues, Europe’s financial woes, and privacy concerns as possible drivers for Palantir’s business. For anyone in peril, the message is clear: Give us a signal and a forward deployed engineer will be at your doorstep. “There are some people out there that don’t think to pick up the phone and call us,” Karp says. “By next year, many of those people will.”

Monday, February 27, 2012

The Oil prices end game, a huge decline soon....

The Oil prices end game, a huge decline soon....
By Chris Cook

The end game is about to begin. On the one hand you have the noise and rhetoric. Greedy speculators gouging gasoline prices; mad mullahs preparing to wipe Israel off the map; bunker buster bombs and fleets being positioned; huge demand for oil from the BRICS countries; China's insatiable thirst for oil; the oil price will head for $200 a barrel and will never again fall below $130 ...

On the other hand you have the reality.

Oil markets
The oil markets are completely manipulated and orchestrated, and the conductors of the orchestra have the benefit of having already held a rehearsal in 2008.

History never repeats itself, but it does rhyme. This time around it is not demand from the United States that is collapsing, but European Union and United Kingdom demand, as oil prices in Euros and pounds sterling have never been higher. In the meantime, the US is awash in oil as domestic production quietly increases, flushed out by the high prices.

As I have outlined in previous articles, the culprit for the high oil prices between 2009 and 2012 - with the exception of the speculative "spike" between March 2011 and June 2011 driven by Fukushima and Libyan price shocks - has been passive investment by risk-averse investors, which enabled producers to support oil prices at high levels.

Much of this passive money underpinning the market and enabling producers to monetize inventory pulled out of the market in September 2011, and another wave pulled out in December 2011.

What is now happening is the end game: an orchestrated wave of noise that is drawing in speculative money. This is enabling the producers who are actually in the know to hedge by selling production forward during what they confidently expect will be a temporary - and pre-planned - managed fall in the oil price.

The game plan
The smartest kids on the block know that gasoline prices much over US$4 per gallon will be both deflationary and lethal to President Barack Obama's re-election chances. So that won't happen other than briefly.

I am by no means the only commentator who has pointed out the complete counter-productivity of these oil sanctions. The smart kids are well aware that oil sanctions are completely useless, and simply enable China to fill its strategic reserves at a discount to the market price at the expense of Greece and Italy in particular.

But the US has been quite happy to let the EU - as useful idiots - take the economic hit. The high oil prices caused by all this noise and nonsense are actually a net benefit to Iran - which rattles its saber loudly as elections approach.

The effect of a managed decline in oil prices to, and probably over-correcting well through, $60 a barrel - which is coming fairly soon - will be extremely beneficial to the US in two ways.

Firstly, it will be catastrophic in particular for Iran, Russia and Venezuela - not exactly on the White House party list - whose hugely oil-dependent revenues will collapse. The ensuing economic mayhem will open these countries up to regime change and to rescue plans which Wall Street will be dusting off.

Secondly, the US population will be laughing all the way to the gas station as gasoline prices fall - at least temporarily - below $2.50 a gallon and release purchasing power into the economy, thereby doing the president's re-election chances no harm at all.

What will then happen is that members of the Organization for Petroleum Exporting Countries will panic and genuinely reduce their production. The Saudis/Gulf Cooperation Council will again orchestrate the inflation of the oil price - as they did in 2009 - comfortable in the knowledge that they have been able to hedge against this temporary fall in prices at the expense of the speculators currently pouring in to the market.

That's the game plan as I see it of the smartest kids on the block. What could ever go wrong?

A buyer's strike
Quite clearly, consumer nations, like everyone else, are in the dark in relation to what has been going on in the oil market and have swallowed the populist "greedy speculator" meme. They are simply unaware of the nature and cosmic scale of the oil market manipulation that has been taking place, and as a result have been happily overpaying for oil for years.

What happens if they simply refuse to pay these prices?

Possibly a "buyers' strike" by China would be enough to crater the market. We've already seen the effect of that on Iran, which has clearly agreed new terms with China after the latter held back purchases earlier this year.

Or possibly speculative short selling of crude oil by hedge funds funded by Chinese investment? I pointed out at a rather spooky conference on "economic terrorism" a few years ago in Lausanne - which examined ways in which terrorists might make economic rather than physical attacks - that the only difference between an economic terrorist and a hedge fund is motive....

System fragility
The markets in oil have never been so fragile and susceptible to shocks. Private inventories of oil are low. The investment banks interpret this - as they interpret everything - as a sign of physical demand and therefore as bullish for the oil price ... oh, and by the way, here are some oil funds they have to sell you.

The reason inventories are low is that private intermediary buyers will only store oil if they can both finance it and lock in a higher forward sale price. Bank financing is scarce and getting scarcer, while forward prices are below current prices; the result is that inventories are low.

The systemic shortage of finance capital means that neither physical oil traders nor the remaining proprietary traders of banks can afford to take into storage much of the approaching flood of oil onto the market.

Also, derivative market risk has become concentrated - since intermediaries are no longer capitalized to take it - in centralized clearing houses, which have for commercial reasons become fragmented silos.

In my view, the steep decline which is planned could easily get out of hand in a not dissimilar way to the tin market in 1985 when the price collapsed - literally overnight - from $8,000 per tonne to $4,000 per tonne.

We will then see whether the clearing houses are "too big to fail" - and ask why, if so, such utilities are run for private profit?

When, not if
In my analysis, absent a massive, and sustained, shortfall in oil supplies - which I cannot see occurring, since all involved have every interest in ensuring it does not occur - the oil price will, as I have already forecast, fall dramatically by the end of this year's second quarter at the latest. It's not a matter of if, but when it will happen.

Finally, as an interesting aside, I have credible reports that Marc Rich - who got on well with both the Shah of Iran and Imam Khomeini, and who sold oil from Iran to Israel for 20 years between 1973 and 1993 - has recently been seen again in Tehran. I doubt that this is for the night life, or because he prefers Tehran air to Swiss: but as a trusted third party there would be few better placed to act as a go-between....

Let's hope so. Once the stultifying political uncertainties of elections in Iran and Russia are over, things could get interesting....

Chris Cook is a former director of the International Petroleum Exchange.

Sunday, February 26, 2012

Euro-oligarchs: Greece should decide on its own to leave the Eurozone....

Euro-oligarchs: Greece should decide on its own to leave the Eurozone....

In Greece, three-quarters of the independent doctors, lawyers, and engineers declare taxable income below the existential minimum. Tax fraud amounts to €20 billion per year (8.5% of GDP). And tax dodgers owe €63 billion in unpaid taxes (27% of GDP). The country is bankrupt and has been kept afloat by the Troika (EU, ECB, and IMF), of which Germany is by far the largest contributor. And the numbers are staggering: the first bailout package of €110 billion, the current bailout package of €130 billion, and the debt swap of €107 billion, in total €347 billion, amount to a mind-boggling 150% of Greece’s GDP!

And even that won’t be enough, apparently, according to a crescendo of German politicians, among them Finance Minister Wolfgang Schäuble who inserted these devastating words into his letter to the members of the Bundestag: “I cannot give any guarantees that the path taken will lead to success.” And: It’s possibly “not the last time that the German Bundestag will have to deal with financial aid for Greece.” Thus, he put a third bailout package on the table.

On Monday, the Bundestag will vote on the second bailout package of €130 billion plus €24.4 billion from the first package that hasn’t been paid yet, a total of €154.4 billion. There is resistance within the governing coalition. And the opposition SPD and Greens accused the government of deception. The documents they received were incomplete, they said. Though there were several hundred pieces of paper, they didn’t include the most important: an analysis of Greece’s ability to service its debt in the long term. Most likely, they said, Greece would need to be bailed out again after 2014 because it won’t get its finances in order by then, and won’t be able to fund itself in the capital markets. €50 billion would be needed, they estimated. And yet, the SPD and the Greens will largely vote for the bailout, which is expected to pass.

But it’s a theoretical approval. Theoretical, because in reality, payment of the tranches will be conditioned on the implementation of all promised measures down to the last iota, however Teutonic they may be—and it’s almost certain that Greece won’t be able or willing to comply with all of them. The latest iota is a leaked document that specified that 160 employees of the German Ministry of Finance were ready to head to Greece to help install a functional financial administration.

“The European Union is suffering under Germany,” said Georgios Karatzaferis, president of the right-wing LAOS party. He accused Chancellor Angela Merkel of trying to “impose her will on Southern Europeans.” And he wasn’t the only one lashing out.

In Germany, the chorus for strict implementation has been loud. While Greece cannot be forced to implement and stick to the austerity and reform package, Bundesbank President Jens Weidman said Friday evening, “it must be clear that more financial means cannot be made available if Greece does not adhere to the agreements.”

And Merkel’s coalition partner, the CSU, has been relentless. Among them, Hans Michelbach, who said that pressure for reform must be increased. Greece “overburdened to excess” the patience of the Troika, and that could not continue. “There can only be new money if all demands for the previous tranche have been met.” That would include privatizing its state-owned enterprises. And about the third bailout package that Schäuble couldn’t exclude? “We’re giving Athens an additional chance with the second package, but the country has to use that chance. One thing is clear: since Greece already didn’t use the first chance, there won’t be a third chance.”

So the plan becomes clear. And it is now politically correct to pronounce it in public: Greece should decide on its own to leave the Eurozone. This way, no politician outside Greece can be blamed.

“The chances for Greece to regenerate itself and become competitive are certainly greater outside the Monetary Union,” said Minister of the Interior Hans-Peter Friedrich (CSU). “I’m not talking about kicking Greece out, but creating incentives for an exit that it can't refuse.”

Luxembourg Finance Minister Luc Frieden said it too: “If the Greek people or the Greek political elite do not apply all of these conditions, they exclude themselves from the Eurozone.” All of these conditions. Then the crucial words: “The impact on other countries will now be less important than a year ago.” And that has been the strategy all along....

Critical Mass: The Mispricing of Derivatives Risk And How the Financial World Ends....

Critical Mass: The Mispricing of Derivatives Risk And How the Financial World Ends....

Jim Sinclair does a good job of explaining the difference between the notional and real value of derivatives, and how that real value comes to bear on the financial system in the event of a default. You can read this here for a review of the basic concept if you do not understand it.

Within my own view of money, uncollateralized financial instruments like derivatives are credits, or potential money. When an event triggers them so that they become real, with a significant presence on the balance sheet and the income statement, then they become money.

In the financial world we see the extraordinary growth of derivatives in notional value, to almost unbelievable proportions. This mass of derivatives facilitates the withdrawal of money from the real economy in the form of wealth transferal, such as bonuses and commissions for example. But they do not become actual money themselves until some trigger event. To perhaps stretch our analogy to the physical world, it could be described as the withdrawal of the ocean, as money is siphoned from the real economy by the financial world, in advance of the arrival of a tsunami as derivatives start hitting the balance sheets and are transformed into 'real money.'

This could be the cause of a hyper-inflationary policy error which I have been alluding to for the past several years. The policy error is not in the simple setting interest rates, but the Fed's failure to regulate the banking system and manage its risks. In this the Fed, particularly under the crooked Greenspan, was an abysmal failure, and improvement has not been forthcoming from BenShalom Bernanke.....

The explosion of the realization of derivatives would create enormous fortunes and unpayable debts. Depending on how the monetary authorities deal with it, the potential for a Weimer experience is there. Nationalizing the banks and canceling the transactions is one way out. Attempting to sustain these mythical financial structures will take the existing currency system down. That is the limit of the Fed's power.

Most theories and models are tested at the extremes of their limits, and I suggest that the coming financial crisis will wash many of the current economic and monetary models away, scouring the detritus of years of conflicting interests and fanciful adornments down to their foundations. But the responsible parties will all sit back and say, "We did not know." But of course they did. They just did not care, as long as it paid them handsomely.

Taking this discussion of derivatives an important step further, the most significant elements of concern in derivatives are the same as they are in all financial schemes: unsustainable leverage and the mispricing of risk.

In derivatives the unsustainable leverage arises from the fact that the impact or risk magnitude of the derivatives, which are often uncollateralized, are artificially reduced by the assumed effects of 'netting.' And the risk is mispriced, not only in the terms of the agreement itself, but in the failure to properly account for counterparty risk as the instrument plays out in a larger risk portfolio. There is individual contract risk, and then there is the cascading risk of a highly compacted financial system.

We see situations today in which a single bank may have a hundred or more trillion dollars of notional value in derivatives on their books, against much less than a trillion in assets.

But the risk in such a large position is allowed because the banks can show that they have supposedly 'netted out' the risk by making other derivative arrangements that offset their own risk, in the manner of a hedge. As the amounts of derivative netting grows larger and more intertwining, the secondary effects of counterparty risk become tightly compressed.

What if a counterparty fails? Then all its own agreements fail, many of which may be hedges that also fail, and a cascading failure of these financial instruments in a tightly compressed and overleveraged system becomes catastrophic.

In 2002 Warren Buffet famously referred to derivatives as 'financial weapons of mass destruction.' But beyond that headline, few in the media took the time to actually communicate what Buffet was really saying, and the risks that the unregulated derivatives markets posed to the banking system.

The collapse of Lehman Brothers threatened to trigger a financial meltdown. A panicked leadership of the country was able to stop it, but at the cost of many trillions of dollars, and a distortion in the real economy that still goes largely unmeasured. And this was by intent, because the leaders feared a loss of confidence in the system. And so while the meltdown was averted, a credibility trap was created that is the epitome of moral hazard.

The influence and knowledge, call it soft blackmail of mutually assured destruction if you will, that the 'Too Big To Fail' banks obtained in this cover-up of the depths of the fraud and mispricing of risk in the financial system has given them enormous power over the political process. It would have been more effective to have nationalized the banks and cut the risk out at the source, but the new president Obama was badly advised to say the least, by advisers he himself appointed, who were in fact long time insiders in the creation of the risk situation itself.

The global financial system is like a nuclear bomb. At its center are at most ten banks whose financial posture is overleveraged and interdependent not only amongst themselves but also with their national economies. It is not a question of 'if' they fail, but 'when,' and what is done about it.

The bailouts become geometrically larger given the size and interwoven complexity of the bets. The only feasible solution is to nationalize the banks, keep the real parts of the economy whole, and restart the system in a more sustainable manner. This is essentially what the Franklin Roosevelt did in 1933, and to a more limited extent what J.P. Morgan did with the NY banks in 1907. In both instances they dictated terms and made the banks sign to preserve the system.

In the case of the 2007 crisis, Bush-Obama failed to dictate terms, and essentially allowed the banks to do whatever they wished to keep going without reforming the system, taking huge sums of money and paying off their bets while maintaining their bonuses and most of their positions. And this was a monumental political failure indeed, and history will probably not be kind.

When the next crisis occurs, there are still a variety of responses. The monied interests will wish to promote another bailout, with harsh terms being dictated to the public, rather than to the banks. This is what is happening in Greece. The terms will be so draconian and unsustainable that state fascism is the most likely longer term outcome. Germany is struggling with that decision today, in light of bad results in their last two experiences along those lines.

I am not hopeful that the leaders of the political world will have the resolve to do what it takes to bring the banks back under control, given the power that big money has obtained over our worldly leaders.

Following are edited excerpts from the Berkshire Hathaway annual report for 2002.

I view derivatives as time bombs, both for the parties that deal in them and the economic system.

Basically these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices, or currency values. For example, if you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction, with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration, running sometimes to 20 or more years, and their value is often tied to several variables.

Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counter-parties to them.

But before a contract is settled, the counter-parties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands. Reported earnings on derivatives are often wildly overstated. That’s because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.

The errors usually reflect the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them. Those who trade derivatives are usually paid, in whole or part, on “earnings” calculated by mark-to-market accounting. But often there is no real market, and “mark-to-model” is utilized. This substitution can bring on large-scale mischief.

As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counter-parties to use fanciful assumptions. The two parties to the contract might well use differing models allowing both to show substantial profits for many years.

In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.

I can assure you that the marking errors in the derivatives business have not been symmetrical. Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.

Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counter-parties. Imagine then that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company.

The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.

Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counter-parties tend to build up over time. A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. However under certain circumstances, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z.

In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. (Such as in the case of AIG for example - Jesse) In these industries, firms that are fundamentally solid can become troubled simply because of the travails of other firms further down the chain.

Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. (This is the Greenspan argument for example, but he and others went further in fighting any sort of regulation in this area. - Jesse)

On a micro level, what they say is often true. I believe, however, that the macro picture is dangerous and getting more so. Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.

On top of that, these dealers are owed huge amounts by non-dealer counter-parties. Some of these counter-parties, are linked in ways that could cause them to run into a problem because of a single event, such as the implosion of the telecom industry. Linkage, when it suddenly surfaces, can trigger serious systemic problems.

The derivatives genie is now well out of the bottle, and these instruments will almost certainly multiply in variety and number until some event makes their toxicity clear. Central banks and governments have so far found no effective way to control, or even monitor, the risks posed by these contracts. In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.

As an endnote, it appears that the money in derivatives was too good for even Mr. Warren Buffet to pass up. Berkshire Profit Falls 30% On Insurance, Derivatives.


Here is a fairly simple financial industry explanation of 'netting.'

"Rather than execute a disastrously complicated web of transactions, swap dealers, and ordinary banks, use clearing houses to do exactly what we just did above, but on a gigantic scale. Obviously, this is done by an algorithm, and not by hand. Banks, and swap dealers, prefer to strip down the number of transactions so that they only part with their cash when absolutely necessary. There are all kinds of things that can go wrong while your money spins around the globe, and banks and swap dealers would prefer, quite reasonably, to minimize those risks. (Presumably by assuming them away, as in the case of Black-Scholes. Except the assumptions made in netting as compared to the risk handwave in Black-Scholes seem like planet killer class ordnance compared to conventional bunker busters. - Jesse)

An Engine Of Misunderstanding

As you can see from the transactions above, the total amount of outstanding debts is completely meaningless. That complex web of relationships between A, B, and C, reduced to 1 transaction worth $1. Yet, the media would have certainly reported a cataclysmic 2 + 3 + 4 + 5 + 2 + 6 = $22 in total debts. (But borrowing from Sinclair's description, if a major counterparty in this daisy chain fails, the notional netting can become 'cataclysmic,' and enormous losses can be realized, especially if there are linkages to the commercial credit and banking systems. And this is where 'mark-to-myth' and bailouts come in. - Jesse)

Charles Davi, Netting Demystified
Here is a visual representation of what a Lehman size failure would look like in today's financial markets....

Japanese financial regulation is pretty spotty, Billions in clients funds Missing at AIJ: Watchdogging Japan....

Japanese financial regulation is pretty spotty, Billions in clients funds Missing at AIJ: Watchdogging Japan....

This is more Madoff than Corzine, but the song of unforeseen counter-party risk remains the same.

The Japanese regulators have decided to take a closer look to see how many more of the 299 asset management firms have funding problems like this.

Don't it always seem to go that you don't know what you've got 'til its gone?

Missing Funds at AIJ: Watchdogging Japan....
By Kana Inagaki and Phred Dvorak
February 24, 2012,
The revelation that billions of dollars may have gone missing from client funds managed by a little-known Tokyo asset management firm highlights a sobering fact about Japanese financial regulation: It’s pretty spotty.

Japan’s financial watchdog Friday said investigators were looking into the alleged disappearance of “most of” the 183 billion yen, or about $2.3 billion, in pension-fund assets managed by AIJ Investment Advisors Co. Details are sketchy: regulators haven’t said exactly how much is supposedly lost, how many clients AIJ had, nor even whether they suspect foul play.

But we do know that if AIJ was doing anything wrong, the chances of its being caught out by Japan’s regulators were pretty slim.

Investment managers like AIJ are required to submit business reports to regulators once a year, Japan’s Financial Services Agency says. If those regulators suspect problems, they can carry out hearings. And some companies actually conduct voluntary audits of their own businesses. (AIJ was not one of them.)

A firm involved in dubious activity would need to be fairly unlucky to find itself caught in the net of one of the Securities and Exchange Surveillance Commission’s annual audits. The regulator conducted inspections of 15 investment managers in the year ended March 2011. Since there were 299 such firms in total, the chances of getting audited were about one in 20.

The FSA says it’s now going to do an audit of all 263 firms that have similar investment-management mandates to AIJ’s.

According to Japan’s Nikkei daily, AIJ may have misled clients for years, claiming they had cumulative returns as high as 240%.

It all makes for a fairly bleak spell for Japanese financial regulators. After all, the discovery of pension funds missing at AIJ comes only months after camera-maker Olympus Corp. admitted to it successfully hid more than $1.5 billion in losses for 13 years....

“To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly.”

John Kenneth Galbraith, The Great Crash of 1929

Friday, February 24, 2012

The Growth Map: Economic Opportunity in the BRICS and Beyond ....

The Growth Map: Economic Opportunity in the BRICS and Beyond ....

BRIC by brick to the future, by Jim O'Neill

Reviewed by Benjamin Shobert

* [See below]: The biggest challenge facing the Zioconned USA today is its utter corruption, Hubris and barbaric criminality of its political class and the coming demise of the US Dollar and how to prevent it from happening....

Against the backdrop of all that has happened in the United States and now Europe since the 2008 financial crisis, it has been easy to criticize modern economics for its inability to predict downside risks or negative trends that would come to define the world.

While this may be a perfectly understandable frustration, it overlooks one of the most important and accurate economic predictions that professional economists have made in the past 20 years: how the rise of the world's emerging economies would happen, and what this would mean for the developed world.

Jim O'Neill, now chairman of Goldman Sachs Asset Management, not only coined the term "BRIC", which stands for both what he saw as the four most important emerging economies of Brazil, Russia, India and China, as well as the larger set of opportunities and challenges that would be faced as these countries developed their respective economies. (South Africa has subsequently become a member of what is now known as BRICS.)

His new book, The Growth Map: Economic Opportunity in the BRICs and Beyond builds on the successful predictions made 10 years ago when he asserted that these four countries would surpass the six biggest economies of the West in 40 years.

O'Neill's predictions a decade ago were, as he now puts it, "rather conservative". His quick rundown of how BRICs actually performed during the period in question lays the foundation for the bold predictions in his new book.

O'Neill writes of his original projections that the aggregate gross domestic product (GDP) of the BRIC countries "has close to quadrupled since 2001, from around $3 trillion to between $11 and $12 trillion. The world economy has doubled in size since 2001, and a third of that growth has come from the BRICs."

To put this into perspective, O'Neill states, "Their combined GDP increase was more than twice that of the United States and it was the equivalent to the creation of another new Japan plus one Germany, or five United Kingdoms, in the space of a single decade." (Emphasis the reviewer's.)

Much of this economic growth comes at the hands of the resurgent BRIC countries, which is something Westerners take for granted today; but O'Neill is right not only to point back at this growth as reason to believe in what he is about to write in his new book, but equally to remind the reader of the enormous economic good that has been set in motion by the entrance of the BRIC economies to the world order. During a period where Americans in particular have grown cynical about whether China's presence has been for their betterment or detriment, O'Neill's reminder is much needed.

Thankfully, in The Growth Map, O'Neill takes the time to explain briefly to readers the original methodology he and his team used when their original bold predictions about the BRIC countries were made. Built largely on what O'Neill calls a "global environment score" or "GES Index", this approach takes into account a total of 13 variables, some obviously economic (inflation, government deficit, external debt, and so forth) and others more intangible (use of computers, education, corruption, stability of government).

O'Neill splits these into "macroeconomic" and "microeconomic" variables, a distinction that is perhaps more clear on the macro side than the micro. His large point is that the methodology used to originally predict the growth of the BRIC countries proved to be accurate because of this approach, one that blends both hard quantitative factors with more soft determinations about a country's current situation.

Anticipating those who will read his book and argue that a particular country should not be included in the BRIC formulation - India as one of the more recent and common examples - O'Neill spends time going over the downside risks he sees in these countries. But, his review of these concerns always goes back to the predictive value of the GES Index.

The larger point he makes is worth reflecting on: during a period when prognosticating about the future of the BRIC countries is as much about Western insecurities as it is a grounded analysis in what drives economies forward, the latter is the right approach. Unwilling to simply overlook trouble in any of the BRIC economies, he is equally unwilling to let these problems obscure the reality of where they have come from, and where they are likely going.

With his history of properly predicting the rise of the BRIC economies firmly established, O'Neill turns his attention to what he calls the "Next Eleven" or "N-11". Originally a group he identified in 2005, this list includes Mexico, Turkey, Egypt, Iran, Nigeria, Bangladesh, Indonesia, South Korea, Pakistan, the Philippines and Vietnam. As O'Neill admits, this group is not only much larger, but more diverse than the original BRIC formulation.

Within this group, as O'Neill admits, is more volatility and instability than existed when he originally constructed the BRIC idea using the GES Index. Consequently, his predictions about the Next Eleven are couched a little more carefully. Where O'Neill's previous predictions were more discrete, namely, that the BRIC economies would surpass the developed West in 40 years, his predictions about the Next Eleven show confidence, but come short of the bold certainty of previous predictions.

O'Neill compartmentalizes the Next Eleven into what he calls "three different tracks". Respectively these are first, "South Korea, Mexico and Turkey, where incomes and development levels are reasonably high, growth conditions are decent and the challenge will be to sustain and improve those conditions in order to converge with the world's richest economies."

His second group includes Indonesia and the Philippines, where he believes each needs "to advance further to get closer to the first group". The final group includes Egypt, Nigeria, Pakistan, Bangladesh, Iran and Vietnam. As O'Neill notes, "The countries in this final group ... are quite different."

Aware that The Growth Map comes at a different moment in the world's economic development than when he made his original BRIC predictions, O'Neill is careful to evaluate how issues like China's consumption of natural resources and its growing role in Asian affairs might be potential sources of tension and unrest. He also appreciates that China's rise, once something Washington believed it should encourage, is currently being interpreted by many Americans as having been at their expense.

O'Neill notes that "At a time when the US economy is struggling, it is easy to blame others, and especially China." He penetratingly writes "It is highly fashionable for US politicians to blame China for America's economic problems." Yet, as O'Neill knows, this sort of response is precisely what many American policy makers and the public at large believe would be best suited to get back what they feel they have lost to the rising BRIC economies.

Towards the end of his book, O'Neill turns his attention towards what he believes the world must do in response to the BRIC nations having, as he puts it, "gone from emerging to emerged". The established order, whether evidenced by non-governmental organizations like the World Trade Organization or the International Monetary Fund, will have to change in ways that developed nations like the United States and the eurozone may want to resist.

O'Neill cautions that "Those countries that ran the world for the latter half of the twentieth century cannot afford to be squeamish or judgmental about countries that now rival them economically, just because of their different social and political systems."

The Growth Map contains its share of predictions, admittedly more carefully couched than those O'Neill was originally made famous for, but ones that are no less potentially impactful. Whether the Next Eleven will in fact emerge like the BRIC nations have is certainly a pregnant question he labors to answer, the more weighty question may be whether the developed West has the willpower and leadership necessary to find their way forward without conflict in a world where they no longer have the unquestioned upper hand.

The Growth Map: Economic Opportunity in the BRICs and Beyond, by Jim O'Neill. Portfolio Hardcover (Dec 2011), ISBN-10: 1591844819. US$29.95, 256 pages.

Benjamin A Shobert is the managing director of Rubicon Strategy Group, a consulting firm specialized in strategy analysis for companies looking to enter emerging economies.

Indonesia, Malaysia beat growth expectations...
By Robert M Cutler

MONTREAL - Both Indonesia and Malaysia, two countries that export more to the dynamic Asian markets than they sell to the lethargic countries of Europe and America, surprised consensus growth estimates to the upside for the fourth quarter of 2011.

Indonesia grew 6.5% year-on-year, marking the fifth consecutive quarter where growth exceeded 6.4%. Growth for the whole year 2011 also came in at 6.5%, up three-tenths of a point over 2010 and significantly above the 5.7% average for the second half of the last decade.

A month ago, Moody's increased its credit rating of Indonesia's sovereign debt to "Baa3", which is the lowest investment-grade rung. This came a month after Fitch raised Indonesia to its own lowest investment-grade rating of "BBB-". Standard & Poor's will likely follow suit in the near future.

In Malaysia, industrial production in December rose 3% year-on-year, driven by manufacturing and the electricity sector. The 5.2% growth in Malaysia's economy in the fourth quarter was down from 5.8% in the third quarter and 7.2% in the second, but still robust due to still strong domestic demand.

Malaysia's economic growth for the whole year 2011 was 5.1% as the first quarter had registered only a 4.8% figure. According to CIMB economic research head Lee Heng Guie, the principal drag on Malaysian growth in the fourth quarter was stagnant external demand for consumer electronics, as quoted by the Kuala Lumpur-based newspaper The Star.

The economy is generally expected to limp along in the first half of 2011, strengthening only in the second half, when questions around the eurozone sovereign debt crisis are better clarified.

Household and business spending continued to accelerate in the fourth quarter, driving a 10.5% expansion in domestic demand, but Malaysia looks to be more affected than Indonesia by the drop in external demand due to slowing global growth.

Indonesia is better placed than Malaysia to continue with some momentum, however diminished, because its population of 237.6 million (2010 census) is the fourth-largest in the world after China, India, and the US. Two thirds of the population is between the ages of 15 and 64, while a quarter is between 0 and 14.

This very dynamic population structure has produced a relatively young emerging middle class that is an excellent market for such goods as electronics and automobiles. Consumption of consumer goods by this population cohort represents as much as half of the Indonesian economy.

The Indonesian equities bellwether Jakarta Composite Index (JCI) has been oscillating around the high 3,900s for over two months, trying to see whether it has the power to break through the medium-term double top (August-September 2011) at 4,000. Above that level lies the all-time high of 4,193. Short-term technical indicators have been on-again, off-again; at present, they are weakening.

At the end of January and beginning of February, the Kuala Lumpur Composite Index (KLCI) in Malaysia successfully, perhaps surprisingly, filled a gap-up from early August late year between 1,497 and 1,545. Congruently to the JCI's structure, the KLCI is up against an intermediate high in its mid-1,500s that is surmounted by the all-time high at 1,595.

The short-term technical indicators for the KCLI are actually more favorable than for the JCI, and the short-term (since the end of last September) is more definitely monotonic. It has recovered 18.2% to its present level from an intra-day low of 1,311 on September 26 last year.

One of the reasons why Malaysia surprised observers was the strength in its foreign direct investment (FDI), which was up 12.3% in 2011 over 2010. This strength derives in part from the fact that most FDI in Malaysia comes from Asia and not from developed economies that would be more susceptible to drawing back.

According to the Malaysian Investment Development Authority, Japan, South Korea, and Singapore alone account for 53% of all FDI in the country, with Japan representing nearly one-third of the total. (Other countries in the top five are the US and Saudi Arabia.) Among the 10 members of the Association of Southeast Asian Nations, Malaysia was outpaced only by Singapore and Indonesia in the race for FDI inflows.

The five largest FDI contributors to the Indonesian economy in 2011 were, in order, Singapore, the US, Netherlands, South Korea, and Japan. Overall FDI in Indonesia rose 20% in 2011 over 2010. There is a good deal of ink being spilt over the prospect of Indonesia, already a member of the Group of 20 nations, this year becoming the 15th country with a gross domestic product (GDP) exceeding $1 trillion.

The biggest potential weakness is the country's export reliance upon resource-based products; industries in this area do not create jobs as prolifically as do services and manufacturing....

* The biggest challenge facing the Zioconned USA today is its utter corruption, Hubris and barbaric criminality of its political class and the coming demise of the US Dollar and how to prevent it from happening....

Imagine, a world the Dollar is no longer commonly accepted as a trading currency and the US has to pay for all its import using other currencies.What will happen to their standard of living? At the moment, any deficit in trade can simply be offset just by printing more Dollars out of thin air and using these imaginary, ghost Dollars to pay for these imports.So the day, the Dollar tanked is Armageddon for the USA....

They know this and are watching what is happening to the Dollar, carefully and nervously.

A number of countries, nations has started moving away from using the Dollar in their international trade dealing through currency swaps and the promotion of using their own currencies.This trend has not gone unnoticed by the money printing USA and seriously threaten their monopoly on printing the Dollar at their whim and fancy.It is a foregone conclusion that if nations around the world started to move away from using the Dollar, the USA will no longer has the mean to support their living standard and will revert back to a poor nation status!

So this has to be prevented at all cost and hegemony is a useful tool to use, to prevent the Dollar demise.Historically, they have noticed that in time of strive and trouble, nations gravitate towards the Dollar and the Dollar strengthen.
Hence the USA has become a nation that thrives on creating hegemony, wars, killings, torture, extra-judicial assassinations by the infamous White House Murder INC, in the Levant and Worldwide, ever since the Barbaric inside Job of 9/11 and big trouble around the world...

A strong Russia is not in the USA interest, as Russia is one of the Nation in front, that is actively promoting not using the US Dollar. So, it is in the US interest that Russia and Japan remains at logger head, so to speak.Japan will then remains dependent on the USA and will behave as told, like not to join in using Yen and Roubles in their trade.
As History has shown, nothing will prevent the demise of a bloated empire, living and acting beyond its mean....
The US economy is in really bad shape and can no longer support the Nation role as a Global cop.In a last desperate attempt, the US is cutting back on everyday services,the pensions, health care, education and infrastructure maintenance, just to come up with the monies(again borrowed) to support its preeminent military might.The fact is, you cannot be a preeminent nation without being a preeminent trading and manufacturing nation....

The willingness of peoples around the world to be Washington’s puppets instead of loyal citizens of their own countries is why the West has been able to dominate the world during the modern era. There seems to be an infinite supply of foreign leaders who prefer Washington’s money and favor to loyalty to their own countries’ interests.

As Karl Marx said, money turns everything into a commodity that can be bought and sold. All other values are defeated–honor, integrity, truth, justice, loyalty, even blood kin. Nothing remains but filthy lucre. Money certainly turned UK prime minister Tony Blair into a political commodity.

The power of money was brought home to me many years ago. My Ph.D. dissertation chairman found himself in the Nixon administration as Assistant Secretary of Defense for International Security affairs. He asked if I would go to Vietnam to administer the aid programs. I was flattered that he thought I had the strength of character to stand up to the corruption that usually defeats the purpose of aid programs, but I declined the assignment.

The conversation was one I will never forget. Warren Nutter was an intelligent person of integrity. He thought regardless of whether the war was necessary that we had been led into it by deception. He thought democracy could not live with deception, and he objected to government officials who were not honest with the American people. Nutter’s position was that a democratic government had to rely on persuasion, not on trickery. Otherwise, the outcomes were not democratic.

As Nutter saw it, we were in a war, and we had involved the South Vietnamese. Therefore, we had obligations to them. If we proved to be feckless, the consequence would be to undermine commitments we had made to other countries in our effort to contain the Soviet Empire. The Soviet Union, unlike the “terrorist threat” had the potential of being a real threat. People who have come of age after the collapse of the Soviet Union don’t understand the cold war era.

In the course of the conversation I asked how Washington got so many other governments to do its bidding. He answered, “Money.”

I asked, “You mean foreign aid?”

He said, “No, bags of money. We buy the leaders.”

He didn’t approve of it, but there was nothing he could do about it.

Purchasing the leadership of their enemies or of potential threats was the Roman way. Timothy H. Parsons in his book, The Rule of Empires, describes the Romans as “deft practitioners of soft power.” Rome preferred to rule the conquered and the potentially hostile through “semi-autonomous client kings which the Senate euphemistically termed ‘friends of the Roman people.’ Romans helped cooperative monarchs remain in power with direct payments of coins and material goods. Acceptance of these subsidies signified that an ally deferred to imperial authority, and the Romans interpreted any defiance of their will as an overt revolt. They also intervened freely in local succession disputes to replace unsuitable clients.”

This is the way Washington rules. Washington’s way of ruling other countries is why there is no “Egyptian Spring,” but a military dictatorship as a replacement for Washington’s discarded puppet Hosni Mubarak, and why European puppet states are fighting Washington’s wars of hegemony in the Middle East, North Africa and Central Asia.

Washington’s National Endowment for Democracy funds non-governmental organizations (NGOs) that interfere in the internal affairs of other countries. It is through the operations of NGOs that Washington added the former Soviet Republic of Georgia to Washington’s empire, along with the Baltic States, and Eastern European countries.

Because of the hostility of many Russians to their Soviet past, Russia is vulnerable to Washington’s machinations.

As long as the dollar rules, Washington’s power will rule.

As Rome debased its silver denarius into lead, Rome’s power to purchase compliance faded away. If “Helicopter Ben” Bernanke inflates away the purchasing power of the dollar, Washington’s power will melt away also....


Thursday, February 23, 2012

Hi-tech heart of China's military, CETC....

Hi-tech heart of China's military, CETC....
By Matthew Luce

This year marks the 10th anniversary of China Electronics Technology Group Corporation (zhongguo dianzi keji jituan gongsi) - known better by its acronym CETC - one of China's 10 official defense industry conglomerate-bureaucracies [1].

CETC's operations are central to China's push toward dual-use electronics and civil-military integration for information technology. CETC is an entirely state-owned, research and development behemoth with the professed goals of producing advanced electronics for China's military and leveraging civilian technology in order to do so [2].

The organization combines the advantages of state research funding and government favoritism with a market-oriented business model. Far from being a dinosaur in the modern electronics business, it has managed to grow and profit in diverse economic sectors and has forged partnerships with some of the biggest names in electronics.

The broad reach of CETC's business relationships combined with its self-described "sacred mission" of "rich country, strong army" make CETC worthy of closer inspection from anyone concerned with the national defense implications of the Chinese electronics and IT industries.

Origin and function
Under CETC's organizational umbrella are 80,000 employees and myriad subsidiaries. CETC oversees 55 semi-autonomous research institutes (often referred to as RIs) - many of which predate CETC itself and have existed since Mao Zedong's defense modernization push in the late 1950s and 1960s. CETC also includes 184 commercial subsidiary companies - most of which were created by the individual research institutes in the past 20 years.

While CETC itself is a young organization, the research institutes that conduct most of its research and production are the oldest electronics research facilities in China. They are responsible for many of China's major advances in defense electronics, including the electronics for the "Two Bombs and One Satellite" initiative that gave China its first nuclear bomb, guided missile, and geo-orbital satellite. Today, CETC produces a wide range of products for military and civilian markets - from lasers and radar arrays to washing machines and power plants.

Despite its size and its explicit role in developing tactical electronics for the People's Liberation Army (PLA), CETC is not well known outside a small community of China defense analysts. Large private companies like Huawei and ZTE have drawn much more attention and suspicion, most recently becoming the focus of respective US Commerce Department and House intelligence committee investigations.

While it is possible and even likely that private corporations like Huawei and ZTE engage in business dealings with the PLA, they nonetheless primarily are interested in the civilian market, and any contracts with the PLA would comprise only a tiny fraction of their total business. At minimum, Huawei and ZTE deny any direct allegiance to the PLA.

CETC, on the other hand, is very open with its stated purpose of leveraging civilian electronics for the gain of the PLA, and a majority of its products and services are destined for state and military customers. If there is any doubt of CETC's relationship with the military, see the "About Us" (jituan gaikuang) page on its website, especially cached pages from 2006 or earlier, since the most jingoistic language has been toned down since that time.

Diverse business areas
CETC's decentralized structure makes its behavior difficult to track, since its research institutes have widely varying technical specialties, appear to operate more or less autonomously and often operate under pseudonyms [3]. This is largely because all of CETC's research institutes are older than CETC itself and most of them continue the same lines of research they pursued before they were amalgamated into CETC and given a common purpose in 2002.

Some of these, like the 45th RI, appear to almost exclusively develop consumer electronics; others, like the 54th RI, focus heavily on military and aerospace sensors as well as communications systems. With the majority of the RI's, however, the distinction is much less clear. Many of these research foundational technology and manufacture industrial components necessary for the advancement of both the defense and commercial electronics sectors. There are RI's specializing in semiconductors, piezoelectronics, nanotechnology, integrated circuits and industrial control systems - to name but a few.

In turn, almost all of the individual research institutes have their own network of commercial subsidiaries and joint ventures. CETC RIs use their subsidiaries to bring their research to the commercial market and turn a profit, but also to arrange partnerships between the PLA, universities and research organizations as well as Chinese and foreign electronics firms.

Some of these subsidiaries are among China's most notable technology companies, especially in the field of information security, including Venus Software Corporation and Westone Information Industry Company - subsidiaries of 32nd and 30th RIs, respectively. Perhaps incidentally, many of these same companies benefit from government subsidies and tax breaks for their role as "key software enterprises", including Venus and Westone.

Many of these subsidiaries also are not acknowledged officially by their parent research institutes. Venus Software and the 32nd RI do not acknowledge their connections on their websites, even though the institute is Venus's founder and, at least previously, the majority shareholder. This practice, as well as the practice of using pseudonyms for the institutes, helps CETC evade notice and any negative associations with the PLA in its business dealings, especially outside of China.

Supporting civilian and defense economies
CETC's distinguishing feature is that it straddles the line between a military technology research center, a commercial entity and an academic institution. This mixed operations strategy stems directly from a technological development policy that could exist nowhere besides China.

Under this policy, CETC can access government research funding to develop commercial and military electronics while training graduate students and engineers and providing a foundation for the advancement of the Chinese technology industry.

Since at least 2002, Beijing has emphasized civil-military technological integration and the belief that a strong military can only emerge from a vigorous and technologically-advanced civilian economy - a point reiterated in last year's authoritative PLA Day editorials [4].

As the defense economy was reorganized continually at the turn of the millennium, CETC and the other defense industrial organizations were encouraged to assist both sectors to build off of one another while encouraging a marketized defense economy. This involved not just coordinating technology exchanges between industry and the military, but providing preliminary research for both sectors.

When in 2006 China's Defense Middle- and Long-Term Science and Technology Development Plan demanded all defense industrial organizations invest at least 3% of revenue into research and development, CETC was the only one that exceeded this figure, pledging to spend at least 5% [5].

CETC benefits from both government funds and corporate revenue to fund its research. The organization is home to 15 state key laboratories - the designated breeding grounds for technologies the Chinese government deems central to national economic and military strategy. Many of the research institutes also host graduate student technical training programs and recognized national "senior scientists".

These resources provide further funding and expert personnel to CETC's research institutes and allow them to leverage them for either military or civilian projects. CETC's relationship with the PLA is demonstrated further by awards it receives from the General Armaments Department, which is responsible for commissioning PLA weapons systems [6].

The PLA's matchmaker
Since one of CETC's expressed objectives is civil-military integration in the electronics sector, it should be no surprise that CETC and its research institutes pride themselves on their partnerships with large Chinese and international corporations. CETC and its subsidiaries have entered into joint ventures and supplier arrangements with some of the world's largest electronics companies, including IBM, Sun, HP, Cisco, Oracle and, unsurprisingly, Huawei. They also supply their products to a growing list of foreign governments.

CETC operates in many ways like a civilian commercial entity and appears eager to start profitable joint ventures that offer access to the Chinese market, helped by CETC's status as one of China's state-authorized investment institutions. CETC's subsidiaries conduct a diverse range of business with foreign firms and governments, including manufacturing parts for export electronics, providing software outsourcing solutions, engineering radar arrays for foreign governments and marketing advanced foreign electronics in China [7].

In many cases, CETC appears to be the middleman that allows these private companies to do business with the PLA. The CETC 15th RI advertises itself on job-seeking websites, such as, as the commercial representative of Huawei and Emerson Electric Company to the PLA, and the 15th RI may not be alone in this role. If this is true for even a few of CETC's subsidiaries, then any company doing business with CETC would suggest tacit abetment of PLA modernization.

Through its subsidiaries, CETC has even managed to establish partnerships with Western military technology firms, bringing their products to the Chinese market. Through its subsidiary group Hebei Far East, the 54th RI has partnered with the US defense contractor Harris Corporation, which, according to its website, provides tactical communications, intelligence and satellite services to the US military, National Security Agency and National Geospatial-Intelligence Agency.

The joint venture, Hebei Far East Harris Communications Company, manufactures a wide range of communications products, including military-grade communications field switches and private mobile radio systems - which it markets in China and the Russian Federation - according to the joint venture's website.

CETC International (CETCI), yet another subsidiary, also is designated as an official Chinese arms export company and markets its products abroad through international branches in Venezuela, Peru, Ecuador, Algeria, Egypt, Morocco, Angola, Sudan, Saudi Arabia, Pakistan, Thailand, Myanmar and Syria. The CETCI catalog appears to be more limited than that of the collective research institutes, but still openly markets products like mobile signal jammers, microelectronics systems and laser products.

CETC is the crux of China's effort to support the PLA with dual-use electronics and information technology. As a research organization, CETC has access to favorable government policies, science grants, and top technicians. As a business, it can actively attract partners in the private sector and leverage their technology. Finally, as a state-run organization, it uses these resources to openly support the PLA and its modernization program.

CETC's decentralized structure and use of unacknowledged subsidies allow it to stay off of the public radar to a large extent even when private and/or profit-driven companies like Huawei and ZTE cannot. Its partners comprise Chinese and international technology giants, including at least one US intelligence contractor. Additionally, its supplier relationships with major international electronics companies may mean that CETC-designed software and electronics components are more ubiquitous in our everyday electronics than most observers realize.

1. Other notable Chinese defense companies include the following: China North Industries Corporation (NORINCO), China Aerospace Science & Industry Corp (CASIC), and China State Shipbuilding Corporation (CSSC), government-run corporations that develop the PLA's physical weapons systems. Inevitably these receive more attention than CETC, just as missiles tend to receive more attention than their guidance systems.
2. "Basing the military among the people" or "combining military efforts with civilian support" (junmin jiehe, yu jun yu min) has become a common slogan since 2006 and the Report to the 17th Party Congress. This part and others, unless otherwise noted, is drawn from the CETC and subordinate organizations' websites.
3. For example, the 15th Research Institute refers to itself as the "North China Research Institute of Computing Technology", the 44th Research Institute is the "Chongqing Optoelectronics Research Institute", and the 29th Research Institute is "Siwi Electronics Corporation".
4. The majority of government defense S&T documents published since 2002 have stressed the importance civil-military integration. See for example the "
National Mid-long-range S&T Development Plan" (guojia zhongchangqi kexue he jishu fazhan guihua gangyao).
5. Tai Ming Cheung, "The Chinese defense economy's long march from imitation to innovation". Journal of Strategic Studies, Vol. 34, No. 3, June 2011, p. 335.
6. The 15th Research Institute, for example, recently received a GAD research award: see, January 18, 2012.
7. For example, the CETC 54th Research Institute won the contract to supply antennas for Australia's enormous ASKAP Radio Telescope Array for astronomy research. See, Australian Telescope National Facility News, No. 66, April 2009.