Tag Archives: commodity broker

Gold and Bonds Getting Back to Normal

Gold, interest rates and the stock market have a very interesting relationship. Normally, declining interest rates are good for business and bad for gold. Post 9/11 and housing bubble, zero interest rate policies (ZIRP) created an artificial situation that fractured this relationship rendering it virtually useless over the last decade. This began to change last summer when the Federal Reserve Board stated that they would begin slowing the stimulus they’ve provided to the economy thus allowing interest rates to gradually rise. These relationships have begun to sort themselves out over the last three quarters and may actually be telling us something about the current pricing in the gold market.

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Historical Wheat vs Corn Spread Prices

Trading the grain markets has always been tricky, especially during the planting and harvesting periods. Historically, this has placed us at the agricultural epicenter for global grain trade. Obviously, tension in Ukraine and the corresponding 15% spike in wheat prices have reminded everyone that even the agricultural markets are now a global game. In this respect, it’s no longer enough to keep an eye on domestic weather patterns to determine the success of our winter crops or anticipate spring wheat seeding. Now, it is imperative to focus on global production issues and World Trade Organization (WTO) agreements, as well.

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Trading Ukraine Uncertainty

Removing the politics of the Russia-Ukraine issue and focusing on the economic implications of Russia’s bloodless annexation of the Crimean peninsula puts some trading opportunities on the table as global risk premiums jump. In order to do this, a couple of suppositions must be declared. First and most importantly, the United States will not actively engage Russian troops. In many ways, this is a replay of the Georgian conflict in 2008. Georgia was in revolt against Russia and wanted closer ties to the European Union and the US. Their cause was quickly championed by Western leaders until it became obvious that neither the European Union, The United States nor, NATO would take any military action to defend Georgia against Russia. This episode set the precedent for the current situation.

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Cheap Feed, Expensive Beef – What Gives?

The cattle market has reached new highs repeatedly this month. We’ve known for years that the U.S. cattle herd has been steadily declining. It currently stands around 89 million head, which is the lowest it’s been since 1952. This hasn’t mattered much as the decades long decline in US beef consumption has wilted domestic demand.  Furthermore, the impact of modern animal husbandry techniques have significantly increased the final weight of the cattle that hit the slaughterhouses, thus supplying the market with more total beef on fewer total animals killed. All of this bearish information begs the question, “Why are cattle prices so high and where do we go from here?”

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Economic Recovery or, Shell Game?

The National Bureau of Economic Research, the ones in charge of official business cycle dating, said Monday that the recession officially ended in June of 2009. Their statement allowed that although economic conditions may not have been favorable since then and that the economy has not returned to normal operating capacity, the recession ended and a recovery began in June 2009. This is good press for the incumbent party heading into election season. However, this is also a brightly burning example of why we shouldn’t trust a sound bite.

 

The bursting of the domestic consumption based economic bubble has left the politicians scrambling to secure their next terms in office. The best way to guarantee re-election is to make everything seem all right to the general voting public. I’m not taking sides in this. The problem is more systemic than it is partisan. The issue starts at the top with former Federal Reserve Chairman Alan Greenspan and the torch has been passed to Ben Bernanke, another Federal Reserve Chairman bound and determined to keep the money flowing. My sincere fear is that the day of reckoning will come when the people who buy our Treasuries to service, and grow, our debt will say, “This is a bad deal. We need to be paid a higher interest rate to take on your credit risk.”

 

The United States as a country has become an unfortunate reflection of the consumer society that our politicians have sought for generations to instill in their constituents. We are now facing the same economic problems at the national level that used to be handled at the dining room table by the family. We are simply over extended. We have spent too much for too long. We must admit that the budget surplus of the Clinton era had more to do with fortuitous timing than sustainable growth and that our projections were wrong. The paradox is that the same legal/governmental system that is all too ready to jump in and save the individual from their own bad decisions fails to acknowledge their own fallibility. The institution of government is being failed by the hubris of the individuals running it.

 

Enough hyperbole. The shell game is being played out in the transfer of private debt to governmental debt. This has enabled business and personal consumption to carry on with as little personal or, corporate lifestyle adjustment as possible. The United States’ personal rate of savings has climbed from 0% in June of 2004 to 6% currently. Over the last 50 years, 6% is much closer to the average. As individuals began to save, governmental spending increased 82% and our deficit grew from 7.35 trillion in 2004 to an estimated 13.4 trillion this year. It is estimated that the gross federal debt will approach 90% of gross domestic product. That leaves 10% of GDP to make the interest payments on existing debt and cover all national expenditures. For example, if your take home pay were $50,000, $45,000 of it would cover your minimum monthly interest payments. The leftover $5,000 would have to cover a year’s worth of basic living expenses like food, clothes, gas, entertainment, etc. The Congressional Budget Office estimates that gross federal debt will exceed gross domestic product by 2012.

 

The government, just like us, has run deficits going back to the Civil War. The issues are size and accountability. Deficits were designed to allow for the purchase of goods and services based on future earnings. This is how we buy houses and cars. The concern is the overextension and lack of self or, governmental control. It is the inability, “Just say no,” that gets all of us into trouble. A politician who stands up and suggests we all tighten our belts will have $0 funding for his election campaign. Businesses won’t contribute, banks won’t contribute, special interest groups won’t contribute and if the politician’s constituents listen, they won’t contribute either. Therefore, the plan to get us out of this mess is by spending more money while devaluing the U.S. Dollar.

 

The plan goes something like this. The government sells more Treasuries on the open market to generate stimulus funds to be spent on domestic programs to placate the people, domestic businesses and special interest groups.  The more Treasuries the government sells, the more U.S. Dollars it places in circulation. The more Dollars in circulation, the less they’re worth. The less the Dollar is worth, the more expensive it becomes to purchase foreign goods and services. This encourages more people to, “buy American.” This also makes domestically produced goods and services cheaper to purchase for foreign countries, therefore, increasing U.S. exports. The hope is that this will allow U.S. businesses to gain traction and begin hiring again.

 

In normal times, this has kept the balance of things moving forwards. I would suggest that these are not normal times. First of all, we are starting this process from a much higher debt ratio than ever before. Assume that you’re very nearly maxed out when an unexpected major medical expense or car repair comes up. Secondly, the U.S. has been able to grow its debt periodically through the sale of Treasuries when needed because we have, more or less, managed our expenses, which made the U.S. a safe credit risk. This is like being able to make at least the minimum monthly payments to your creditors in the roughest of financial times. Third, the Dollars we are borrowing will not be worth as much as the Dollars we are repaying. Typically, this difference is made up in the interest that we have to pay back with the principal. Finally, this is the same path being sought out by the entire Euro zone, England, and Japan, which puts us in the middle of a global competitive devaluation.

 

The end result is that it won’t take long for the countries that are lending us money to decide that they can do better lending to someone else, perhaps another country or, their own populations. Keep in mind that we are talking about the creation of new debt or, extending more credit on top of the current debt we will be struggling to pay the interest on. Essentially, following the path of increasing deficits in an attempt to grow our way out of societal gluttony and the misguided actions of elected representatives will only continue the downward debt spiral until someone has the courage to stand up and yell, STOP! As we approach this election season, I’ll cast my ballot for the candidate that simply states, “We’re going to have to learn to do more, with less.”

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

 

Don’t Pay Up for Precious Metals Diversification

Gold and silver have exploded in recent years. The contributing factors of low interest rates, economic uncertainty, global fear and pending inflation have done their share to boost precious metals’ outsized gains relative to the stock market. Gold has rallied more than 150% over the last five years while the broad stock indexes are all flat to lower, depending on the day. Silver, for its part, has nearly doubled in the last five years. Given our still historic low interest rates and the growing economic trouble overseas as well as our ballooning governmental budget deficit, it’s reasonable to believe that the forces behind this trend continue to remain intact. The question has changed from, “Should I be invested in precious metals,” to “What’s the most cost effective way to maintain a presence in precious metals.”

The boom in the precious metals market has brought with it the familiar hype of the gold bugs. It has also fostered the invention of precious metal Exchange Traded Funds (ETF’s) and cash for gold TV commercials. Commodity futures markets have also benefited from the added attention being paid to gold. Each of these has a place in the marketplace and each has a vested interest in hyping their product as the one that’s best suited to your needs. However, if you are ascribing to efficient portfolio theory and seek to include precious metals ownership as a part of your portfolio diversification plan, the best bang for your buck is through commodity exchange traded contracts which are regulated by the Commodity Futures Trading Commission (CFTC) and guaranteed by their appropriate exchange.

The market sectors mentioned above can be lumped into two categories: small speculators and investors. Gold bugs and cash for gold are for people with left over jewelry, some family heirlooms and gold coins like American Eagles or South African Krugerrands. Typically, this type of gold ownership sell side biased. This means owners of small pieces or collections are keeping an eye on price and hoping to sell when they think the market has peaked. When they bring their physical collections to market, they will end up at the coin shops, pawn shops, cash for gold, or their local jewelry shop. The willing buyers are always waiting and ready to pay below market value for collections that may have taken a lifetime to accumulate. Upon recent survey of the available outlets, prices to be paid were typically $40 per oz under market value for gold and $.30 per oz under market value for silver. Those on the buy side of this equation, looking to add to their private physical collections will find themselves paying up $30 – $50 per oz over market value in gold and up to $1.20 over per oz in silver. Therefore, small speculators in the physical precious metals market may lose more than 10% of the value of their collection in the buying and selling process.

Passive investment in the precious metals can be done in two ways, ETF’s and commodity exchange traded products. The benefits of ETF’s are that the amount to be invested can be determined beforehand and the investor can pick their own allocation, even if that amount is less than the price of one ounce of gold. The downside is these ETF’s typically underperform the actual market they are designed to track. Typically, one would expect a dollar for dollar rise and fall between the price of the metal and the value of the account. However, due to administrative fees, expenses, incentive fees, cost of acquisition, advertising, etc, the longer the ETF trades, the further behind the actual price they fall. Therefore, it is possible to lose money in a flat market, or realize a smaller return than one would expect in a rising market.

Finally, exchange traded commodity contracts like those listed with the Chicago Mercantile Exchange Group are the actual proxy to which ETF’s and local dealers tie their prices. Perhaps the single biggest drawback to these products is their preset size. There are about half a dozen precious metals products listed ranging in full cash value from $18,000 to $125,000. These contracts have several benefits for passive portfolio diversification. First, these are standardized products fully assayed and certified by the appropriate exchange. This assures the investor that their 100 ounces of gold is 24 carat and their silver is .9999 fine and that the value of your holdings can be found 24 hours a day, rather than being quoted by the guy in the shop down the street.  Secondly, there are no administration fees, advertising costs, or incentive fees. The only charge is a one- time commission to your commodity broker, typically, around $50 per contract. Also, you will control the actual metal and not find yourself invested in mining sales or land right options because you didn’t read the prospectus thoroughly. Finally, the biggest reason exchange traded products are so much more cost effective is the use of margin and the amount of cash it frees up for the individual investor. The $18,000 contract mentioned above requires a cash deposit with the exchange of $1,150. This allows the individual investor to use the remaining $16,850 in excess cash for a money market account and earn interest on top of any return produced in the actual market itself. Therefore, those wishing to pursue efficient portfolio theory and diversify their holdings can most efficiently implement this process through the use of commodity futures markets.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

Volatility’s Perfect Storm

Volatility’s Perfect Storm

I’ve been actively trading the stock indices – S&P 500, Nasdaq, Russell 2000 and Dow futures for 20 years and I’ve never seen a day like today. It was truly a, “Perfect Storm.” I believe this will happen more and more frequently in the future as the three main reasons for May 6th’s volatility are gaining momentum all of the time.

First, public complacency was the highest it has been since the summer of 2007. Every bailout and new government program bolsters the warm and fuzzy investor psyche that allows us to believe everything will work out. The Volatility index measures the cost of protecting your stock portfolio through the purchase of put options. Put options are like buying portfolio insurance. If you hedged your $300,000 stock portfolio it would have cost you approximately $8,500 in put premium to protect the full value of that portfolio through June, from any downside risk. That same insurance policy in the afternoon would have been worth $23,625. Considering the value of your portfolio equaled the decline of the stock market, you would’ve lost 3.25% on your $300,000 or, $9,750. The difference between the $8,500 paid up front versus the current portfolio’s value of $290,250 plus the current value of the insurance policy $23,625 means that your net worth on the stock market’s biggest point loss day in history would have actually INCREASED by $5,375. The increase in the VIX is the reason for the inflated option premium and the magnitude of the rally of the VIX bears testament to the market’s general complacency.

Secondly, All of the markets are tied to each other. That’s why we are Commodity AND Derivative Advisors. In the age of electronic commodity trading, one issue always affects another one and that one in turn, affects another on and so on. Every trade in an outright market like the S&P 500, Euro Currency or, Japanese Yen will have an effect on the other markets related to it. This has, in effect, created one giant butterfly effect. In the age of algorithmic trading, where the minutest of market inefficiencies are exploited by aggressive capital placement, abnormal market moves will become self fueling. Many of these models use markers based on the model’s expectation of, “normal,” relationships to its data points. When things get pushed beyond the model’s, “normal,” expectations you have a case of, “If you liked stock ABC at $12 a share, you’re going to love it at $4 a share.” There were at least two stocks in the S&P 500 that traded to 0, today. This means they were broke, bankrupt, didn’t exist. Two Fortune 500 companies disappeared on someone’s lunch break and by the time the employee got home from work, no one knew the difference. Twenty minutes of electronic market butterfly effect.

Finally, as the market began to fall, the media was showing the Greek police force in full riot gear after passing their severe austerity vote in an attempt to procure financing from the European Union. Furthermore, the context of the day’s discussion among the talking head TV pundits was the doom and gloom surrounding the demise of the European Union, civil protest and bankruptcy in Greece with the specter of Spain’s impending default as a backdrop. Doom and Gloom sells. Traders, both retail and institutional are listening to the end of the world as we know it while watching the stock market meltdown and trading programs are ticking off one sell order after another in an attempt to be the first ones to market with their orders. The pursuit of greater bandwidth on their data feeds, faster processors in their computers and deeper levels of quantifiable algorithms put them in the lead in the race to the bottom and right back up. Welcome to the new age of 24 hour doom and gloom media coverage, total connectivity and computer programs replacing common sense trading. We specialize in common sense trading.

 

This methodology is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. This method is meant for educational purposes and to illustrate the correlation between the commercial’s trading and its effect on creating turning points within the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures. The information contained herein comes from sources believed to be reliable, but are not guaranteed as to accuracy or, completeness.

 

Our Tax Dollars at Work in Brazillian Cotton Fields

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

Reprinted from Time Magazine. You migh want to keep an airsick bag or a bucket nearby.

Why Brazil’s Cotton Farmers Get Subsidies from the U.S.

Time.com 
By MICHAEL GRUNWALD Michael Grunwald 56 mins ago

What could be more outrageous than the hefty subsidies the U.S. government lavishes on rich American cotton farmers?

How about the hefty subsidies the U.S. government is about to start lavishing on rich Brazilian cotton farmers? (See the top 10 green ideas of 2009.)

If that sounds implausible or insane, well, welcome to U.S. agricultural policy, where the implausible and the insane are the routine. Our perplexing $147.3 million–a-year handout to Brazilian agribusiness, part of a last-minute deal to head off an arcane trade dispute, barely even qualified as news; on Tuesday, April 6, it was buried in the 11th paragraph of this Reuters story. (The New York Times gave it 10th-paragraph play.) If you’re perplexed, here’s the short explanation: We’re shoveling our taxpayer dollars to Brazilian farmers to make sure we can keep shoveling our taxpayer dollars to American farmers – which is, after all, the overriding purpose of U.S. agricultural policy. Basically, we’re paying off foreigners to let us maintain our ludicrous status quo. (See a photo gallery of farm life in America’s heartland.)

I’ve previously written that federal farm subsidies are bad fiscal, environmental and agricultural policy; bad water, energy and health policy; and bad foreign policy, to boot. Cotton subsidies are a particularly egregious form of corporate welfare, funneling about $3 billion a year to fewer than 20,000 planters who tend to use inordinate amounts of water, energy and pesticides. But the World Trade Organization (WTO) doesn’t prohibit dumb subsidies. It only prohibits subsidies that distort trade and hurt farmers in other countries.

And yes, U.S. cotton subsidies do that too. By encouraging Americans to plant cotton even when prices are low, they promote overproduction and further depress prices. An Oxfam study found that removing them entirely would boost world prices about 10%, which would be especially helpful to the 20,000 subsistence cotton growers in Africa. In 2005 the WTO upheld a challenge that Brazil had filed against the cotton subsidies as well as some export-credit guarantees for all American farm products, but the U.S. essentially ignored the ruling.

So last August, the WTO gave Brazil the right to impose punitive tariffs and lift patent protections on $829 million worth of U.S. goods – including nonfarm products like cars, drugs, textiles, chemicals, electronics, movies and music. The retaliation was supposed to start Wednesday, April 7, and it would have driven home how our relentless coddling of farmers hurts other American exporters, paralyzing our efforts to open overseas markets to the nonfarm goods and services that make up 99% of our economy. But at the 11th hour, negotiators from the Office of the U.S. Trade Representative and the Agriculture Department reached a temporary deal with their Brazilian counterparts, so the retaliation is on hold.

The obvious solution, in an alternate universe, would have been for the U.S. to get rid of its improper subsidies. But the current farm bill does not expire until 2012, and the congressional agriculture committees don’t want to mess with it because, well, they just don’t. Senate Agriculture Chairman Blanche Lincoln of Arkansas and ranking Republican Saxby Chambliss of Georgia on Wednesday praised both governments for finding an alternative solution and pledged to “explore modifications” in 2012. Maybe they will, but don’t bet on it – cotton, after all, is not unheard of in Arkansas and Georgia. (Here’s the top recipient of federal cotton subsidies, with a cool $24.2 million from 1995 to 2006. Yes, that’s an Arkansas farm.)

The U.S. negotiators did agree to modify the complicated export-guarantee program to make it less of an export-subsidy program. They also agreed to ease restrictions on Brazilian beef that have been justified as an effort to protect Americans from foot-and-mouth disease – and criticized as an effort to protect U.S. cattlemen from competition. But the big-ticket item is the settlement’s “technical assistance” fund of $147.3 million, prorated, for Brazilian cotton growers. That just happens to be the precise amount of the retaliation the WTO had approved for the improper cotton subsidies. According to the U.S. press release, the fund will be replenished every year “until passage of the next farm bill or a mutually agreed solution to the cotton dispute is reached.” So the total cost will exceed the price tag of the infamous Alaskan bridge to nowhere, which was at least designed for Alaskans; the annual cost will far exceed the $100 million President Obama ordered his Cabinet to cut from the federal budget last year. (See 25 people to blame for the financial crisis.)

Of course, helping Brazil’s Big Ag – which is just as big as our Big Ag – won’t stop the U.S. (or Brazil!) from dumping cut-rate cotton into the world market, hurting subsistence cotton growers in Mali and Burkina Faso. (I’ve heard the deal may include modest aid for African farmers, but it’s not in the press release, and government officials never replied to me with answers to my questions.) But there is at least one piece of good news from the fields: U.S. cotton subsidies have been declining lately, because U.S. cotton farmers want to be independent of government assistance.

Just kidding! U.S. cotton subsidies have been declining lately, but only because the government-subsidized ethanol boom has made government-subsidized corn and government-subsidized soybeans even more lucrative for farmers. The fix is still in when it comes to American agriculture. Congress might “explore modifications” in 2012, but somehow its explorations and modifications always end up shoveling even more cash.

Outside Views on Obama’s


This blog is published by Andy
Waldock. Andy Waldock is a trader, analyst, broker and asset manager.
Therefore, Andy Waldock may have positions for himself, his family, or, his
clients in any market discussed. The blog is meant for educational purposes and
to develop a dialogue among those with an interest in the commodity markets.
The commodity markets employ a high degree of leverage and may not be suitable
for all investors. There is substantial risk in investing in futures.

Here are a couple of takes on Obama’s new position on
Afghanistan and what it means. The first is from George Friedman of Stratfor Research
and the second is a collection of global quotes on the topic put together by David
Galland of Casey Daily Dispatch.

 

By George Friedman

U.S. President Barack Obama announced the broad structure of his Afghanistan
strategy
in a speech
at West Point on Tuesday evening. The strategy had three core elements. First,
he intends to maintain pressure on al Qaeda on the Afghan-Pakistani border and
in other regions of the world. Second, he intends to blunt the Taliban
offensive by sending an additional 30,000 American troops to Afghanistan, along
with an unspecified number of NATO troops he hopes will join them. Third, he
will use the space created by the counteroffensive against the Taliban and the
resulting security in some regions of Afghanistan to train and build Afghan
military forces and civilian structures to assume responsibility after the
United States withdraws. Obama added that the U.S. withdrawal will begin in
July 2011, but provided neither information on the magnitude of the withdrawal
nor the date when the withdrawal would conclude. He made it clear that these
will depend on the situation on the ground, adding that the U.S. commitment is
finite.

Related Special Topic Page

In understanding this strategy, we must begin with an obvious but unstated
point: The
extra forces
that will be deployed to Afghanistan are not expected to
defeat the Taliban. Instead, their mission is to reverse the momentum of
previous years and to create the circumstances under which an Afghan force can
take over the mission. The U.S. presence is therefore a stopgap measure, not
the ultimate solution.

The ultimate solution is training an Afghan force to engage the Taliban
over the long haul, undermining support for the Taliban, and dealing with al
Qaeda forces along the Pakistani border and in the rest of Afghanistan. If the
United States withdraws all of its forces as Obama intends, the Afghan military
would have to assume all of these missions. Therefore, we must consider the
condition of the Afghan military to evaluate the strategy’s viability.

Afghanistan vs.
Vietnam

Obama went to great pains to distinguish Afghanistan
from Vietnam
, and there are indeed many differences. The core strategy
adopted by Richard Nixon (not Lyndon Johnson) in Vietnam, called
“Vietnamization,” saw U.S. forces working to blunt and disrupt the
main North Vietnamese forces while the Army of the Republic of Vietnam (ARVN)
would be trained, motivated and deployed to replace U.S. forces to be
systematically withdrawn from Vietnam. The equivalent of the Afghan surge was
the U.S. attack on North Vietnamese Army (NVA) bases in Cambodia and offensives
in northern South Vietnam designed to disrupt NVA command and control and
logistics and forestall a major offensive by the NVA. Troops were in fact
removed in parallel with the Cambodian offensives.

Nixon faced two points Obama now faces. First, the United States could not
provide security for South Vietnam indefinitely. Second, the South Vietnamese
would have to provide security for themselves. The role of the United States
was to create the conditions under which the ARVN would become an effective
fighting force; the impending U.S. withdrawal was intended to increase the
pressure on the Vietnamese government to reform and on the ARVN to fight.

Many have argued that the core weakness of the strategy was that the ARVN
was not motivated to fight. This was certainly true in some cases, but the idea
that the South Vietnamese were generally sympathetic to the Communists is
untrue. Some were, but many weren’t, as shown by the minimal refugee movement
into NVA-held territory or into North Vietnam itself contrasted with the
substantial refugee movement into U.S./ARVN-held territory and away from NVA
forces. The patterns of refugee movement are, we think, highly indicative of
true sentiment.

Certainly, there were mixed sentiments, but the failure of the ARVN was not
primarily due to hostility or even lack of motivation. Instead, it was due to a
problem that must be addressed and overcome if the Afghanistation war is to
succeed. That problem is understanding the role that Communist sympathizers and
agents played in the formation of the ARVN.

By the time the ARVN expanded — and for that matter from its very foundation
— the North Vietnamese intelligence services had created a systematic program
for inserting operatives and recruiting sympathizers at every level of the
ARVN, from senior staff and command positions down to the squad level. The
exploitation of these assets was not random nor merely intended to undermine
moral. Instead, it provided the NVA with strategic, operational and tactical
intelligence on ARVN operations, and when ARVN and U.S. forces operated
together, on U.S. efforts as well.

In any insurgency, the key for insurgent victory is avoiding battles on the
enemy’s terms and initiating combat only on the insurgents’ terms. The NVA was
a light infantry force. The ARVN — and the U.S. Army on which it was modeled —
was a much heavier, combined-arms force. In any encounter between the NVA and
its enemies the NVA would lose unless the encounter was at the time and place
of the NVA’s choosing. ARVN and U.S. forces had a tremendous advantage in
firepower and sheer weight. But they had a significant weakness: The weight
they bought to bear meant they were less agile. The NVA had a tremendous
weakness. Caught by surprise, it would be defeated. And it had a great
advantage: Its intelligence network inside the ARVN generally kept it from
being surprised. It also revealed weakness in its enemies’ deployment, allowing
it to initiate successful offensives.

All war is about intelligence, but nowhere is this truer than in
counterinsurgency and guerrilla war, where invisibility to the enemy and
maintaining the initiative in all engagements is key. Only clear intelligence
on the enemy’s capability gives this initiative to an insurgent, and only
denying intelligence to the enemy — or knowing what the enemy knows and intends
— preserves the insurgent force.

The construction of an Afghan military is an obvious opportunity for Taliban
operatives and sympathizers to be inserted into the force. As in Vietnam, such
operatives and sympathizers are not readily distinguishable from loyal
soldiers; ideology is not something easy to discern. With these operatives in
place, the Taliban will know of and avoid Afghan army forces and will identify
Afghan army weaknesses. Knowing that the Americans are withdrawing as the NVA
did in Vietnam means the rational strategy of the Taliban is to reduce
operational tempo, allow the withdrawal to proceed, and then take advantage of
superior intelligence and the ability to disrupt the Afghan forces internally
to launch the Taliban offensives.

The Western solution is not to prevent Taliban sympathizers from penetrating
the Afghan army. Rather, the solution is penetrating the Taliban. In Vietnam,
the United States used signals intelligence extensively. The NVA came to
understand this and minimized radio communications, accepting inefficient
central command and control in return for operational security. The solution to
this problem lay in placing South Vietnamese into the NVA. There were many cases
in which this worked, but on balance, the NVA had a huge advantage in the
length of time it had spent penetrating the ARVN versus U.S. and ARVN
counteractions. The intelligence war on the whole went to the North Vietnamese.
The United States won almost all engagements, but the NVA made certain that it
avoided most engagements until it was ready.

In the case of Afghanistan, the United States has far more sophisticated
intelligence-gathering tools than it did in Vietnam. Nevertheless, the basic
principle remains: An intelligence tool can be understood, taken into account
and evaded. By contrast, deep penetration on multiple levels by human
intelligence cannot be avoided.

Pakistan’s Role

Obama mentioned Pakistan’s
critical role. Clearly, he understands the lessons of Vietnam regarding
sanctuary, and so he made it clear that he expects Pakistan to engage and
destroy Taliban forces on its territory and to deny Afghan Taliban supplies,
replacements and refuge. He cited the Swat
and South
Waziristan
offensives as examples of the Pakistanis’ growing effectiveness.
While this is a significant piece of his strategy, the Pakistanis must play
another role with regard to intelligence.

The heart of Obama’s strategy lies not in the surge, but rather in turning
the war over to the Afghans. As in Vietnam, any simplistic model of loyalties
doesn’t work. There are Afghans sufficiently motivated to form the core of an
effective army. As in Vietnam, the problem is that this army will contain large
numbers of Taliban sympathizers; there is no way to prevent this. The Taliban
is not stupid: It has and will continue to move its people into as many key
positions as possible.

The challenge lies in leveling the playing field by inserting operatives
into the Taliban. Since the Afghan intelligence services are inherently
insecure, they can’t carry out such missions. American personnel bring
technical intelligence to bear, but that does not compensate for human
intelligence. The only entity that could conceivably penetrate the Taliban
and remain secure is the Pakistani Inter-Services Intelligence (ISI). This
would give the Americans and Afghans knowledge of Taliban plans and
deployments. This would diminish the ability of the Taliban to evade attacks,
and although penetrated as well, the Afghan army would enjoy a chance ARVN
never had.

But only the ISI could do this, and thinking of the ISI as secure is hard to
do from a historical point of view. The ISI worked closely with the Taliban
during the Afghan civil war that brought it to power and afterwards, and the
ISI had many Taliban sympathizers. The ISI underwent significant purging and
restructuring to eliminate these elements over recent years, but no one knows
how successful these efforts were.

The ISI
remains the center of gravity of the entire problem. If the war is about
creating an Afghan army, and if we accept that the Taliban will penetrate this
army heavily no matter what, then the only counter is to penetrate the Taliban
equally. Without that, Obama’s entire strategy fails as Nixon’s did.

In his talk, Obama quite properly avoided discussing the intelligence aspect
of the war. He clearly cannot ignore the problem we have laid out, but neither
can he simply count on the ISI. He does not need the entire ISI for this
mission, however. He needs a carved out portion — compartmentalized and
invisible to the greatest possible extent — to recruit and insert operatives into
the Taliban and to create and manage communication networks so as to render the
Taliban transparent. Given Taliban successes of late, it isn’t clear whether he
has this intelligence capability. Either way, we would have to assume that some
Pakistani solution to the Taliban intelligence issue has been discussed (and
such a solution must be Pakistani for ethnic and linguistic reasons).

Every war has its center
of gravity
, and Obama has made clear that the center of gravity of this war
will be the Afghan military’s ability to replace the Americans in a very few
years. If that is the center of gravity, and if maintaining security against
Taliban penetration is impossible, then the single most important enabler to
Obama’s strategy would seem to be the ability to make the Taliban transparent.

Therefore, Pakistan is important not only as the Cambodia of
this war, the place where insurgents go to regroup and resupply, but also as a
key element of the solution to the intelligence war. It is all about Pakistan.
And that makes Obama’s plan difficult to execute. It is far easier to write
these words than to execute a plan based on them. But to the extent Obama is
serious about the Afghan army taking over, he and his team have had to think
about how to do this.

 

Obama’s Speech – Views from Abroad

One of the more memorable
moments of Obama’s meteoric rise to power was his speech in front of hundreds
of thousands of adoring fans in Berlin.

So, what do the Europeans
think about El Magnifico now?

The following is a quote from
Spiegel Online, one of Germany’s most influential news outlets.

Never before has a speech by President
Barack Obama felt as false as his Tuesday address announcing America’s new
strategy for Afghanistan. It seemed like a campaign speech combined with Bush
rhetoric — and left both dreamers and realists feeling distraught.

One can hardly blame the West
Point leadership. The academy commanders did their best to ensure
thatCommander-in-Chief Barack Obama’s speechwould be well-received.

Just minutes before the
president took the stage inside Eisenhower Hall, the gathered cadets were asked
to respond “enthusiastically” to the speech. But it didn’t help: The
soldiers’ reception was cool.

One didn’t have to be a cadet
on Tuesday to feel a bit of nausea upon hearing Obama’s speech.It was the least
truthful address that he has ever held. He spoke of responsibility, but almost
every sentence smelled of party tactics. He demanded sacrifice, but he was
unable to say what it was for exactly.

You can read
the rest of the article here
.

Also reporting in was friend
and correspondent Mr. Watson, writing from his cozy pad on the Algarve, with a
rather unique (and, I suspect, unworkable) idea… though I present it anyway as
it may stimulate some further thoughts on the matter of Afghanistan.

Living in Portugal, I had to
stay up to the early hours of the morning to watch President Obama’s much
trumpeted speech. Frankly, apart from the much anticipated increase in troops
and the cost to the taxpayer, there was really nothing new. Just the same old
rhetoric that the president is very good at delivering.

During his speech the
president said that these additional 30,000 soldiers alone were going to cost
the long-suffering taxpayer an additional $30 billion per year. I then thought,
could there be a more cost-effective use of these funds? Most of the Taliban, I
understand, are not hardcore fundamental fanatics. They are referred to as the
“$10 a day Taliban.” These are Afghanis who are just trying to make a
living for themselves and their families. Basically they are mercenaries.

Let’s assume that there are
also about 30,000 Taliban. If you take the same $30 billion dollars, you could
pay these guys $100,000 a year each, for 10 years. The deal is, to get these
funds, they would have to switch to our side and either fight for us, against
the limited number of Al Qaedafanatics, or at the very least stop fighting the
U.S. and NATO troops. If anybody moralizes about the taxpayer paying for
mercenaries, they might want to rethink things a minute. There are still 75,000
so-called “contractors” working for the U.S. in Iraq and Afghanistan. They are
nearly all ex-U.S. service personnel and get paid more than $100,000 a year each.
They are mercenaries.

There are other benefits to
this policy. The Afghanis probably would have no need to grow poppies for the
opium trade. They could feed and provide health services to their families. The
kids could get a good education – at the moment only 7% of Afghanis are
literate. This new program in effect would be “Quantitative Easing”
for Afghanistan, and the economy would take off with this “pump priming”
operation. Against a backdrop of improving economic conditions, the country
would have ten years to develop new business enterprises and to settle into a
stable condition. Also, of course, you can largely bring the U.S. and NATO
troops home and save a lot of lives.

Now, to be clear, I think the
odds of that idea working are scant indeed… but even so, I’d rank the odds a
lot better than continuing to pour troops into the country in the attempt to
beat the Taliban into submission.

The Coming Double Dip

This blog is published by Andy Waldock. Andy Waldock is a commodity futures trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.

This morning’s (10/29/09) GDP headline on MSNBC reads, “GDP Grows at Best Pace in Two Years.” Bloomberg says, “Economy Expands for First Time in a Year.” Lastly, CNN said, “Economy Finally back in gear.

Statistically, speaking, this morning’s GDP numbers showed growth of 3.5% for the third quarter. This breaks a four quarter string of steadily shrinking numbers. By definition, this uptick brings us out of, “recession.”  This morning’s report looks great in the headlines, sounds good on the evening news and provides warm fuzzy water cooler conversation. However, I believe this is exactly the setup for the Double Dip Recession we’ve been talking about for quite some time.

Let me paraphrase the economic definition of “recession. “ A recession occurs when an economy has two consecutive quarters of declining GDP. We had experienced four straight quarters of declining GDP prior to this morning’s report.  In a free market economy, I would join the water cooler conversation and breathe a collective sigh of relief. However, our economy over the last year, can hardly be called a, “free market economy,” and therefore, I will continue to hold my breath and face the realities of what I believe will be a SIGNIFICANT downturn in our country’s economic stability.

Over the last quarter, the economic effect of the government’s cash for clunkers and housing stimulus packages has been substantial. Unfortunately, the temporary stimulus has done nothing to fix the underpinnings of our country’s global ability to compete into the future. These programs were far more akin to giving a man a fish, rather than teaching a man to fish. Had we allowed the markets to work themselves out, we would have saved billions of taxpayer money that went to bail out worthless financial corporations. Had some of this money been spent on our country’s infrastructure instead, we would have created new jobs by updating the electrical grid and allowing new green energy to be transferred from where it’s created to where it’s needed. The highway system, bridges and railways haven’t been significantly updated since their creation in the 1950’s and are in dire need of repair. As I write this, I see that the Golden Gate Bridge is closed because a cable snapped! Finally, high speed internet needs to be rolled out to everyone, just like the phone companies did so many years ago. These INVESTMENTS in our country’s future would do far more to ensure long term growth than the corporate BAILOUTS we are paying for to make us feel good now.

Due to the programs that have been implemented, we have ended the recession. Hurray for us – NOT. What we have done is placed whip cream and cherries on a pile of cow dung. Let me blow the froth off and show you how much it smells underneath the rhetoric. Deflation is still our major economic concern. Deflationary economies have no chance of sustaining growth. Many of you will argue that because of the falling Dollar and our government’s position of Quantitative Easing, that inflation should be our primary concern. I don’t think that’s the case.

First of all, we still have rising unemployment. According to the last unemployment report, we are at 9.8% unemployed. There are also another 7% underemployed and another 3-4% who’ve simply quit looking for work. According to John Mauldin, “A few years ago, 1 in 16 Americans were unemployed or underemployed. Today, that number is 1 in 5.” Obviously, this means no wage inflation. This is also why I think national infrastructure retooling would’ve been more beneficial. Secondly, between the housing collapse and the bear market in equities, we have seen significant wealth destruction. People are increasing their rate of savings as their net worth declines. Haven’t we all tightened our collective belts a bit? Again, lack of spending equals deflation not, inflation. Finally, the Federal Reserve Board has dropped interest rates to near 0%. Typically, this would be extremely stimulative and very inflationary. However, the money the Fed is printing is not making it to out to home buyers, entrepreneurs or, small businesses. The money is being used to shore up the balance sheets of the many troubled lending institutions at the corporate and private levels. Therefore, the velocity of money is still very low in spite of the amount of money the Fed has been printing and money velocity is positively correlated with inflation. Low velocity means low inflation.

This morning’s GDP numbers need to be taken in context. The dip was halted but, it’s just a breather before the next section of the slide. Watch the Commitment of Traders Reports for the next selling opportunity.