Iraq Update

As most major news outlets are reporting, there has been an increase in coalition casualties over the weekend. We honor those whom have fallen, been injured and served; righteously for their sacrifice. What is missing here from the press is context. The Multinational Force in Iraq has just began its largest offensive since the initial invasion, aptly titled “Operation Arrowhead Ripper,” for the large element of the 2^nd I.D. or “Arrowhead” division.

John Lennon once wrote/sang “what if there was a war and no one showed up?” Well, allow me to retort: “what if there was a war and no one covered it from up close?”

I know of Michael Yon, an independent journalist who was embedded with the 1-4 Cav. and Stryker Brigades previously, is up close and personal at the TOC now. For the kickoff of Ripper (19^th June), only a reporter from the NY Times was there, with others just getting in on the 22^nd from the LA Times and Time Magazine.

I guess the media really has written General Petreaus’ strategy off as a failure. Yesterday, I came across a quote that struck me as rather fitting:

It appears we have appointed our worst generals to command forces, and our most gifted and brilliant to edit newspapers! In fact, I discovered by reading newspapers that these editor/geniuses plainly saw all my strategic defects from the start, yet failed to inform me until it was too late. Accordingly, I'm readily willing to yield my command to these obviously superior intellects, and I'll, in turn, do my best for the cause by writing editorials - after the fact.

Robert E. Lee, 1863

I am unsure if the summer doldrums will run their course or if:

Iraq returns to dominate headlines, taking focus away from economic/ financial news.

Or

More fallout from Bear Stearn’s sub prime funds continues (and escalates).

Or

Players remain attuned to economic weakness last quarter… is it here to stay?

For now, market remains range-bound with a short term bearish outlook and an intermediate and long term bullish outlook.

CLICK TO ENLARGE

Friedman (Posthumously) on Immigration

Neither myself, nor anyone really is qualified to put words in the mouth of the greatest economist of all time, however, his words on the effect of businessman as natural opponents of free enterprise provide a useful basis for debunking the myth that undocumented workers are doing “the jobs that Americans just won’t do…”

Not only do I find that platitude incredibly disgusting and blissfully ignorant, it simply doesn’t hold up to a simple analysis.

One of the largest (or perhaps the single largest) driving forces on our side of the border behind the surge of undocumented workers coming to the United States is business and the lure of employment without citizenship and or a work visa. The other obvious reason pushing them on their side (whilst business is pulling) is simply to better their lot in life—the “Horatio Alger Myth,” if you will.

Many economists label humans as capital—simply as a metric that can be quantified. Many economists also agree that along with goods, resources, money, etc.—labor (or humans) should also participate in the free flow of capital. Common sense (in the law of supply and demand) tells us where there is a shortage of supply or an overwhelming amount of demand, resources will be effectively and efficiently allocated to where they are needed most.

Labor intensive businesses require labor, more specifically cheap labor. Once upon a time, they attempted to separate our country for free labor. Since slavery has been abolished, business wants the next best thing—cheap labor; the cheaper the better—which is legitimate, so long as it is legal. If the wages for these positions were dictated by the market, rather than the exploiter of those without the legal documentation to be here—Americans would be doing these jobs also; this is a cold, hard fact.

Not only are the labor conditions many undocumented workers face a clear violation of human rights (in many cases) that harkens back to the days of sweatshops and child labor, but it distinctively does not fit under the penumbra of free enterprise or the American way.

Milton Friedman distinctly wrote the chief opponents of free enterprise are intellectuals and businessmen; for opposite reasons. Rather than paraphrasing, it is best you hear it from the man himself (from Capitalism and Freedom):

“Every intellectual believes in freedom for himself, but he’s
opposed to freedom for others.…He thinks…there ought to be a central planning board that will establish social priorities.…The businessmen are just the opposite—every businessman is in favor of freedom for everybody else, but when it comes to himself that’s a different question. He’s always the special case. He ought to get special privileges from the government, a tariff, this, that, and the other thing…"

This is the true essence of where business; both large and small have gone very wrong on this issue.

Third Gear was Major

Part I, Background:

I drive a car. In order to do so legally, I have a nice laminated document that fits neatly in my wallet. It has a picture of me (a good one too), my date of birth, an ID number, my name (first, last and middle initial), my current residence, my sex, eye color, height, class of license (I can only operate automobiles, not buses/trucks or heavy machinery), my signature and finally, the dates of issuance/ expiration.

For security reasons it has a hologram in the background, a swipe area in the back and barcode. This particular features are extremely difficult to reproduce and I cannot name any occurrence when this has happened, lest on a large scale.

10 years ago, driver’s licenses from all states lacked many, if not most of these pictures. I recall not too long ago that New Jersey licenses didn’t even have pictures of the operator.

In essence, technology has made a profound impact in our lives and in terms of aiding law enforcement, it has been nothing short of a miracle. If you unsure of the extent of the impact of technology in law enforcement, tune into to an episode of “CSI” or “Law and Order”—while they are TV shows, they have numerous consultants and former law enforcement members on their payrolls as consultants and the like.

I do dare say, despite the waits at the Department of Motor Vehicles, the individual states have done a great job maintaining databases of those enrolled, from the permit holders up to the livery driver, trucker and average commuter.

The logical question would be, “what about non-drivers?”

In every state (while ages vary from 13-18) individuals are required by law to carry picture ID’s on them, (one of which must be Government issued-or recognized as a valid form) AT ALL TIMES, which failure to comply could result in a fine, detention or imprisonment.

In many cases, people simply opt for State ID cards, available through DMV’s in all 50 states and are identical to licenses but clearly state they are merely for identification. These are also issued to those failing to meet the criteria for maintaining a driver’s license, i.e. license suspension or termination.

Another option is a U.S. Passport through the Department of State, which also requires a picture ID, one of which is government issued as well.

For those whom are both citizens and non-citizens and are enlisted in our Armed Services, they are also required to carry identification on them

If you are here as a guest in this country but may be seeking permanent residency, you will also require government approved ID, though it may be a green card or foreign work permit.

Depending on the individual state, hunting licenses, gun permits and other localized forms of ID may also be accountable.

Part II, relationship between Federal and State:

Without a Government issued form of Identification, chaos would ensue on many levels. Obviously the police activity and investigations would grind to a halt. But I have news for you, this will never happen.

Even when illegal/undocumented/etc aliens (whatever you want to call them) cross over and get caught, they identification is ascertained and they are fingerprinted before releasing and deporting them. This is the most far fetched case of literally an unidentified person in our country and we are still able to discover the individual’s name, D.O.B., etc. often through the cooperation of foreign governments and by standard police work.

It seems to me that the states, which act independently in many regards (age of driver’s license, etc.) are still bound to operate within the framework of the guidelines provided by the federal government.

Even as federal crimes take place, mainly those that constitute a particular offense that crosses over state borders—it is the current ID combined with other resources (state license plates, etc.) that lead to the capture and/or prosecution.

Part III, simplicity and necessity:

What could the average individual accomplish for any period of time without a Driver’s License, Passport or State ID card?

The answer is not much.

You could not apply for a job, bank account, mortgage or any of life’s normal activities without proof of your identity. You cannot board a plane. You cannot withdraw money from a bank (and you need ID to get an ATM card). Credit card/ Personal Checks require a photo ID. Basically, think about how many times you show your Identification over the course of a week, it adds up.

Part IV, the “need” for a national ID card:

It simply does not exist. There is far more than enough bureaucratic overlap in the government as it is, not to mention the inefficient and ineffective nature of the federal government as a whole.

Since these cards would invariably fall under the jurisdiction of the Department of Homeland Security, a cursory look at how they have handled “identification matters” gives keen insight for what one could look forward to should they manage this program.

A few key items:

1. 16 of the 9-11 hijackers still are on the Government’s “No Fly List” after being dead for more than 5 years
2. Zacarias Moussaoui (the 19^th Hijacker in Government custody for 5 years is also on the no fly list.
3. Saddam Hussein, deposed, tried, convicted and executed in Iraq is also on the list
4. Many people whose names match or are similar to names found on the list (but are not a threat to commercial aviation) can be detained for hours or even days. Currently, there is no established bona fide process for these people to have their names removed.
5. In many cases those whom have established they are not the person in question on the list are still not allowed to board their flights
6. There are currently 75,000 people on the list—a number which we are sadly unprepared to screen and supervise effectively due to a lack of resources.

If Federal Investigators, Border Security agents, Customs Agents at Airports and all those in charge of protecting the populace possess all the same information on a form of Identification that simply says “Alabama,” “California,” “New York,” or “Tennessee” in lieu of “The United States of America” atop the card—how can we expect a superior level of protection as a result?

Many countries already employ National ID Cards (with Biometric features) and have not enjoyed any quantifiable benefit as a result. One poignant example is Spain, which had implemented a countrywide standard was effectively targeted by terrorists in Madrid on March 11^th, 2004. Backpack laden explosives dispersed throughout depots and stops managed to kill 191 people and wound over 2000.

Part V, the impact on civil liberties:

While anyone who knows me would be surprised that I find myself on the same side as any supporter of civil liberties or the ACLU; a National ID Card presents some serious problems.

Among them:

1. It further centralizes power in the hands of the government, namely the supervising agency and its employees. It also will definitely require the help of the private sector and allow a large amount of information on individuals to be located in one area.
2. It will also allow for the tracking of individuals, including those not necessarily considered a threat. This coincides with constitutional protection, specifically the “right to privacy:
3. The claim that it will deter criminal behavior is without merit, as all forms of ID currently employed have failed to do so.
4. To date, the only countries prior to Spain to employ such a measure have been totalitarian regimes, i.e. the former USSR, Nazi Germany and East Germany

Part VI, Conclusion:

A National ID Card system is a flawed in theory and in practice. Not only does the cost of implementing, operating and maintaining such a system provide a huge hurdle (think trillions of dollars), the practicality and integrity of this program would constantly be under scrutiny from Congress and Advocacy groups.

There is also no study that has effectively demonstrated any benefit above and beyond the current system, which is decentralized and largely run by the individual states.

Finally, the “slippery slope” argument must be made here. What information will be made available upon “swiping” or “scanning” the ID CARD.?

Some questions that inevitably will arise are:

1. Will it include financial information?

2. Will it include Family information—such as marital status, children, etc.?

3. What about detailed medical Information such as current ailments or family history?

I firmly believe the introduction of a National ID Card is a waste of resources that will overlap a system in place that works. While National Security is paramount, putting such a system under a branch of government that is worried about confirmed dead terrorists boarding a plane is not only ineffective, but presents an opportunity for abuse and error. Centralizing the intimate details of an entire country in one virtual location will not only create a new target for terrorists but also a “holy grail for hackers.”

The federal government and taxpayers would be better served to see their current system improved (or even overhauled), as well as a defined process to establish who belongs on the “no fly list” and to give those listed inadvertently a means out.

In closing, President Reagan once opined in his first inaugural address, “Government is not the solution to our problem. Government is the problem.”

SUPREME HEADQUARTERS ALLIED EXPEDITIONARY FORCE

June 6^th, 2007

From June 6^th, 1944:

SUPREME HEADQUARTERS ALLIED EXPEDITIONARY FORCE

Soldiers, Sailors and Airmen of the Allied Expeditionary Force!

You are about to embark upon the Great Crusade, toward which we have striven these many months. The eyes of the world are upon you. The hopes and prayers of liberty-loving people everywhere march with you. In company with our brave Allies and brothers-in-arms on other Fronts, you will bring about the destruction of the German war machine, the elimination of Nazi tyranny over the oppressed peoples of Europe, and security for ourselves in a free world.

Your task will not be an easy one. Your enemy is well trained, well equipped and battle-hardened. He will fight savagely.

But this is the year 1944! Much has happened since the Nazi triumphs of 1940-41. The United Nations have inflicted upon the Germans great defeats, in open battle, man-to-man. Our air offensive has seriously reduced their strength in the air and their capacity to wage war on the ground. Our Home Fronts have given us an overwhelming superiority in weapons and munitions of war, and placed at our disposal great reserves of trained fighting men. The tide has turned! The free men of the world are marching together to Victory!

I have full confidence in your courage, devotion to duty and skill in battle. We will accept nothing less than full Victory!

Good Luck! And let us all beseech the blessing of Almighty God upon this great and noble undertaking.

Dwight D. Eisenhower

Cool Hand Luke

Bernanke is sitting on his hands yet again. While the economy oscillates between the upper range of the Fed’s imaginary inflation target and no growth, the ubiquitous central banker to the world opted to continue along the “wait and see path.”

As predicted, in the wake of his broadcast remarks to Cape Town, South Africa; the European Central bank raised rates from 3.75% to 4% this morning.

Morgan Stanley issued a “Triple Sell” warning on European equities for the first time since 2000 and the fifth such signal since the 1980’s. This rating is based largely on the Price-to-Earnings Ratio (PE Ratio) for the continentals reaching a level that is consummate with “frothy.”

Another round in political primaries concluded last night with the GOP debate, following Sunday’s snipe-a-thon between Edwards and Obama amongst the democratic faithful; with Clinton at times being targeted but maintaining her front-runner stature by staying above the fray.

On the other side of the aisle, there was an apparent armistice between the Romney and McCain camps, which managed to make it through the entire event without any serious barbs. Come to think of it, there wasn’t really any political pot-shots exchanged among the right, it really was more political posturing for the title of “Heir Apparent” to the Reagan mantle.

I will also be supporting Senator John McCain (R-AZ) for the Republican Nomination for President of the United States.

Stub Equity

Wall Street is a self-marketing, self-sustaining institution that is aptly comparable to an ecosystem than anything you will ever read in an economics or business textbook. Wall Street as defined as a whole is a survivor. Despite the best attempts by regulators, politicians and anybody else keen on boxing “the street” in, it has confounded and will continue to confound antagonists.

In the days of Jesse Livermore it was so called “pools” of two varieties: Bull Pools and Bear Pools. These pools basically allowed large investors to collude on a grand scale, which often resulted in market corners (literally controlling the entire market) and/or plunging companies, commodities or whatever into oblivion. The passage of the SEC Act of 1933 and the appointment of Ambassador Joseph Kennedy; patriarch of the Kennedy clan, inside trader, bootlegger and politician, banned pools from the marketplace.

30 years later, the advent of the mutual fund allowed investors to work together in a similar fashion. It didn’t take long for the fund industry to come under the thumb of regulators which imposed a litany of rules governing practices.

In the 1980’s it was the leveraged buyout (LBO), specifically a buyout fueled and financed by junk bonds that pioneered a period of huge returns and illicit behavior. The rise (and subsequent fall) of Ivan Boesky and Michael Milliken—probably best represented in Oliver Stone’s “Wall Street” in Michael Douglas’ amalgamation of a character in Gordon Gekko.

In the 1990’s, it was the hedge fund—a vehicle for “accredited investors” that gave the hedge fund a management fee and a share of profits derived from trading. Taking advantage of the very nature of the investment (accredited investors are defined as those with exceptional financial means and experience); regulators did not need to protect the investing public from malfeasance.

In the case of the hedge fund, it was competition that led to the arrival of its successor (though hedge funds are still quite popular). Only so many people and their respective funds can rely on quantative/ black box trading to drive returns that beat the market. Today we have returned to buyouts, though the primary driver is “private equity.” Firms like the Blackstone Group, KKR and Texas Pacific have taken tens of billions worth of market capitalization from the public’s hands and on to their balance sheets.

Chrysler Automotive, Dow Chemical, and HCA are some of the largest targets of private equity—though the market may be maturing, it appears to be far from over as Blackstone has solicited funds from the Chinese government in the pre-IPO stage, as they plan to go public to raise more money later this year.

Private equity looks to layer debt onto their takeovers, often engineering large layoffs and reductions in overhead to drive profitability. How successful this will be over the longer term is debatable, as surely some will buckle under the amount of leverage applied to their balance sheets by suitors.

The other emergence from this M&A surge is “stub equity.” This is a highly illiquid investment that represents an equity share in a private company. Presently, many mutual funds are figuring out whether or not they can hold stub equity in their portfolio’s as they may own millions or billions of dollars in companies that go private. As always, this should lead to a new class of derivatives attached to this new vehicle, adding a new layer of risk to an already leveraged marketplace.

While one cannot be sure what is next, it is uniquely helpful to judge according to investor’s appetite for risky investments, which is extremely high today. This should send warning signals to central bankers and regulators that we are becoming more susceptible to a credit meltdown.