Do you know where your bytes are tonight?

Goha, an Egyptian male folk character, has been often used to convey wise nuggets in the fashion of Aesop's Fables, with a satirical twist. So Goha was once found, at his wits end, looking for his donkey. A passer-by notices his befuddlement and the following dialogue ensues.

    - "Goha, what's the trouble?"
    - "I lost my donkey!"
    - "Where was it?"
    - "Tied to a tree."
    - "Which tree?"
    - "The one with the cloud above it"
    - "Did some one steal it?"
    - "I don't know. I can't find the cloud."

I have seen a lot of IT folk do worse. I saw them...read more

What's in your wallet?

Money. The enabler of all economic activity. The root of all evil. Whatever soubriquet you attribute to it, its nature and substance are becoming the topic of a vigorous debate as of late. A topic that was thought to have been fully settled over half a century ago and relegated to the thought experiments of historians and academics has been gaining renewed interest. ...read more

Airport Nude Scanners

The current lively debate about the health risks of the back scatter X-Ray airport scanners, misses a very important point. These machines are first and foremost X-Ray machines. The fact that the government is currently using them in a low power mode, to capture the low radiation back-scatter images, does not mean the machines are not capable of a high radiation dose. Whether due to malfunction, operator error or a software glitch, the radiation dosage has the potential to exceed advertised levels. For frequent fliers cancer risk is a serious concern.

Given the rising concern that determined prospective terrorists are likely to use body cavities for hiding contraband, will the government resist the temptation of raising the power level a tad to examine the inside of our bodies? Given that government officials are exempt from the process, would they care if the cancer risk for the rest of us is increasing? Given the potential to make billions more, will the equipment manufacturers hesitate in refitting the machines with a software update that has an image-depth control feature? Do you trust that the government will tell you when it decides to see inside of you?

I have no idea where we are headed, but it doesn't smell right.

AIG's Bottomless Pit

Since the majority of the general public, and all of the Financial Media, seem to be constantly asking in bewilderment as to reason AIG keeps requiring additional bail-outs, I decided to try my hands at a simple answer. AIG has exposure to the highest tranches of credit risk. In other words, AIG has insured the highest quality credit in the world. But it did that with gusto. I reckon AIG has risk exposure roughly equal to $1 billion/basis point of investment grade risk^*. In other words, every time investment grade credit risk rises by 0.01% AIG books a mark-to-market loss of $1 billion. Why mark-to-market then? The mark-to-market is required by AIG's counterparties and the rating agencies to properly protect against an AIG default. When an adverse mark-to-market takes place, one has to post additional collateral with counterparties or convince rating agencies of reserve adequacy. The inability to do so, causes a total collapse in credit quality and ultimately insolvency. That is why the bail-outs keep coming.

Two years ago investment grade credit spreads where around 30bps. Today they are over 200bps^*. This blow-up in credit spreads has happened without any considerable defaults in the investment grade world. What would happen when default start taking place. How much of a bail-out would AIG then need. Go figure!

---

* A March 3, 2009 article at CNNMoney.com states that the total AIG bailout so far stands at $163 billion. This almost exactly confirms the analysis presented above.

Filling the Crater

As Washington tries to navigate its way through the current economic morass, the general public is repeatedly stunned by the enormity of the figures. The number trillion (one followed by 12 zeros) was thought by many to be an imaginary number, merely a couple of years ago. Nowadays, it seems that every government official will be in charge of dispensing a trillion or two.

What happened? And is inflation upon us?

The big-bang noise you just heard was the sound of the credit bubble blowing up. The federal reserve system of America, and its sisters around the globe, have been creating capital out of thin air for over 25 years. Through the less than sober expansion of credit, the global economy looked exceptionally healthy for the most part of a quarter of a century. A mini 'real estate'/'savings & loans' bubble, followed by a massive 'technology company'/'stock market' bubble, followed by a giant credit/'hedge fund'/'real estate' bubble, followed by a commodities bubble gave us the pleasurable externalities of a wildly vibrant economy.

The bubble popped! It was tens of trillions of dollars big. Now we are left with a crater. The governments of the world are trying to shovel as much cash as possible into the crater.

In all likelihood, they won't be able to fill the whole crater. That means that no matter how much money they print, it is just a partial rationing of the credit they have already issued. As a result it has no inflationary impact. All prices should fall, albeit not at the same rate. For instance, gold may fall less than Florida real estate. To support asset prices, the government will have to inject so much cash that bubbles will pop up in some unexpected places.

Whether this effort will succeed or not is uncertain. One thing is certain, however, a bubble in government has already begun!

Black Beard Is Back

For a while, the term 'piracy' conjured up notions like 'use of unlicensed software' and 'intellectual property bootlegging' instead of images of Black Beard or Sir Francis Drake. This is no longer true. High seas piracy is in vogue again. Somali pirates are wreaking havoc with shipping lanes in one of the busiest routes in the world. Having he longest shores in Africa and located at the Horn of Africa, destitute Somalis, who populate a land with practically no government, discovered unto themselves a lucrative business. All ships traveling through the Suez Canal to Europe or USA have to pass through the Horn of Africa. Somali pirates have been increasingly targeting these ships. It was thought, however, that by avoiding that route and going Cape of Good Hope (southern tip of Africa) the piracy threat can be avoided albeit at some added cost. The capture of the Sirius Star last week changes the belief. By capturing the newest and largest Saudi owned oil tanker on its way to the USA with 2 million barrels of oil (1/4 of the Saudi daily production) Somali pirates now showed that the Cape of Good Hope is not off limits.

This strange development (namely, the return of piracy) has broader and a more disturbing significance than meets the eye. It is a telling symptom of the times. We are moving into a world that is undergoing a global power restructuring. Nations that for a few centuries dominated the world power scene and projected a revered image, no longer command the same respect. Others that are bound to take their place are not there yet. In the mean while, chaos ensues. More specifically, the economic troubles of the West is creating a power vacuum that is allowing rogues everywhere to expand their influence unimpeded. The disturbing truth is that the troubles of the West are not simply a fleeting hiccup. There is well-founded concern that as the pirates further hone their skills they (or others like them) might try hand at other locales; most notably the oil shipping highway, i.e. the Persian Gulf.

Economically, this is big news. First, the cost of insurance will rise significantly. Secondly, the market for armed guard and protection services will grow. Consequently, the global cost of goods and transportation will rise. The fact that the price of oil went down following this piracy incidence is scary!

If the piracy business model proves lucrative, others may be enticed to join in. Aided by cheap satellite imagery, GPS equipment, and fast boats, unscrupulous souls, with access to a safe haven, might try larger scale operations. Piracy which plagued the world for many centuries became virtually extinct in the last two due to the hegemonic control exercised by the western nations over most of the globe. Failed states and malfeasant safe havens were either eliminated or held accountable. The current financial meltdown in the West will be accomapanied by the return of failed states and corrupt safe havens of every stripe. Naval protection will be needed. You could buy the services of the US Navy or the Royal Navy, as in the days of old. Or, given the unsophisticated nature of the threat, you could recieve sufficient protection from the Indian,Chinese or Egyptian Navy, for a fraction of the cost.

More foreboding, is what we are currently witnessing a harbinger to the return of old times in a lot of other ways? Will crime rise everywhere, particularly in the west, as cities, states and municipalities falter towards bankruptcy? Will we travel in convoys surrounded by armed vehicles? Will physical security become a major concern? Will the caravan make a comeback?

We Want Change

When Obama supporters shout 'We Want Change' they seem to be, at least on a subconscious level, actualizing what they feel is already happening about them. They tend to sense the presence of a strong undercurrent of ‘Change’. Change with an upper case 'C' represents a paradigm shift; a global power structure rearrangement. In a recent WSJ opinion piece, titled Obama And The Politics Of Crowds, Fouad Ajami discusses Obama's mastery of crowd politics. He argues that Obama, like all revolutionaries before him, is using the crowds, building up their hope, ultimately to disappoint them.

I spent years of my life studying the behavior of aggregate media. An aggregate medium is a large mass made up of a very large number of particles. Various types of aggregate media share similar dynamics. This is generally true, whether we are talking about a fluid medium, such as a large body of water, or a public medium, such as a large society or a nation. Masses, as such, are usually found in one of two states. The first state (scientifically called the ‘steady state’) is a state with a strong and discernible current or flow. In such a state, the current is too powerful for any one (or a few) human actor (actors) to alter. Thus it is hard for charismatic leaders to truly shine when the medium is in such a state.

The second state is a state of turbulence. The currents may be strong, yet the aggregate overall is directionless. This type of state is inherently unstable. The longer it lasts the more chaotic it gets. Such a state eventually results in the ushering in of a charismatic leader. In addition to being in command of crowd dynamics, this leader has to be well in tune with the most dominant of the prevailing undercurrents. The leader then acts as a crystallizing catalyst who helps the alignment of particulate direction. The charismatic leader ultimately helps the return to a steady state as chaos subsides. Observers tend to attribute the state change to the abilities and extreme skill of the charismatic leader. The truth, however, is that in a large pool of talents there is almost always such a leader. Unstable dynamic systems, almost invariably, ultimately reach a steady state stable configuration. The charismatic leader is more like a skilled surfer. When the right wave arrives there is usually a talented surfer around to ride it.

Socially, economically and demographically the world lives in a state of unclear direction. The currents have been building underneath the surface for a long time (see Greenspan's book The Age of Turbulence). It took the recent economical and financial crisis, however, to bring it all to the surface. Mohamed El-Erian, in his book When Markets Collide, analyzed certain of these currents and their impact on the field of investing.

As an example let us briefly examine one such undercurrent, namely the public view regarding the economic direction of America. It seems, at least on the face of it, that Obama supports a socialistic redistributive economy. McCain, on the other hand, seems to advocate the continuation of a regulation-free laissez-faire capitalist economy. The truth is: this is just a hoax. The country is already undergoing the most socialistic wealth redistribution since its inception. The amount of money randomly distributed by the US government in the last year is mind boggling. The sums of money involved in the current economic bailout by the Treasury Department, combined with the unrestrained liquidity offered by the Fed to curb or mitigate the failure of banks and other financial institutions (Bear Stearns, AIG, Fannie Mae, Freddie Mac, Lehman Brothers, WaMu, Wachovia, …), add up to trillions of dollars. By the time the current financial crisis is over, the government would have randomly injected more than $3 trillion into the system. This is in excess of the total IRS collection for the year 2006 of $2.5 trillion. Stated differently, the current government is effectively doubling the tax burden on every American taxpayer. This is happening without the taxpayer’s awareness, since it is done through money supply inflation. Taxpayers still think we live in a free market; and fear Sweden style socialism. When the citizens expect the government to bail them out, they have already voted for socialism. Even more foreboding, when the citizens act irresponsibly for years, turning their economy into a third order one, a form of socialism is almost a foregone conclusion.