Turkish Forum

Category: Richard De Graff

  • MISREADING INTENTIONS IN THE SYRIA CRISIS

    MISREADING INTENTIONS IN THE SYRIA CRISIS

    Wednesday, November 23, 2011, 8:50 AM
    STRATFOR
    —————————
    November 23, 2011

    George Freidman Chairman STRATFORD

    Summary
    The aim of the Sunni army defectors who make up the Free Syrian Army is to sow divisions within the military that will ultimately bring down the Syrian regime from within. A number of foreign players share this agenda, but they are reluctant to provide military cover for an opposition still struggling under the weight of the Syrian security apparatus. A closer examination of the dilemmas faced by the main stakeholders in the conflict reveals how the current dynamics of the conflict leave ample room for error as each tries to read the other’s intentions.

    Analysis
    With months of demonstrations failing to dislodge the regime of Syrian President Bashar al Assad, military defectors who make up the Free Syrian Army (FSA) are trying to exploit Alawite-Sunni divisions in the army to bring the regime down from the inside while asking outside powers for military assistance. Though no outside country has intervened in Syria on the FSA’s behalf, a number would like to see the end of the Iranian-allied regime in Damascus. Turkey has been particularly aggressive in condemning the Syrian regime, even threatening to create a buffer zone extending into Syrian territory.

    The FSA hopes to convince Ankara that helping Syrian defectors can prevent border instability — Turkey’s primary concern. Meanwhile, al Assad and Iran may use their influence over Kurdish militant proxies as leverage to forestall Turkish involvement. Though the Syrian regime appears for now to be holding together, the confusion surrounding each party’s intentions has the potential to lead to miscalculations and bring about the very situation each player hopes to avoid.

    The Free Syrian Army

    The Free Syrian Army loosely refers to a group of mid- to low-ranking Sunni army defectors. They are led by Col. Riad al-Asaad, who is believed to be based in Turkey. The FSA claims it has 22 “battalions” of soldiers throughout Syria capable of launching attacks on symbolic targets; in the past week, the FSA has claimed to have attacked an air force intelligence facility and Baath Party offices. The FSA’s leadership has said its main strategic aim is to elicit further defections and, by splitting the army, cause the regime to collapse from within. With Syria’s Alawite-dominated army units concentrated on urban opposition strongholds, the FSA has been able to transmit messages, facilitate cross-border travel and coordinate defections among the mostly Sunni army soldiers manning checkpoints and border posts. The attacks claimed by the FSA so far suggest the group is not receiving arms from outside the country but is waging its resistance primarily using the arms and ammunition with which members defect.

    A significant propaganda campaign is part of the FSA’s efforts to seek assistance, but the group is still operating under the weight of Syria’s pervasive security and intelligence presence. In reaching out to countries like Turkey and Saudi Arabia that may want al Assad to fall, the FSA has stressed the need for military cover — much like that provided by NATO in Libya, which allowed rebels time and space to develop their resistance in the eastern stronghold of Benghazi. This is why FSA leadership has emphasized the Syrian regime’s allegedly heavy use of the air force to bombard civilians — the FSA hopes to create a justification for humanitarian intervention. (STRATFOR has not seen any indication that the regime has chosen to use its air force against demonstrators, likely out of fear of Sunni air force pilot defections.)

    The exact nature of this proposed military intervention is deliberately ambiguous, varying from the implementation of buffer zones extending into Syrian territory to air cover provided by no-fly zones. Though the FSA has sought to avoid creating the perception it is inviting foreign “occupiers” into Syria, the group undoubtedly hopes to bring about a replication of the Libya model of intervention. In the FSA’s view, if the opposition can draw external forces into forming buffer zones in Syrian territory, it will bring them one step closer to receiving the more significant tactical support they are seeking, such as the insertion of foreign special operations forces, to help split the army and topple the regime.

    Turkey’s Reluctance

    The FSA is having trouble finding military powers willing to intervene. Turkey has been the most vocal in pressuring al Assad, with Turkish Prime Minister Recep Tayyip Erdogan on Nov. 22 calling for al Assad’s resignation and on numerous occasions threatening to implement a buffer zone extending into Syrian territory. Turkey also openly hosts FSA leadership, along with other defectors who have fled into Turkey. However, while Ankara has a broad spectrum of options for supporting the opposition from its own side of the border,  Turkey has not indicated it will follow through on its threat of military intervention.

    Rather than deal with the near-term security implications of hastening al Assad’s fall, Turkey prefers to gamble on the regime’s inability to crush the resistance. Turkey could use a protracted political crisis in Syria to cultivate an opposition to Ankara’s liking, while avoiding direct involvement. The risk for Turkey is that al Assad will survive the crisis with Iranian aid. But Turkey also wants to avoid the near-term threat of becoming vulnerable to Syrian and Iranian militant proxy attacks, especially as the country has recently seen a significant rise in Kurdish militant activity.

    Turkey’s primary interest in Syria is to ensure that instability there does not cause a refugee crisis or encourage Kurdish separatist activity within Turkey’s borders. Any eventual military intervention by Ankara — and its absorption of the associated risks — would be driven mainly by these concerns and not by the welfare of Syrian citizens. The United Nations estimates that roughly 7,600 Syrians currently live in Turkish refugee camps, but Turkey does not face an imminent crisis from thousands more refugees flooding across the border. This is largely because Syria has concentrated military crackdowns in opposition strongholds further south in the cities of Homs, Hama and Daraa.

    (click here to enlarge image)

    Constraints in Creating a Refugee Crisis

    The FSA could try to spur Turkey to militarily intervene by creating just such a refugee crisis. By focusing activity in and around the northern strategic cities of Aleppo (an opposition stronghold) and Idlib, the FSA could draw harsher crackdowns by the Syrian army that would send civilians fleeing toward the Turkish border. This would also fixate Syrian forces on one location while thinning out the concentration of forces in other areas where the FSA may be trying to operate.

    Similarly, the FSA could attempt to draw Jordan into the Syrian conflict by provoking stronger crackdowns in the southwest, where Syrian forces have concentrated much of their strength since the beginning of the uprising. Rumors circulated in the past week that the Jordanian government was also contemplating a “safe zone” on the Syria-Jordan border in the event of a refugee crisis, but a STRATFOR source in the Jordanian government strongly denied this. At the same time, the source said Jordan might have to contemplate such a measure if tens of thousands of refugees came across the border and if Jordan’s forces were augmented by Gulf Cooperation Council (GCC) troops.

    This is unlikely in the near term. An estimated 3,000 Syrians have fled to Jordan, and the Jordanian government is just now starting to set up refugee camps. Jordan does, however, share an interest in weakening the al Assad regime. STRATFOR has received indications from Syrian sources that GCC money and supplies have moved through Jordan to opposition forces in Daraa and the Damascus suburbs. But despite significant opposition activity near the Jordanian border, the refugee flow in the south has not reached the level that would warrant a Jordanian intervention, and Amman likely will continue to exercise caution when it comes to escalating its limited involvement in Syria.

    While the FSA needs to accelerate a crisis to compel outside intervention, potential interventionists have a strategic interest in staving off such a crisis. Though Turkey, Jordan, Saudi Arabia and the United States all share an interest in supporting the Syrian opposition and sowing rifts within the regime, none appear ready to step up their involvement. Should a neighboring country like Turkey (or possibly Jordan) detect that the FSA is trying to create a refugee crisis on its border, that government could take measures to restrict FSA activity on its territory to avoid being led toward military confrontation with Syria. In the meantime, it remains unclear whether the FSA can survive without a refuge near the main areas of resistance and solely with the weapons taken when they defected, while at the same time trying to lure the Syrian army into intensifying its crackdowns.

    Al Assad’s Dilemma

    Syria and Iran want to prevent further support from reaching Syrian dissidents by making clear to Turkey that there are repercussions for trying to split the Syrian regime. The most direct way to capture Turkey’s attention is through Kurdish militancy. Syria and Iran may not have the ability to directly orchestrate attacks by the Kurdistan Workers’ Party core based out of the Qandil Mountains in northern Iraq, but they can potentially exploit splinter factions. The Turkish government takes this threat seriously and it is likely a major factor in Turkey’s reluctance to escalate its confrontation with Syria. But Syria and Iran would also need to exercise a great deal of caution — using Kurdish militant proxies could inadvertently give Turkey a compelling reason to intervene in Syria.

    Al Assad’s strategic interest is simple: to ensure the survival of the regime. This is an interest shared by Iran, which needs Syria to complete an arc of influence running from Afghanistan to the Mediterranean. Though the Alawite-dominated forces are so far holding together, they are being stretched thin trying to maintain intensive security operations across the country. This strain does not bode well for the regime’s ability to bring an end to the crisis soon. At the same time, the amorphous FSA does not appear able to threaten the Syrian regime without significant outside help. This dynamic gives Turkey and others time to develop a more coherent strategy on Syria, but it will leave the FSA in a tenuous position as it attempts to get its insurgency off the ground with limited foreign backing.

    Copyright 2011 STRATFOR.

  • Rare and Unusual WWII Photographs

    Rare and Unusual WWII Photographs

    For all photography and history buffs, these are incredible photos !!!

    ATT00134

    VERY RARE & Unusual WWII Photographs

    Where have these pics been hiding for the past 65 years?

    Japanese Kawanishi H8K seaplane after strafing. Kwajalein

    Squad of Rufe’s at Bougainville . These things were very nimble even with the pontoons.

    The A6M2-N float plane version of the Zero did extremely well, suffering only a small loss in its legendary maneuverability. Top speed was not affected, however, the aircraft’s relatively light armament was a detriment.

    Snow on deck. USS Philippine Sea North Pacific 1945

    HARVS on the way in shot by a P-47. Rare shot. Deck crew climbing up to get the pilot out. He did. That’s a fuel tank his foot is on. Empty? Marines disembark LST at Tinian Island.

    Bougainville.

    Guam

    Outside Bastogne

    German 280mm K5 firing U.S. munitions ship goes up during the invasion of Sicily. V1 Spitfire “tipping-off” a V1. If you’ve never heard of this insane tactic ……. At first V1’s were shot down by gunfire. Optimum range was inside 200yds, which was marginal for survival. Many planes were damaged and quite a few pilots killed. Basically at such high speed and low altitude a plane had to fly though the explosion and hope. With the high risk of being blown up some of the best pilots started tipping the V1’s wing, because of damage to wing tips they later developed a tactic of disrupting the aitflow by placing their wing very close to the V1’s wing, causing it to topple.

    Not every pilot did this. At night this was not possible, the flame from the V1 blinded the pilot to everything else, though some Mossie pilots flew past closely in front of the V1, again causing it to topple. The thought of doing this at 450mph, 4,000 feet above the ground, at night and being blinded gives me the willies. Panzerkampfwagen VI “E Tiger” Ju 88 loading a torpedo. This is one HUGE bomber … and it’s on pontoons!!!! German “KARL” mortars. Sebastopol Reloading a KARL BOOM! Macchi 202v

    Italian 303 Bombers over N Africa

    See more pictures below!!

    PICTURES TAKEN 69 YRS AGO & LEFT IN A BROWNIE ARE REAL INTERESTING.

    ====================================================

    (December 7, 1941)

    Isn’t it amazing how a film could last so long in a camera without disintegrating?

    Fantastic photos taken 69 years ago. Some of you will have to go to a museum to

    see what a Brownie box camera looked like?

     

    Here is a simple picture of what we are talking about. . .

     

    These photos are absolutely incredible…..Read below, the first picture and at the end…

    PHOTOS STORED IN AN OLD BROWNIE CAMERA

    Thought you might find these photos very interesting; what quality from 1941. These Pearl Harbor photos

    were found in an old Brownie stored in a foot locker and just recently taken to be developed. They are from

    a Sailor who was on the USS Quapaw ATF-110.

    PEARL HARBOR

    December 7th, 1941

  • A guidebook for new Congresspersons for January 2011

    A guidebook for new Congresspersons for January 2011

    (more…)

  • Poor Richard’s Report

    Poor Richard’s Report

    Poor Richard’s Report                                                                         

     

                                                                                                    Over 300,150 readers

    My Mission: God has uniquely designed me to seek, write, and speak the truth as I see it. Preservation of one’s wealth while providing needful income is my primary goal in these unsettled times. I have been given the ability to evaluate, study, and interpret world and national events and their influence on the future of the financial markets. This gift allows me to meet the needs of individual and institution clients.  I evaluate situations first on a fundamental basis then try to confirm on a technical basis. In the past it has been fairly successful.

                                 SPECIAL BULLITEN:

     

                                 Our President is about to be Tested – Big Time

     

                The Middle East is about to blow sky high. We have now involved the UN Security counsel plus Germany (called P-5+1) to make Iran negotiate their nuclear weapons program. The due date is September 24, 2009.  To make matters worse the President promised Israel that if they did not take military action with Iran, he would deliver crippling sanctions with Iran.

    Big deal. What we withhold, China and Russia will deliver. This is now guts ball diplomacy that will reverberate across the whole world.

                Here is a scary and realistic scenario that could happen while everyone is concerned with what is going on in the kiddy pool of health care reform and economic recovery.

                ISRAEL will never, never allow itself to be at mortal risk. If and when their intelligence concludes the Iranians are close to getting a bomb, diplomacy will end. Russian expansionism has always been in the setting of somebody else’s war. Putin will ignite the match if he ever gets the chance. Imagine. They get Georgia without a contest, and open the door to secure Ukraine, and make trillions of Rubles selling “high test” to Europe after the Iranians close the Straits of Hormuz. It would stir up a real blizzard and they could retake the Baltic region while NATO is off figuring out how to get the gulf oil turned back on.           

     Buy GLD (NYSE-$99+) or CEF (NYSE-$13+) and top off your home fuel tanks.

     Have a strong cash position also.

     

    Richard C De Graff

    256 Ashford Road

    RER      Eastford Ct 06242     

    860-522-7171 Main Office  

    800-821-6665 Watts

    860-315-7413 Home/Office

    rdegraff@coburnfinancial.com

     

    This report has been prepared from original sources and data which we believe reliable but we make no representation to its accuracy or completeness. Coburn & Meredith Inc. its subsidiaries and or officers may from time to time acquire, hold, sell a position discussed in this publications, and we may act as principal for our own account or as agent for both the buyer and seller.

  • Poor Richard’s Report

    Poor Richard’s Report

    Poor Richard’s Report

    Over 300,010 readers
    My Mission: God has uniquely designed me to seek, write, and speak the truth as I see it. Preservation of one’s wealth while providing needful income is my primary goal in these unsettled times. I have been given the ability to evaluate, study, and interpret world and national events and their influence on the future of the financial markets. This gift allows me to meet the needs of individual and institution clients.

    Economies Change Principles Never Do

    In my July 2009 letter I wrote that I would not write a letter about investing for a year. Well, economies may change, but never the principles behind them. We have had the worst recession/depression since 1981-1982 and many have called an end to it.
    Let me make one point vitally clear. Today’s stock markets are only for individuals who have extra funds. Funds that are “dear” should remain in a savings account at your local bank where you can watch it. We need a new congress to enact honest reforms that protect us.
    Today’s economists look at all kinds of statistics and come up with many wrong conclusions. Alan Greenspan, former Federal Reserve Chairman, loves the picture of himself in the bathtub surrounded by stacks of financial garbage. If only he had walked around any random town or talked to any local bank or asked a few questions, things might be better today.
    I turned bearish in January 2001 when the Fed lowered the discount rate Jan. 2 and again Jan. 3, 2001. That is the only time it was ever done two days in succession, I believe. Edson Gould’s “3 steps and stumble” rule was transformed into my “2 steps in a row and drop dead” rule.
    So this letter will be more of my opinion and where I stand based upon clear observations.
    Let me state right out that using today’s standards, the economy has bottomed. I use the word bottomed. We should see a mild recovery before we turn down again. The mainstream media will not tell you this because they are all selling something.
    Small businesses grow into big business if they are fairly successful. They hire instead of layoff. They don’t need big bonuses, because the challenge is success and stock ownership. IBM is the only corporation to remain top-dog for over 60 years. J P Morgan is a close second.
    Here is the problem, which we should have learned from the Japanese Economy. Government spending does not mean a hill of beans. What is a hill of beans? Nothing!
    I believe Dr Bernanke’s helicopter speech was meant for the general public – not the politicians in Washington D.C. The “cars for clunkers” was an overwhelming success – short term. I believe this is why the economy bottomed or stopped going down- temporarily.
    If the general public was given a trillion dollars and was told to pay down debts and to spend the remaining moneys wherever they wanted – you would see the overall economy pick up. We might have lost a few car companies, but that is “creative destruction” as one famous economist (Schumpeter) calls it. Small businesses hire and pay employees. Large corporations try to downsize and cut expenses after they have grown. Their earnings are shown with mirrors.
    So there will be no follow-through with all the wasted government spending and this, coupled with more government borrowing and weaker dollar, will cause the economy to slide down again.
    When I started in this business there was a very ugly word and it had to be used sparingly. It was USURY. Banks operate under the Rule of 72. Take whatever interest rate you are paying and divide it into 72. So if you have a 7% mortgage then 7/72 would mean that the bank would double its money every 10.29 years.
    Millions of people who own homes today are getting crushed by Credit Card Companies reaping an immoral return on huge Satanic interest rates. Divide 15% into 72, that is 4.8 years for them to double their money. Paying lobbyists to bribe our Congress is child’s play to these companies. However, the homeowners are careful about what they spend in these scary economic times. They are waiting for price cuts, which is how deflation starts. Cutting prices brings in business, but that puts pressure on employees and companies to stay profitable let alone grow.
    All economic bubbles create a deflationary trend wherever that bubble occurred. We have had several and the world has had its share. This makes consumers cautious. This slows down the economy while owners try to work down excess inventory. This is deflationary.
    The US Government has to borrow trillions of dollars to pay for the misbegotten stimulus funds. Now take the interest rate THEY are paying. Divide that into 72 and that will give how many years it will take the bondholder to double his money. So, sooner or later we must borrow to pay interest rates. What goes around comes around. We are digging a bigger hole for ourselves and we don’t even have a shovel.
    Bank Bonus versus Salaries
    This is a simple problem. Brokers of any sort should never be put in charge of any financial institution. That is worse than putting a fox in the chicken coup. Bankers love a steady salary and following rules. They have their own code of conduct. Brokers hate salaries and a steady paycheck. They need the challenge of competition with a commiserate reward. Most brokers are left hand column readers. The left hand column normally has the sales credits and they check the fattest one first. Good left hand column readers get promoted and end up in management.
    Banks should be able to form their own syndicate to bid on bonds and preferred stocks but not common stocks. Banks should be in charge of Money Market Funds and Brokers should not have cash management accounts. My point is that banks and brokers should be able to compete on a level playing field, but the more aggressive ones can go belly up in bad times. No government bail outs.
    OFF Shore Drilling- Way out
    Two deep water oil wells have recently been discovered in the middle of the Gulf of Mexico that hold billions of barrels of recoverable oil. Also Brazil has discovered light crude 200 miles off shore and they will become a major exporter in a few years. They will be competing with Saudi Arabia.
    It is believed the outer continental shelf on our eastern seaboard holds giant finds. Just think, with our own over-supply of oil our President would not have to bow to oil kings.
    Derivatives
    My long time readers know that I hate derivatives with a passion. They are the Judas of the financial world. It is a complex transaction that derives something to give to someone else. It is a con-job designed to maximize sales credits (commissions) while placating the unwary (on both sides) into a false sense of security and pleasure (believing they have outsmarted everyone else), which is encompassed by a soap bubble that will be pricked over time.
    All or almost all financial problems and disasters have the root cause in derivatives, from the Orange County California to Sub-prime and consequent bubbles. This has cost us more than Health Care ever will. We should ban all future derivative trades right now and then wait five years to see how much better off we are. The President can issue an edict. It is not how much money one makes but how you make it. There is no such thing as a free lunch.
    More advice…..
    Stay away from funds. Remember the sub prime mess started when the mixed AAA debt with junk bonds or sub prime notes.
    The economy is struggling on a lower level and the debt coverage of many bonds is now suspected. Only the CFO and chief executive officers really know what is going on, and some cases they don’t even know. Directors only know what they are told. I have seen directors go down with the ship and they can’t even swim.
    Buy Gold. GLD on the NYSE and CEF are my favorite choices. (Check out on the internet or consult with me about your concerns.) WE are not buying gold because of inflation, but as a hedge that the dollar collapses because of too much debt and a loss of confidence in it. Going back on the gold standard would shut the spending congress down.
    Governments in the future will save for future social projects. This is due to the mess we are in now.
    President Obama did the correct thing when he nominated Benjamin Bernanke for a full term as Federal Reserve Chairman. The Fed is supposed to be politically neutral. The chairman’s former students at Princeton thought he was a democrat when President Bush nominated him. This makes up for the error Donald T Regan, then Secretary of the Treasury under President Regan, made for canning Paul Volker because he was a democrat. Chairman Volker miffed, named Greenspan as his replacement as a joke, and they fell for it.
    I love preferred stocks. Especially Amerco $2.125 cumulative preferred selling under its call price of $25. It is listening on the NYSE and is currently yielding in the 8% range. 85% of the dividend is considered tax free. That amount to an 11% tax free return. Remember the rule of 72! An easy way to keep tabs on this company is to check out the common stock. The common stock is U-HAUL. The symbol is UHAL. If it takes a sudden dive of 10% or more; it is a good chance the company is in trouble.
    I love the Canadians because they have a strong pro-business economy. Their stocks got clobbered also, but their financial system is strong because their bankers thought before they acted. There is a lot of value up there.
    Then there are some local small cap products that have a unique product that can have a positive affect in its application. Companies that provide a need where today there is a black hole. These are very speculative and can be bought in small lots until their fortunes improve over time.
    Finally there is cash and lots of it. In deflationary times there are moments when the chance of a lifetime emerges IF you have CASH.
    So right now I would keep as much cash available where you can retrieve it by writing a check or walking into your local bank for a cashier’s check.
    I still believe we have a rough two years ahead of us with many false starts as far as investments go. The players today believe a new era has started and most are playing by the same rules. A major rule though is that most past leaders fade in the new market. They become a source of funds for new ideas and investments. Stocks that tanked into the teens and single digits have a high marble wall to surmount and you have an ice pick.
    We could have a double dip, but the market could make new lows.
    That is it for now.

    Breaking News:
    The Financial Times Headline dated September 15, 2009

    OBAMA;
    WALL ST
    must
    change

    Compliance sought
    with financial overhaul

    developing ………………….
    Cheerio !~!!!!

    Richard C De Graff
    256 Ashford Road
    RER Eastford Ct 06242
    860-522-7171 Main Office
    800-821-6665 Watts
    860-315-7413 Home/Office
    rdegraff@coburnfinancial.com

    This report has been prepared from original sources and data which we believe reliable but we make no representation to its accuracy or completeness. Coburn & Meredith Inc. its subsidiaries and or officers may from time to time acquire, hold, sell a position discussed in this publications, and we may act as principal for our own account or as agent for both the buyer and seller.

  • Poor Richard’s Report

    Poor Richard’s Report

    Poor Richard’s Report

    Over 300,001 readers
    My Mission: God has uniquely designed me to seek, write, and speak the truth as I see it. Preservation of one’s wealth while providing needful income is my primary goal in these unsettled times. I have given the ability to evaluate study, and interpret world and national events and their influence on future of the financial markets. This gift allows me to meet the needs of individual and institution clients. I evaluate situations first on a fundamental basis then try to confirm on a technical basis. In the past it has been fairly successful.

    This is a classic letter. Please read it. Cheerio !!!!
    From:
    This sender is DomainKeys verified
    “John Mauldin”
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    Thoughts from the Frontline Weekly Newsletter
    An Uncomfortable Choice
    by John Mauldin
    August 28, 2009

    In this issue:
    An Uncomfortable Choice
    What Were We Thinking?
    Frugality is the New Normal
    And Then We Face the Real Problem
    The Teenagers Are in Control
    Choose Wisely
    Argentina, Brazil, Uruguay, New Orleans, Detroit, and More
    We have arrived at this particular economic moment in time by the choices we have made, which now leave us with choices in our future that will be neither easy, convenient, nor comfortable. Sometimes there are just no good choices, only less-bad ones. In this week’s letter we look at what some of those choices might be, and ponder their possible consequences. Are we headed for a double-dip recession? Read on.
    An Important Announcement
    But first, I want to make a very important announcement. There are not many times in a career when you can say that something new has been created in the financial services industry and that you have been a part of it. But now I can say that and, I must admit, with a little pride in helping to bring a new creation into the world.
    For years, Steve Blumenthal and I have shared a passion for bringing Absolute Return Strategies to all investors, not just the wealthy and institutional investors.
    I want to introduce you to a new mutual fund, one that is different than the typical long-only equity mutual fund. My friends and partners at CMG have created a mutual fund that is comprised of 9 different trading strategies, a “fund of trading strategies,” so to speak; and it’s one that I believe will be strategically suitable for the economic environment that I think we face. And, as a mutual fund, it is open to all investors.
    You can learn more about it by reading a report I have prepared, entitled “How to Deal with Volatility in Extraordinary Markets – Introducing the CMG Absolute Return Strategies Fund.” Simply click here.
    If you are an investment advisor or broker, you especially should read about this new fund and contact CMG directly for more information and reports. Full disclosure: as a consultant to the Advisor to the fund, my investment advisory firm does participate in the fees. And be sure and read all the disclosures and risk factors in the document.
    And now, let’s look at the choices we face.
    An Uncomfortable Choice
    As our family grew, we limited the choices our seven kids could make; but as they grew into teenagers, they were given more leeway. Not all of their choices were good. How many times did Dad say, “What were you thinking?” and get a mute reply or a mumbled “I don’t know.”
    Yet how else do you teach them that bad choices have bad consequences? You can lecture, you can be a role model; but in the end you have to let them make their own choices. And a lot of them make a lot of bad choices. After having raised six, with one more teenage son at home, I have come to the conclusion that you just breathe a sigh of relief if they grow up and have avoided fatal, life-altering choices. I am lucky. So far. Knock on a lot of wood.
    I have watched good kids from good families make bad choices, and kids with no seeming chance make good choices. But one thing I have observed. Very few teenagers make the hard choice without some outside encouragement or help in understanding the known consequences, from some source. They nearly always opt for the choice that involves the most fun and/or the least immediate pain, and then learn later that they now have to make yet another choice as a consequence of the original one. And thus they grow up. So quickly.
    But it’s not just teenagers. I am completely capable of making very bad choices as I approach the end of my sixth decade of human experiences and observations. In fact, I have made some rather distressing choices over time. Even in areas where I think I have some expertise I can make appallingly bad choices. Or maybe particularly in those areas, because I have delusions of actually knowing something. In my experience, it takes an expert with a powerful computer to truly foul things up.
    Of course, sometimes I get it right. Even I learn, with enough pain. And sometimes I just get lucky. (Although, as my less-than-sainted Dad repeatedly intoned, “The harder I work the luckier I get.”)
    Each morning is a new day, but it is a new day impacted by all the choices of the previous days and years. Tiffani and I have literally interviewed in depth well over a hundred millionaires, and talked anecdotally with hundreds over the years. I am struck by how their lives, and those of their families, come down to a few choices. Sometimes good choices and sometimes lucky choices. Often, difficult ones. But very few were the easy choice.
    What Were We Thinking?
    As a culture, the current mix of generations, especially in the US, has made some choices. Choices which, in hindsight, leave the adult in us asking, “What were we thinking?”
    In a way, we were like teenagers. We made the easy choice, not thinking of the consequences. We never absorbed the lessons of the Depression from our grandparents. We quickly forgot the sobering malaise of the ’70s as the bull market of the ’80s and ’90s gave us the illusion of wealth and an easy future. Even the crash of Black Friday seemed a mere bump on the path to success, passing so quickly. And as interest rates came down and money became easier, our propensity to acquire things took over.
    And then something really bad happened. Our homes started to rise in value and we learned through new methods of financial engineering that we could borrow against what seemed like their ever-rising value, to finance consumption today.
    We became Blimpie from the Popeye cartoons of our youth: “I will gladly repay you Tuesday for a hamburger today.”
    Not for us the lay-away programs of our parents, patiently paying something each week or month until the desired object could be taken home. Come to think of it, I am not sure if my kids (15 through 32) have ever even heard of a lay-away program, not with credit cards so easy to obtain. Next family brunch, I will explain this quaint concept. (Interestingly, I heard about a revival of the concept on CNBC radio, coming back from dropping Trey off at school this morning. Everything old is new again.)
    As a banking system, we made choices. We created all sorts of readily available credit, and packaged it in convenient, irresistible AAA-rated securities and sold them to a gullible world. We created liar loans, no-money-down loans, and no-documentation loans and expected them to act the same way that mortgages had in the past. What were the rating agencies thinking? Where were the adults supervising the sand box?
    (Oh, wait a minute. DThat’s the same group of regulators who now want more power and money.)
    It is not as if all this was done in some back alley by seedy-looking characters. This was done on TV and in books and advertisements. I remember the first time I saw an ad telling me to call this number to borrow up to 125% of the value of my home, and wondering how this could be a good idea.
    Turns out it can be a great idea for the salesmen, if they can package those loans into securities and sell them to foreigners, with everyone making large commissions on the way. The choice was to make a lot of money with no downside consequences to yourself. What teenager could say no?
    Greenspan keeping rates low aided and abetted that process. Starting two wars and pushing through a massive health-care package, along with no spending control from the Republican Party, ran up the fiscal deficits.
    Allowing credit default swaps to trade without an exchange or regulations. A culture that viscerally believed that the McMansions they were buying were an investment and not really debt. Yes, we were adolescents at the party to end all parties.
    Not to mention an investment industry that tells their clients that stocks earn 8% a year real returns (the report I mentioned at the beginning goes into detail about this). Even as stocks have gone nowhere for ten years, we largely believe (or at least hope) that the latest trend is just the beginning of the next bull market.
    It was not that there were no warnings. There were many, including from your humble analyst, who wrote about the coming train wreck that we are now trying to clean up. But those warnings were ignored.
    Actually, ignored is a nice way to put it. Derision. Scorn. Laughter. And worse, dismissal as a non-serious perpetual perma-bear. My corner of the investment-writing world takes a very thick skin.
    The good times had lasted so long, how could the trend not be correct? It is human nature to believe the current trend, especially a favorable one that helps us, will continue forever.
    And just like a teenager who doesn’t think about the consequences of the current fun, we paid no attention. We hadn’t experienced the hard lessons of our elders, who learned them in the depths of the Depression. This time it was different. We were smarter and wouldn’t make those mistakes. Didn’t we have the research of Bernanke and others, telling us what to avoid?
    In millions of different ways, we all partied on. It wasn’t exclusively a liberal or a conservative, a rich or apoor, a male or a female addiction. We all borrowed and spent. We did it as individuals, and we did it as cities and states and countries.
    We ran up unfunded pension deficits at many local and state funds, to the tune of several trillion dollars and rising. We have a massive, tens of trillions of dollars, bill coming due for Social Security and Medicare, starting in the next 5-7 years, that makes the current crisis pale in comparison. We now seemingly want to add to this by passing even more spending programs that will only make the hole deeper.
    Frugality is the New Normal
    I could go on and on, but I think you get the point. The time for good choices was a decade ago. It would have been more difficult at the time, so that is not what we did. And now we wake up and are faced with a set of choices, none of them good.
    Reality is staring back in the mirror at the American consumer, and especially the Boomer generation. The psyche of the American consumer has been permanently seared. We are watching savings beginning to rise and consumer spending patterns change for the first time in generations. Even as the authorities try to prod consumers back into old habits, they are not responding. Borrowing and credit are actually falling. Banks, for whatever reason, now want borrowers to actually be able to pay them back. Go figure.
    Frugality is the new normal. We are resetting the underpinnings of a consumer-driven society to a new level. It will require a major overhaul of our economy. The normal drivers of growth – consumer spending, business investment, and exports – are all weak, and it is only because of massive government spending that the second quarter was not as bad as the two previous quarters and that the coming quarter will be positive.
    But what then? How long can we continue with 10%-plus GDP deficits? We have an economy that is in a Statistical Recovery, fueled by government largesse. In the real world, we are watching unemployment rise, and it is likely to do so through the middle of next year. Deflation is in the air. Capacity utilization is near all-time lows. Housing numbers are only bouncing because of the government program of large tax credits for first-time home buyers and lower home prices. It will be years before construction is significant.
    We will be faced with a choice this fall and early next year. If you take away the government spending, the potential for falling back into a recession is quite high, given the underlying weakness in the economy. A few hundred billion for increased and extended unemployment benefits will not be enough to stem the tide. There will be a groundswell for yet another stimulus package. Another 10% of GDP deficit is quite likely for next year.
    As I (and Woody Brock) have made very clear in these e-letters, deficits that are higher than nominal GDP cannot continue without dire consequences. Good friend Richard Russell writes today:
    “The US national debt is now over $11 trillion dollars. The interest on our national debt is now $340 billion. This is about at 3.04% rate of interest. In ten years the Obama administration admits that they will add $9 trillion to the national debt. That would take it to $20 trillion. Let’s say that by some miracle the interest on the national debt in 10 years will still be 3.09%. That would mean that the interest on the national debt would be $618 billion a year or over one billion a day. No nation can hold up in the face of those kinds of expenses. Either the dollar would collapse or interest rates would go through the roof.”
    That would be at least 30% of the national budget. How would your household do, paying that much as interest? How can you operate when interest payments are 30% or more of the budget? Do you borrow to pay the interest? And the Obama administration openly admits to deficits of over a trillion a year for the next ten years, under very rosy growth assumptions. Anyone outside of Washington and rosy-eyed economists think we will grow 4% next year? I am not seeing many hands go up.
    And Then We Face the Real Problem
    If we do not maintain high deficits, it is likely we fall back into recession. Yet if we do not control spending, we risk running up a debt that becomes very difficult to finance by conventional means. Monetizing the debt can only work for a few trillion here or there. At some point, the bond market will simply fall apart. And it could happen quickly. Think back to how fast things fell apart in the summer of 2007. When perception of the potential for inflation changes, it changes things fast.
    The problem is that we are now in a very deflationary world. Deleveraging, too much capacity, high and rising unemployment, falling real incomes, and more are all the classic pieces of the formula for deflation.
    Let’s look at what my friend Nouriel Roubini recently wrote. I think he hit the nail on the head:
    “A combination of higher official indebtedness and monetization has the potential to yield the worst of all worlds, pushing up long-term rates and generating increased inflation expectations before a convincing return to growth takes hold. An early return to higher long-term rates will crowd out private demand, as lending rates on mortgages and personal and corporate loans rise too. It is unlikely that actual inflation will emerge this year or even next, but inflation expectations as reflected in long-term interest rates could well be rising later in 2010. This would represent a serious threat to economic recovery, which is predicated on the idea that the actual borrowing rates that individuals and businesses pay will remain low for an extended period.
    “Yet the alternative – the early withdrawal of the stimulus drug that governments have been dispensing so freely – is even more serious. The present administration believes that deflation is a worse threat than inflation. They are right to think that. Trying to rebuild public finances at a deflationary moment – a time when unemployment is rising, and private demand is still contracting – could be catastrophic, turning recovery into renewed recession.”
    There are no good choices. Nouriel, optimist that he is (note sarcasm), suggests that there is a possibility that the government can manage expectations by showing a clear path to fiscal responsibility that can be believed. And thus the bond markets do not force rates higher, thereby thwarting recovery.
    And technically he is right. If there were adults supervising the party, it might be possible. But there are not. The teenagers are in control. Instead of fiscal discipline, we are hearing increased demands for more spending. Please note that the very rosy future-deficit assumptions assume the end of the Bush tax cuts at the close of 2010. But raising taxes back to the level of 2000 does not make the projected future budget deficits go away.
    I mean, seriously, does anyone think Pelosi or Reid are going to lead us to fiscal constraint? Obama talks a good game, but he has not offered a serious deficit-reduction proposal, other than further tax increases. And by serious, I mean we need cuts on the order of several hundred billion dollars. The Republicans lost their way and their power (deservedly, in my opinion). Just as at the high school prom, the very few adults are being ignored.
    It is the proverbial rock and the hard place. Cut the stimulus too soon and we slide back into a deeper recession. Let the budget spin out of control for a few years and we will see inflation return, with higher rates and a recession. Raise taxes by 1.5-2% of GDP in 2010 and we are shoved back into recession.
    There are no good choices. If we do the right thing and cut the deficit, it means very hard choices. Can we keep our commitments to two wars and our massive defense budget? Medicare and Social Security reform are not painless. Education? Research? The “stimulus”? But cutting the deficit by hundreds of billions while raising taxes by even more than is already in the works, is not the formula for sustainable recovery.
    Have we grown up? Are there adults in the room? Sadly, I don’t think there are enough. We are still a nation of teenagers. We will do whatever we can to avoid the pain today. We will kick the can down the road, hoping for a miracle. Will we grow up? Yes, but the lessons learned will be hard.
    There are no statistical signs of an impending recession. We are not going to get an inverted yield curve this time, which made it relatively easy for me to predict recessions in 2000 and 2006. We are in a deflationary, deleveraging world. A far different world than in the past.
    I see little room for us to avoid a double-dip recession. It would take the skill and speed of former Cowboys running back Tony Dorsett hitting a very small hole in the line to break us into the open. I see no running back in our national leadership with such ability. As I have outlined above, recession could be triggered again in any number of very different economic environments. It all depends on the choices we make. But the choices lead to the same consequences, at least in my opinion.
    As I wrote in August 2000 and August 2006, I write again in August 2009: there is a recession in our future. I was early both of those times and I am early now, maybe two years early, though I doubt it. And as I pointed out both of those last times, the stock market drops an average of over 40% during a recession. When I was on Kudlow in October of 2006, I was given a hard time about my recession call and prediction of a bear market. I think it was John Rutherford who dismissed my bearish vision. And he was right for the next three quarters, as the market proceeded to rise another 20%. I looked foolish to many, but I maintained my views.
    You have choices. You can buy and hold (buy and hope?) or you can develop a strategic alternative. The next bear market, as I wrote in 2003 and in Bull’s Eye Investing, will likely be the bottom. (It takes at least three of them to really take us to the bottom.) But the next one will change perceptions for a long time. Valuations will drop. Savings will rise even more. And a generation will grow up. The adults will return. Chastened. Scarred. Shaken. But we will Muddle Through. That is what we do. Even my teenagers.
    Choose wisely.
    Argentina, Brazil, Uruguay, New Orleans, Detroit, and More
    Only a month ago my fall schedule looked surprisingly light. And then reality hit. I will be at the Schwab conference in San Diego on September 15. If you are going to be there, drop me a note. That is my only trip in September. But then it gets interesting. I celebrate my 60th birthday the first weekend of October, then fly to New Orleans to be at the annual New Orleans Conference, October 8-11. The speaker line-up is better than ever. I find this to be one of the best conferences I go to very year. I have been attending on and off for over 25 years. You should think about this one.
    Then I will spend the next weekend in Detroit, then probably go to New York, then Philadelphia for a CMG conference October 20, then down to Houston, over to Orlando, stop to change clothes and pack at home, and then fly off on a whirlwind trip to Argentina, Brazil, and Uruguay, speaking at a series of CFA conferences. Orlando in mid-November … and nothing else so far. Switzerland and London in January.
    I recently did an interview with King World News that was quite frankly one of the best interviews I have ever done. Eric King really got me going. It is in two parts. I give you the link to the first part, and the second is in their archives. There are also interviews with a very serious group of names. I am flattered to be included. Click here.
    It is time to hit the send button. I am resisting the temptation to launch into politics, so I need to quit before I do. Suffice it to say, we could see some big changes as we work through our teenage years, back to adulthood.
    Speaking of good choices, the wedding last weekend was fabulous. I am delighted with my new son-in-law. Life goes on, even as my kids struggle to get enough hours of work and money. Henry is at UPS, and work hours are way down and they have a new son. Chad finally got a new job, which may give him enough hours to survive, but not a lot of money. For those of you who think I live in an ivory tower, I do have a view into the lives of seven kids who are very real people, as well as those of lots of friends. I am very well aware of how tough it is out there, and realize how blessed I am.
    You have a great week. Tomorrow I get to go the Dallas Cowboys game in the new stadium in a suite, courtesy of a friend who got the seats from Jerry Jones himself. Not sure where, but it sounds cool. Sometimes life gives you lucky breaks.
    Your amazed to still be writing after all these years analyst,

    John Mauldin
    John@FrontLineThoughts.com
    Copyright 2009 John Mauldin. All Rights Reserved

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