One of the phenomena that behavioral economists and psychologists have identified as being part of our decision making process is happening now. The perils of complexity refers to the phenomena where the more complex a decision the more we fall back on simplistic solutions.
In the case of Greece, the number of variables, parties involved and lack of precedents has resulted in the market saying in effect " This is too hard to figure out so I'm just going to wait until it is easier to quantify, then I'll re-price the risk"
Meanwhile Germany is exhibiting the classic signs of an employer who really wants an employee to quit, but doesn't want to pay severance. Over the last few weeks Germany has progressively increased the cost to Greece of staying in the EU by introducing tougher conditionality for any release of funds. Germany wants Greece to leave so that it can redeploy the funds where it is less likely to be a money sinkhole. But they want the process to be sufficiently drawn out that the market has time to adjust. In this regard they are mostly succeeding. We now have Dutch EU Commissioners openly talking about Greece leaving the EU and the market doesn't even blink.
However the market has not priced in the risk because it is too complex. If Greece leaves, as I now think they will, there will be a re-pricing of risk. It will not be a Lehman event, but it should be the catalyst for at least a modest (2-5 %) correction.
Way back in early 2011, members of the U.N. Security Council had no problem getting a resolution through that authorized military force in Libya ostensibly to protect civilians from attacks by forces loyal to strongman Moammar Gadhafi. The year before, lawmakers on both sides of the Atlantic were bickering over who did what and why in terms of the cancer-stricken Lockerbie bomber. This Scottish decision to release him, depending on which U.S. lawmaker you spoke with, was tied to a BP deal to drill for oil in Libya. Despite fractures in the new interim government in Tripoli and reports of renewed protests, a decision by the Italian government to quietly discuss trade relations suggests something isn't quite right in the way Western allies pick their fights.
Ever since the end of World War Two, the U.S. has come to regard Saudi Arabia as almost its exclusive oil producing enclave.
In February 1945, after the Yalta Conference with Soviet General Secretary Iosif Stalin and British Prime Minister Winston Churchill, on his way home U.S. President Franklin Delano Roosevelt and King Ibn Saud met aboard the New Orleans-class heavy cruiser U.S.S. Quincy in the Suez Canal’s Great Bitter Lake. During the meeting, instigated by Roosevelt, he and Ibn Saud concluded a secret agreement in which the U.S. would provide Saudi Arabia military security, including military assistance, training and a military base at Dhahran in Saudi Arabia, in exchange for secure access to supplies of oil.
Sixty-seven years later, my, how things have changed, as China is now muscling into the Kingdom of the Two Holy Places.
On 15 January Visiting Chinese Premier Wen Jiabao and Saudi Arabian King Abdullah bin Abdul Aziz agreed to make concerted efforts to enhance bilateral relations.
I am happy to join with you today in what will go down in history as the greatest demonstration for freedom in the history of Slope.
Five years ago, a great American, in whose symbolic shadow we stand today, began shorting the market. This momentous decree came as a great beacon light of hope to millions of bears who had been seared in the flames of withering injustice. It came as a joyous daybreak to end the long night of their captivity.
If you're like most Americans, you hadn't heard of James Stockdale until he showed up for the 1992 Vice Presidential debates and made this famous line:
Afterwards, he became the butt of jokes and was basically portrayed as a dottering old man. He and Ross Perot captured nearly 20% of the vote, in spite of being a third party ticket, and the nation soon stopped talking about Admiral Stockdale.
I hadn't thought of him for years, but last night I happened to trip across an article about the man, and I was amazed. He suffered through unspeakable horrors as a prisoner of war and, in all that time, he showed strength, resolve, and character that I imagine 99.9999% of the population lack. The guy had brass balls, pure and simple, and he was awarded the Medal of Honor for his courage.
Read on:
Stockdale was held as a prisoner of war in the Hoa Lo prison for the next seven years. Locked in leg irons in a bath stall, he was routinely tortured and beaten. When told by his captors that he was to be paraded in public, Stockdale slit his scalp with a razor to purposely disfigure himself so that his captors could not use him as propaganda. When they covered his head with a hat, he beat himself with a stool until his face was swollen beyond recognition. When Stockdale was discovered with information that could implicate his friends' "black activities", he slit his wrists so they could not torture him into confession.
One can only imagine fellow VP-debate-participant Dan Quayle's behavior in such a circumstance. Once they mussed his hair, it would probably be all over. To continue:
Stockdale was part of a group of about eleven prisoners known as the "Alcatraz Gang": George Thomas Coker, George McKnight, Jeremiah Denton, Harry Jenkins, Sam Johnson, James Mulligan, Howard Rutledge, Robert Shumaker, Ronald Storz and Nels Tanner; which was separated from other captives and placed in solitary confinement for their leadership in resisting their captors. "Alcatraz" was a special facility in a courtyard behind the North Vietnamese Ministry of National Defense, located about one mile away from Hoa Lo Prison. In Alcatraz, each of the eleven men were kept in solitary confinement in cells measuring 3 feet by 9 feet with a light bulb which was kept on around the clock. The men were locked in leg irons each night
What amazed me the most is what Stockdale said in reflection:
"I never lost faith in the end of the story, I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade."
Now here's the important part......when asked about who died during captivity, he replied:
"Oh, that's easy, the optimists. Oh, they were the ones who said, 'We're going to be out by Christmas.' And Christmas would come, and Christmas would go. Then they'd say, 'We're going to be out by Easter.' And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart."
And then, finally, the most important part of all, which you might want to read ten times to yourself:
"This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be."
I hope the departed Admiral will forgive me for using his words as an inspiration for traders - - or anyone undergoing a challenge - - but these are some of the most inspiring words I've ever read.
Thank you, Admiral Stockdale, for everything you did. I promise that those old jokes tossed around in the 1990s about you are no longer funny anymore. You were a great man.
Oh, and just to add icing to the cake. His name was James Bond Stockdale.
The pieces and policies for potential conflict in the Persian Gulf are seemingly drawing inexorably together.
Since 24 December the Iranian Navy has been holding its ten-day Velayat 90 naval exercises, covering an area in the Arabian Sea stretching from east of the Strait of Hormuz entrance to the Persian Gulf to the Gulf of Aden. The day the maneuvers opened Iranian Navy Commander Rear Admiral Habibollah Sayyari told a press conference that the exercises were intended to show "Iran's military prowess and defense capabilities in international waters, convey a message of peace and friendship to regional countries, and test the newest military equipment." The exercise is Iran's first naval training drill since May 2010, when the country held its Velayat 89 naval maneuvers in the same area. Velayat 90 is the largest naval exercise the country has ever held.
I want to break a myth I see portrayed everyday in the media. The myth of “These people know what they are talking about.” Trust me, they do no not. But unlike most when I make such an accusation I am not being flippant. Let me give you a real life first hand example on why things are the way they seem, and why these so-called “evil people” are not putting money to work in the economy.
It’s very hard for most to truly understand just how far-reaching some innocuous regulation is or can become because it makes for such a great sound bite. i.e.: “If you’re not for it, then you must want polluted water that kills women and children.” So let’s cut through this crap perpetrated by the requisite debate teams and I’ll put just one tiny little face on a monster of an issue.
According to Iraqi Council of Representatives Oil and Energy Committee member Furat al-Sharei, the 10 oil fields that spread across the Iraqi-Kuwaiti frontier are still waiting to have a line drawn through them to delineate the border, more than eight years after a coalition led by U.S. forces toppled the regime of Iraqi President Saddam Hussein.
According to al-Sharei, the two countries must first collaborate in developing legislation for equitably sharing the fields before oil extraction can begin, noting, "The problem of the common fields can be resolved by developing legal mechanisms."
Over the past couple of weeks, I have had a marvelous time reading this book by James Rickards named Currency Wars. As you might guess, it is an analysis of how countries use their currencies for whatever self-interested intentions they may have (either good or bad). I love history, and the way this book weaves together history and economics makes it hard for me to put down. It also makes what's going on right now easier for me to grasp (and fear).
Here's a bit about the book:
In 1971, President Nixon imposed national price controls and took the United States off the gold standard, an extreme measure intended to end an ongoing currency war that had destroyed faith in the U.S. dollar. Today we are engaged in a new currency war, and this time the consequences will be far worse than those that confronted Nixon.
Currency wars are one of the most destructive and feared outcomes in international economics. At best, they offer the sorry spectacle of countries' stealing growth from their trading partners. At worst, they degenerate into sequential bouts of inflation, recession, retaliation, and sometimes actual violence. Left unchecked, the next currency war could lead to a crisis worse than the panic of 2008.
Currency wars have happened before-twice in the last century alone-and they always end badly. Time and again, paper currencies have collapsed, assets have been frozen, gold has been confiscated, and capital controls have been imposed. And the next crash is overdue. Recent headlines about the debasement of the dollar, bailouts in Greece and Ireland, and Chinese currency manipulation are all indicators of the growing conflict."
It's pretty unusual for me to make a post about any book (except for one I've written), but Currency Wars is an exception. You can get it by clicking here. If you're interested in a general list of books I suggest for traders, it's right here.
