“We Need Shed No Tears For The Capitalists” – Key Highlights From Buffett’s 2015 Annual Letter

Earlier today Berkshire Hathaway released its 2015 annual report, which among other things includes Buffett’s traditional annual observations and insights. Buffett brushes past last year’s disappointing stock performance, muses on the future of America while taking a swipe at Donald Trump, dwells on Berkshire’s ties to Brazilian PE firm 3G, talks about Berkshire’s big 2015 deal, defends manufactured-housing unit Clayton Homes, bashes inequality and capitalists (just not the crony kind), and concludes with a summary of the biggest risks facing America. 

Before we get into the meat, a quick summary of the company’s operational results.

In 2015 Berkshire earned $24.08 billion, up from $19.9 billion a year ago, driven by an 8% increase in total revenue to $210.8 billion; however as shown below is notable that in 2015 the amount of revenues from investment and derivative gains rose by more than 150% to $10.3 billion, resulting in $6.7 billion in after tax gains.

 

In the fourth quarter Berkshire generated $51.8 billion in revenue,
translating to $5.5 billion in net earnings or $3,333 in EPS,

 

Some other key operational results: Berkshire’s gain in net worth during 2015 was $15.4 billion, which increased the per-share book value of both our Class A and Class B stock by 6.4%. The company’s per-share book value was $155,501, up from $146,186 the previous year. 

Perhaps most notable about 2015 is that this was a year in which BRK’s stock posted not only its worst return since 2008, hurt by investments in companies like American Express, Wal-Mart and IBM while cheaper oil prices was a growing problem for key holdings including BNSF and Geico…

 

… and the first time since 2011 in which BRK notably underperformed the S&P.

 

Buffett provides a defense of this underperformance, by falling back to his preferred indicators of performance during down years: book and “intrinsic” value:

Today, the large – and growing – unrecorded gains at our “winners” make it clear that Berkshire’s intrinsic value far exceeds its book value. That’s why we would be delighted to repurchase our shares should they sell as low as 120% of book value. At that level, purchases would instantly and meaningfully increase per-share intrinsic value for Berkshire’s continuing shareholders.

 

The unrecorded increase in the value of our owned businesses explains why Berkshire’s aggregate marketvalue gain – tabulated on the facing page – materially exceeds our book-value gain. The two indicators vary erratically over short periods. Last year, for example, book-value performance was superior. Over time, however, market-value gains should continue their historical tendency to exceed gains in book value.

Just not this year.

In terms of the most important development for Berkshire in 2015, Buffett says it was not a financial one, but one related to improvements and increased capex spending for Buffett’s railroad, BNSF:

The most important development at Berkshire during 2015 was not financial, though it led to better earnings. After a poor performance in 2014, our BNSF railroad dramatically improved its service to customers last year. To attain that result, we invested about $5.8 billion during the year in capital expenditures, a sum far and away the record for any American railroad and nearly three times our annual depreciation charge. It was money well spent.

 

BNSF moves about 17% of America’s intercity freight (measured by revenue ton-miles), whether transported by rail, truck, air, water or pipeline. In that respect, we are a strong number one among the seven large American railroads (two of which are Canadian-based), carrying 45% more ton-miles of freight than our closest competitor. Consequently, our maintaining first-class service is not only vital to our shippers’ welfare but also important to the smooth functioning of the U.S. economy.

He notes that despite declines in the railroad industry, mostly due to the collapse of coal and oil shipments, “BNSF maintained volume, and pre-tax income rose to a record $6.8 billion (a gain of $606 million from 2014).” He does, however, warn that the pain for BNSF is only just starting and expects “lower earnings at BNSF” in 2016.

The letter then covers Berkshire’s relationship with Brazilian PE company 3G, its recent acquisition of Precision Castparts, and focuses on its disappointing “Big Four” investments: American Express, Coca-Cola, IBM and Wells Fargo. This is what he said:

Berkshire increased its ownership interest last year in each of its “Big Four” investments – American Express, Coca-Cola, IBM and Wells Fargo. We purchased additional shares of IBM (increasing our ownership to 8.4% versus 7.8% at yearend 2014) and Wells Fargo (going to 9.8% from 9.4%). At the other two companies, Coca-Cola and American Express, stock repurchases raised our percentage ownership. Our equity in Coca-Cola grew from 9.2% to 9.3%, and our interest in American Express increased from 14.8% to 15.6%…. If Berkshire’s yearend holdings are used as the marker, our portion of the “Big Four’s” 2015 earnings amounted to $4.7 billion. In the earnings we report to you, however, we include only the dividends they pay us – about $1.8 billion last year. But make no mistake: The nearly $3 billion of these companies’ earnings we don’t report are every bit as valuable to us as the portion Berkshire records.

Of course, their dramatic underperformance in 2015 is also a main reason why BRK stock has seen its worst performance in 7 years.

* * *

An interesting discussion takes place on page 16 where Buffett discusses a topic near and dear to our heart: ridiculous non-GAAP adjustments which put lipstick on ugly GAAP earnings:

… it has become common for managers to tell their owners to ignore certain expense items that are all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.” If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?

 

Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring “earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors.

Buffett goes into an extended tirade about how politicians (being a very vocal supporter of Hillary Clinton, it quite clear just which GOP candidate he is referring to) are wrong that America’s future is bleak and instead says that “the babies being born in America today are the luckiest crop in history.” Here are excerpts from the section:

It’s an election year, and candidates can’t stop speaking about our country’s problems (which, of course, only they can solve). As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do.

That view is dead wrong: The babies being born in America today are the luckiest crop in history.

 

* * * 

 

Indeed, most of today’s children are doing well. All families in my upper middle-class neighborhood regularly enjoy a living standard better than that achieved by John D. Rockefeller Sr. at the time of my birth. His unparalleled fortune couldn’t buy what we now take for granted, whether the field is – to name just a few – transportation, entertainment, communication or medical services. Rockefeller certainly had power and fame; he could not, however, live as well as my neighbors now do.

 

Though the pie to be shared by the next generation will be far larger than today’s, how it will be divided will remain fiercely contentious. Just as is now the case, there will be struggles for the increased output of goods and services between those people in their productive years and retirees, between the healthy and the infirm, between the inheritors and the Horatio Algers, between investors and workers and, in particular, between those with talents that are valued highly by the marketplace and the equally decent hard-working Americans who lack the skills the market prizes. Clashes of that sort have forever been with us – and will forever continue. Congress will be the battlefield; money and votes will be the weapons. Lobbying will remain a growth industry.

To be sure, Buffett knows all about those, and since corporations remain the true owners of America, one can understand Buffett’s optimism:

“For 240 years it’s been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs. America’s social security promises will be honored and perhaps made more generous. And, yes, America’s kids will live far better than their parents did.

The ones born to crony capitalists who get bailed out any time there is a major risk dislocation, absolutely.

One thing is certain: his skepticism toward Tinder will be enjoyed by Becky Quick:  “My parents, when young, could not envision a television set, nor did I, in my 50s, think I needed a personal computer. Both products, once people saw what they could do, quickly revolutionized their lives. I now spend ten hours a week playing bridge  online. And, as I write this letter, “search” is invaluable to me. (I’m not ready for Tinder, however.)”

* * *

Buffett also provides a curious discussion on climate change, because he has “a proxy proposal regarding climate change to consider at this year’s annual meeting. The sponsor would like us to provide a report on the dangers that this change might present to our insurance operation and explain how we are responding to these threats.”

This is what he says:

It seems highly likely to me that climate change poses a major problem for the planet. I say “highly likely” rather than “certain” because I have no scientific aptitude and remember well the dire predictions of most “experts” about Y2K. It would be foolish, however, for me or anyone to demand 100% proof of huge forthcoming damage to the world if that outcome seemed at all possible and if prompt action had even a small chance of thwarting the danger.

 

This issue bears a similarity to Pascal’s Wager on the Existence of God. Pascal, it may be recalled, argued that if there were only a tiny probability that God truly existed, it made sense to behave as if He did because the rewards could be infinite whereas the lack of belief risked eternal misery. Likewise, if there is only a 1% chance the planet is heading toward a truly major disaster and delay means passing a point of no return, inaction now is foolhardy. Call this Noah’s Law: If an ark may be essential for survival, begin building it today, no matter how cloudless the skies appear.

Or, in a worst case scenario, the insurer can just hope for another government bailout. After all Berkshire employs some 361,270 workers.

* * *

In an surprising twist, following his spirited defense of the bright future facing America’s children, Buffett then says that “gains achieved in recent years have largely benefitted the wealthy” making one wonder just whose children’s future will be so bright.

… the productivity gains achieved in recent years have largely benefitted the wealthy. Second, productivity gains frequently cause upheaval: Both capital and labor can pay a terrible price when innovation or new efficiencies upend their worlds.

But it is not until the next sentence that we hit peak crony cynicism:

We need shed no tears for the capitalists (whether they be private owners or an army of public shareholders). It’s their job to take care of themselves. When large rewards can flow to investors from good decisions, these parties should not be spared the losses produced by wrong choices.

Unless of course you happen to be Warren Buffett and having made huge investments in insolvent US banks, you too need a taxpayer funded bailout to save you…

 

…  or risk having your “investing Oracle” halo crashing into the dustbin of history.

* * *

Then there is the topic of Berkshire’s troubled mortgage lender Clayton Homes which has gotten in hot water recently due to its predatory lending practices. Buffett promptly rushes to defend it:

Lenders other than Clayton have come and gone. With Berkshire’s backing, however, Clayton steadfastly financed home buyers throughout the panic days of 2008-2009. Indeed, during that period, Clayton used precious capital to finance dealers who did not sell our homes. The funds we supplied to Goldman Sachs and General Electric at that time produced headlines; the funds Berkshire quietly delivered to Clayton both made home ownership possible for thousands of families and kept many non-Clayton dealers alive.

 

Our retail outlets, employing simple language and large type, consistently inform home buyers of alternative sources for financing – most of it coming from local banks – and always secure acknowledgments from customers that this information has been received and read.

 

* * *

 

At Clayton, our risk retention was, and is, 100%. When we originate a mortgage we keep it (leaving aside the few that qualify for a government guarantee). When we make mistakes in granting credit, we therefore pay a price – a hefty price that dwarfs any profit we realized upon the original sale of the home. Last year we had to foreclose on 8,444 manufactured-housing mortgages at a cost to us of $157 million.

 

The average loan we made in 2015 was only $59,942, small potatoes for traditional mortgage lenders, but a daunting commitment for our many lower-income borrowers. Our buyer acquires a decent home – take a look at the home we will have on display at our annual meeting – requiring monthly principal-and-interest payments that average $522.

 

Let me talk about one subject of which I am particularly proud, that having to do with regulation. The Great Recession caused mortgage originators, servicers and packagers to come under intense scrutiny and to be assessed many billions of dollars in fines and penalties.

 

The scrutiny has certainly extended to Clayton, whose mortgage practices have been continuously reviewed and examined in respect to such items as originations, servicing, collections, advertising, compliance, and internal controls. At the federal level, we answer to the Federal Trade Commission, the Department of Housing and Urban Development and the Consumer Financial Protection Bureau. Dozens of states regulate us as well. During the past two years, indeed, various federal and state authorities (from 25 states) examined and reviewed Clayton and its mortgages on 65 occasions. The result? Our total fines during this period were $38,200 and our refunds to  customers $704,678. Furthermore, though we had to foreclose on 2.64% of our manufactured-home mortgages last year, 95.4% of our borrowers were current on their payments at yearend, as they moved toward owning a debt-free home.

In other words, Buffett also owns the Federal Trade Commission, the Department of Housing and Urban Development and the Consumer Financial Protection Bureau and dozens of states regulators.

Finally, while there is much more in the full letter, we would like to close with Buffett’s summary of risk factors.

Berkshire operates in more industries than any company I know of. Each of our pursuits has its own array of possible problems and opportunities. Those are easy to list but hard to evaluate: Charlie, I and our various CEOs often differ in a very major way in our calculation of the likelihood, the timing and the cost (or benefit) that may result from these possibilities.

 

Let me mention just a few examples. To begin with an obvious threat, BNSF, along with other railroads, is certain to lose significant coal volume over the next decade. At some point in the future – though not, in my view, for a long time – GEICO’s premium volume may shrink because of driverless cars. This development could hurt our auto dealerships as well. Circulation of our print newspapers will continue to fall, a certainty we allowed for when purchasing them. To date, renewables have helped our utility operation but that could change, particularly if storage capabilities for electricity materially improve. Online retailing threatens the business model of our retailers and certain of our consumer brands. These potentialities are just a few of the negative possibilities facing us – but even the most casual follower of business news has long been aware of them.

 

There is, however, one clear, present and enduring danger to Berkshire against which Charlie and I are powerless. That threat to Berkshire is also the major threat our citizenry faces: a “successful” (as defined by the aggressor) cyber, biological, nuclear or chemical attack on the United States. That is a risk Berkshire shares with all of American business.

 

The probability of such mass destruction in any given year is likely very small. It’s been more than 70 years since I delivered a Washington Post newspaper headlining the fact that the United States had dropped the first atomic bomb. Subsequently, we’ve had a few close calls but avoided catastrophic destruction. We can thank our government – and luck! – for this result.

 

Nevertheless, what’s a small probability in a short period approaches certainty in the longer run. (If there is only one chance in thirty of an event occurring in a given year, the likelihood of it occurring at least once in a century is 96.6%.) The added bad news is that there will forever be people and organizations and perhaps even nations that would like to inflict maximum damage on our country. Their means of doing so have increased exponentially during my lifetime. “Innovation” has its dark side.

 

There is no way for American corporations or their investors to shed this risk. If an event occurs in the U.S. that leads to mass devastation, the value of all equity investments will almost certainly be decimated. No one knows what “the day after” will look like.

And then there’s this: “U.S. Test Fires Nuclear ICBM, Warns “We Are Prepared To Use Nuclear Weapons.” What we do know is that if there is anyone who will profit from said devastation on “the day after”, Berkshire will be it.

Full Berkshire annual letter below (pdf)


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“Let’s Pray This Works”: Syria “Ceasefire” Begins After Russia Takes “Total Control” Of Country

Last Monday, Washington and Moscow hailed an agreement that would see a temporary cessation of hostilities in Syria.

The “ceasefire” went into effect on Saturday and so far, so good. “Clashes and airstrikes across western Syria largely abated Saturday morning, as an internationally backed truce took hold in parts of the country where rebels have been fighting the regime,” WSJ reported this morning. Although the SAA apparently hit a few rebel positions east of Damascus, overall, “it was a calm morning.”

Russia said it would halt all flights over the country for the first 24 hours to avoid “mistakes” in targeting. “Given the entry into force of the U.N. Security Council resolution that supports the Russian-American agreements on a ceasefire, and to avoid any possible mistakes when carrying out strikes, Russian military planes, including long-range aviation, are not carrying out any flights over Syrian territory on Feb. 27,” the Defense Ministry said.

By “mistakes” Moscow means hitting anyone other than al-Nusra or ISIS, who are not included in the agreement. Rebels, not to mention analysts, have argued that Russia and Hezbollah will be able to use al-Nusra as an excuse to continue the offensive against anti-Assad elements. While the ISIS presence is concentrated in eastern Syria, al-Nusra has positions in Aleppo City, the Jabal Turkman region of Northeastern Latakia, the Jabal Zawiya region in Southern Idlib Province, and the Quneitra Province along the Golan Heights. Just to name a few. That effectively means Russia can bomb anywhere along the country’s urban backbone in the west and claim to be targeting the group, which, you’re reminded, is an offshoot of al-Qaeda.

(a captured ISIS fighter lets you know “who’s number one”)

The other important thing to note about the ceasefire is that Russia and Hezbollah were within a month or so of declaring victory when the deal was struck. The Iranians and Hassan Nasrallah had surrounded Aleppo and the YPG were about to cut off the Azaz corridor, the last remaining supply line from Turkey. Backed by Russian airstrikes, the Hezbollah offensive was racking up gains and it was just a matter of time before Aleppo city was recaptured by forces loyal to Assad.

That meant Russia was negotiating from a position of strength. “We are totally in control of the situation in all of the territory of Syria,” Sergei Rudskoi, head of the main operations directorate of the general staff said today.

The rebels echoed that sentiment in the days leading up to the ceasefire. Russia pounded anti-Assad positions all week in an apparent effort to cement gains and ensure the rebels loses are devastating enough that they can’t use the lull in fighting to regroup.  

We are heading toward being liquidated I think,” a former official in a rebel group from Aleppo told Reuters.

In other words, Russia and Iran have the rebels feeling like HY fund managers in a junk bond rout and the opposition is essentially finished.

(women walk amongst the ruins of a town in Hasaka)

Some rebel commanders say the Syrian army (or whatever is left of it) isn’t abiding by the truce. “In early reports of violence, a Syrian rebel group in the northwest said three of its fighters had been killed while repelling an attack from government ground forces a few hours after the plan came into effect,” Reuters reports. “There are areas where the bombardment has stopped but there are areas where there are violations by the regime such as Kafr Zeita in Hama, via targeting with artillery, and likewise in Morek in northern Hama countryside,” Fursan al-Haqq chief Fares Bayoush said on Saturday.

Importantly, it’s not entirely clear what this is supposed to accomplish. “Let’s pray that this works because frankly this is the best opportunity we can imagine the Syrian people has had for the last five years in order to see something better and hopefully something related to peace,” U.N. Syria envoy Staffan de Mistura said at a midnight news conference in Geneva.

While any day that innocent people aren’t dying (or at least are dying less, because six people were killed in a suicide attack in Hama and three children died in Deir al-Zor in an “unspecified” attack) is a good day in Syria, this seems to be a road to nowhere. Aleppo is surrounded. There’s no chance of the rebels rallying here. They’ll either have to eventually surrender or they’ll ultimately be starved out or overrun. There’s no chance whatsoever that Assad is going give back the territory captured over the last two months. 

(a fighter from Islamist Failaq al-Rahman holds his weapon on Friday in Ghouta, the late Zahran Alloush’s stronghold)

What seems likely is this: it would appear that this may be the prelude to what will amount to a negotiated surrender. If Russia can build up some goodwill with the rebels over the next week or so and if the Assad government can demonstrate a willingness to focus its attacks on “the terrorists” rather than the FSA, then perhaps the rebellion will be willing to accept defeat in exchange for some kind of seat at the table in a new government. 

Make no mistake, this is farcical. As long as Russia, Iran, and Hezbollah overtly back Assad and the Saudis and Turks are unwilling to provide the same level of support for the rebels, there are only two possible outcomes here: 1) the ceasefire collapses, Russia and Hezbollah overrun Aleppo, the rebellion goes the way of the dinosaurs, or 2) by some miracle (Allahu akbar) the rebels decide to lay down their guns in exchange for what will be billed as representation in a restructured government. But if you think that representation will be anything other than symbolic, and if you think Bashar al-Assad and the Alawites are going to establish some kind of democratic oasis in the Mid-East after seeing their country gutted by militants, you’re sorely mistaken.

If anything, the last five years underscore Assad’s cold, yet pragmatic assessment of his country’s political prospects: “We do not claim that we did not make mistakes in Syria. And we do not claim that we, in the Middle East, have reached a stage of significant political openness. We were moving in that direction, not very quickly, and maybe slowly.”

The implication there is simple: the region isn’t ready for democracy and when you remove a Mid-East autocrat, you risk creating anarchy.

Photos: Retuers/AFP


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Markets At Risk As “Tepid, Uninspiring” G20 Proves Investor Hopes Were “Pure Fantasy”

Anyone hoping this week’s G-20 meeting would yield some manner of “Shanghai Accord” to revive sluggish global growth, pull the global economy out of the deflationary doldrums and calm jittery markets that have seen harrowing bouts of volatility in the first two months of the year are disappointed on Saturday.

The joint communique issued by policymakers at the end of the two-day summit is bland and generic, with officials parroting vacuous promises to avoid competitive currency devaluations and maintain monetary policies aimed at supporting economic activity and price stability.

Officials pledged to “consult closely” on FX markets, a reference presumably to China’s “surprise” August 11 deval and the PBoC’s move in December to adopt a trade weighted basket as a reference point for the RMB, a move that telegraphed lots of downside for the currency.

The statement also “acknowledges” the fact that geopolitical risks abound and as Bloomberg noted this morning, “officials added a potential ‘Brexit’ to its long worry list in the communique.”

“That’s a win for Chancellor of the Exchequer George Osborne, who had sought to rally international finance chiefs behind the campaign to keep Britain in the European Union,” Bloomberg goes on to point out.

“Downside risks and vulnerabilities have risen,” due to volatile capital flows and slumping commodities but – and this was a critical passage – “monetary policy alone cannot lead to balanced growth.”

What?! We thought counter-cyclical Keynesian tinkering was the magic elixir. A cure-all that smooths business cycles and creates demand out of thin air. Now you’re telling us it “can’t lead to balanced growth” and implicitly that Paul Krugman is a snake oil salesman? This can’t be.

(Janet is not amused)

“The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the statment continues, in a rather dour assessment of the economic landscape. “While recognising these challenges, we nevertheless judge that the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy,” officials added. 

Right. If markets were “reflecting the underlying fundamentals” of this global deflationary trainwreck, things would probably be even more volatile. 

Predictably, everyone called on fiscal policy to save the day, in what amounts to a tacit admission that central banks have failed. “Countries will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path,” the statement reads.

So countries will somehow adopt expansionary fiscal policies without resorting to deficit financing via debt sales. So, magic. Got it. 

Long story short, there is no “Shanghai Accord” akin to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the USD to shore up America’s trade deficit and boost economic growth. All we have here is a generic statement and empty promises. 

Investor hopes of coordinated policy actions proved to be pure fantasy,” said TCW’s David Loevinger, a former China specialist at the U.S. Treasury. “It’s every country for themselves.”

Yes it is which means the great yuan devaluation will continue unabated as will the competitive easing. 

This isn’t a good thing for markets. As Citi’s Steve Englander wrote yesterday, “they won’t save the world but probably convince investors that global policymakers are sufficiently on the same page to add to global confidence.” 

Well guess what? They didn’t. We close with the likely read through for markets from Citi’s Brent Donnelly:

The G20 draft communiqué looks like it is out and it seems pretty tepid / uninspiring. So the relevant question now is whether or not this 160-handle rally in SPX (!) is partially attributable to shorts squaring up ahead of the G20 meeting. I would say the rally in the past two days has had extra momentum because of G20 and now shorts should be looking to reestablish—so I think stocks should trade weak from here into Monday.


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The Quagmire To End All Quagmires

Submitted by StraightLineLogic.com's Robert Gore via The Burning Platform blog,

There are few good reasons to go to war, but the US faces the danger of being dragged into World War III for the worst of reasons. It will be fighting in a region in which it has no overriding interest, picking a side in a sectarian battle far older than the US, and allied with Machiavellian, despotic regimes who have no regard for its interests. Even proponents of the war cannot specify what a “victory” would look like. They nourish a vague hope that the two primary antagonists will somehow be vanquished and a government cut to the specifications of the US will be imposed by force and magically accepted by its subjects. Such a miracle would require a huge military commitment, trillions of dollars, and years, if not decades, of sustained effort. That miracle would require another miracle: after the last fifteen years of counterproductive and costly warfare in the Middle East, US politicians and the public nevertheless supporting the engagement for its lengthy duration.

Syria is a witches’ brew of conflicting internal and external forces. The US has been at odds with its leadership since Hafez al-Assad, father of the current leader, Bashar al-Assad, seized power in 1970. He aligned Syria with the Soviet Union and launched a war against Israel in 1973. He was a standard issue Middle Eastern autocrat in the Saddam Hussein, Muammar Gaddafi mold and his son has followed in his footsteps. The Assads’ Alawite Shiite Muslim sect, though a minority amidst a Sunni majority, controls the government and the leadership has fingers in all the worthwhile commercial and industrial pies. It has been religiously tolerant and politically intolerant.

The Obama administration saw an opportunity to change the Syrian regime under cover of the Arab Spring movement in 2011. Initially peaceful demonstrations against Bashar al-Assad soon turned violent as the government cracked down on demonstrators. Within a year, the military attacked resistance strongholds and Syria was engulfed in civil war. The main opposition came from an alliance of Sunni groups, mostly al Qaeda and its offshoots, including ISIS. The Obama administration pursued a confused policy that it advertised as aiding moderate Syrian rebels, who were supposedly opposed to both the Assad government and Islamic extremist groups. In truth, most of the ostensible moderates had ties to the latter. The few that didn’t either joined the extremists when confronted or fled, leaving their US-supplied weaponry and provisions behind.

None of this is news to either Obama or Congress. Nor is it a state secret that the Sunni extremists have received funding, supplies, and other aid from Sunni states—and US allies—Saudi Arabia, the Gulf States, and Turkey (See “With Friends Like These…” and “Who Needs Enemies?“). The US government wants to install a compliant regime in Syria, just as it wanted to install such regimes in Afghanistan, Iran, Iraq, Yemen, and Libya. Those efforts failed, stifled by the Sunni-Shiite schism, guerrilla warfare and terrorism, blowback, Middle Eastern intrigue, and the US government’s ignorance, hypocrisy, and duplicity. Although it has done virtually nothing to stop ISIS, it still pretends that its main goal in Syria is the eradication of Islamic extremism rather than Bashar Assad’s government.

With his move into Syria and a remarkable speech at the United Nations, Vladimir Putin revealed the US government’s mendacity for all to see, except for the US public, where the mainstream media coverage ignored his speech in favor of the usual government propaganda. (Some questions were asked about the efficacy of US efforts to defeat ISIS after the San Bernardino shootings last December, but they quickly faded.) At the invitation of Assad, Russia joined with the Shiites—the Syrian government, Iraq, Iran, and Hezbollah—and Syrian and Iraqi Kurds. The Assad alliance treats all those opposed to Assad as terrorist enemies. The tide has turned and the alliance has regained territory. It is on the verge of recapturing Aleppo, Syria’s second largest city.

Turkey, Saudi Arabia, and the Gulf States are alarmed that the Islamic extremists they have funded and supported, and the US and its Western allies, have failed to depose Assad. If the Assad alliance cuts the rebels’ supply line from Turkey and takes Aleppo, it will not only solidify Assad’s hold on western Syria, but also solidify the influence of archenemy Shiite Iran in Iraq, Syria, and Lebanon. It is a make or break moment for the rebellion. The Sunni nations, especially NATO member Turkey, would dearly love to have their fight become Europe and the United States’ fight, too. If they can ensnare the Western nations, then Syria inevitably becomes the launchpad for World War III.

This next world war’s Archduke Ferdinand moment may come if Saudi Arabia, currently hosting a military exercise in its northern region called “Northern Thunder” involving at least 12 other nations, 350,000 soldiers, 20,000 tanks, 2,450 warplanes and 460 helicopters, leads that force into western Iraq en route to Syria. Or the trigger may come if Turkey, either in conjunction with Saudi Arabia or on its own, invades Syria from the north. With 600,000 troops, Turkey’s has the second largest armed forces in NATO. In addition to its loathing of the Shiites and Iran, Turkey fears Kurd nationalism. The Kurds, who have been the most effective fighting force against ISIS in both Iraq and Syria, have long desired their own state. Kurdish separatists are also a vociferous presence in Turkey. The US government has embraced the Kurds in Iraq and Syria, but like the Turkish government, labels the Turkish Kurds as terrorists. Turkey would probably concentrate on subduing the Kurds before it went after Assad.

The US public is blissfully unaware either that the world is a hair’s breadth away from World War III or that their government has had an outsize role in creating that risk. The US may be dragged in by Turkey’s president Recep Tayyip Erdo?an, a corrupt, megalomaniac autocrat, or the corrupt, repressive House of Saud. The US will be in direct conflict with Russia and Iran, and lurking in the background, perhaps China. Neither the US’s so-called friends nor its foes care one whit about the best interests of the US and will in fact work against them. The blowback created will dwarf current levels of terrorism and refugee flows. The US’s degeneration into a police state will gain new momentum. Other than its deluded wish that both Assad and the Islamic extremists somehow disappear, the US government will have no clear idea of what would constitute victory, and consequently, no ability to attain it. And this war could go nuclear.

It will be the quagmire to end all quagmires, supported by the same coalition of mental and moral midgets who have backed every disastrous US military foray since Afghanistan. It’s questionable how long the US will retain the support of Europe. Its refugee flood will turn into a deluge as the war spreads from Syria outward to the rest of the Middle East, central Asia, northern Africa, and quite possibly to Europe itself. Nor is it a sure thing that financial markets will fund this war at today’s rock-bottom interest rates. The conflict will add more trillions to the US government’s current $19 trillion debt, and with a depression looming, the government’s ability to pay will be called into question. There would be no political support for a another protracted, expensive, and bloody military commitment in the Middle East if the American people were explicitly told that just such a commitment is under consideration, especially if they were also told that it could lead to World War III. A populace fooled into war is unlikely to back it for any length of time.

In Syria, the US will either fold or go all in. On past form, it will choose the latter and rue it ever after. Few Americans, inside or outside the government, realize either that those are the choices or that the stakes are so high. Sadly, such realizations may come only when their sons and daughters are drafted, or as the image of a mushroom cloud fills the screens of their mobile devices.


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Why A Hedge Fund Manager Who Made A Killing From Subprime Is Buying Bitcoin

Long before “The Big Short’s” Michael Burry was a household name for his insight into the upcoming subprime crisis of 2006-2007, there were many others among them John Paulson, Kyle Bass, and Corriente Advisors’ Mark Hart. Just like Bass, Mark is another Texas-based hedge fund manager who correctly predicted, and profited from, the subprime crisis. He is also an expert on China, and in fact, just last month in the aftermath of the recent Chinese devaluation which roiled markets, he said that “China should weaken its currency by more than 50 percent this year.”

In fact, it was Hart who (alongside ex-PBOC advisor Yi Yongding) first proposed the idea of the one-off devaluation that promptly afterwards become the conventional expectation for this weekend’s G-20 summit in Shangai. To wit:

Hart believes that the Chinese crawling devaluation is an error as it carries with its the latent threat of much more devaluation in the future, thus encouraging even more outflows, which in turn forces China to sell even more reserves, which destabilizes the economy even further, forcing even more devaluation and so on.

 

Instead, a one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. He adds that China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.

According to Hart, while a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

As we said one month ago, “Hart is correct, and China will have to pick one option: either a sharp devaluation, or failing that, debt defaults: the current course of gradual CNY debasement will only results in an acceleration in capital outflows until ultimately China’s $3 trillion rainy day fund is whittled away to nothing (and as a reminder, according to some estimate just a little over $1 trillion in it is actually liquid assets).”

And while we explained that Hart’s “devaluation” trade consists of buying Yuan puts, according to a recent interview he gave to Raoul Pal RealVision, he has also put another trade on alongside his FX deval: buying bitcoin.

Why bitcoin?

The same reason we gave back on September 2, 2015 when Bitcoin was trading at $215 in a post titled “China Scrambles To Enforce Capital Controls (Which Is Great News For Bitcoin)” and long before the topic of China’s capital controls, and their circumvention, became a routine topic of conversation. As we explained simply, with Chinese capital controls increasingly more strict, the local population, which was nearly $25 trillion in deposits in local banks, will rush to transfer these massive amount of savings offshore, and will end up using bitcoin to do it. This is specifically what we said:

… while China is doing everything in its power to not give the impression that it is panicking, the truth is that it is one viral capital outflow report away from an outright scramble to enforce the most draconian capital controls in its history, which – as every Cypriot and Greek knows by now – is a self-defeating exercise and assures an ever accelerating decline in the currency, which authorities are trying to both keep stable while also devaluing at a pace of their choosing. Said pace never quite works out.

 

So what happens then: well, China’s propensity for gold is well-known. We would not be surprised to see a surge of gold imports into China, only instead of going to the traditional Commodity Financing Deals we have written extensively about before, where gold is merely a commodity used to fund domestic carry trades, it ends up in domestic households. However, while gold has historically been the best store of value in history and has outlasted every currency known to man, it is problematic when it comes to transferring funds in and out of a nation – it tends to show up quite distinctly on X-rays.

 

Which is why we would not be surprised to see another push higher in the value of bitcoin: it was earlier this summer when the digital currency, which can bypass capital controls and national borders with the click of a button, surged on Grexit concerns and fears a Drachma return would crush the savings of an entire nation. Since then, BTC has dropped (in no small part as a result of the previously documented “forking” with Bitcoin XT), however if a few hundred million Chinese decide that the time has come to use bitcoin as the capital controls bypassing currency of choice, and decide to invest even a tiny fraction of the $22 trillion in Chinese deposits in bitcoin (whose total market cap at last check was just over $3 billion), sit back and watch as we witness the second coming of the bitcoin bubble, one which could make the previous all time highs in the digital currency, seems like a low print.

 

Yes, bitcoin may be slowly but surely leaving the domain of the libertarian fringe, but in exchange it is about to be embraced as the most lucrative and commercial “blockchained” way to capitalize on what may soon become the largest capital outflow in history…

Two months later the value of bitcoin rose by more than 100%, but what was delightfully amusing to us was attempts by the self-appointed guardians of monetary wisdom to explain the move not as one of Chinese capital flight but because of some tiny, alleged Chinese Ponzi scheme. Apparently in the mainstream media if one can’t predict what happens, one tries to explain why something happened… and gets that wrong too. Because if bitcoin’s surge was only due to some two-bit Russian scammer exposed four months ago, it would be back at $215 if not lower, instead of trading at $432 as of this moment. 

What really happened is what we said happened, and here is Mark Hart confirming precisely that. Here is the excerpt from an interview he gave to Raoul Pal’s RealVision:

Bitcoin is interesting to me as a route for capital flight. I am not opining on the long-term viability of bitcoin – I do think there is something there – but I am long bitcoin specifically to capture capital flight from China.

Sounds quite identical to what said 6 months ago. Full clip below:

 

But this is where it gets really interesting: if one wants to bet on a massive Chinese devaluation (which is coming, the only question is when) one can simply short the Yuan as so many hedge funds have done in the past 2 months only to find that by “fighting the PBOC” they are gambling not only with their AUM, but their professional careers due to not only the unlimited downside of their trades, but to the substantial leverage involved in such FX trades.

Furthermore, relentless interventions by a belligerent Chinese central bank in recent weeks have shown that even as the Yuan will ultimately devalue, and dramatically at that, the PBOC will do everything in its power to crush the “hated” speculators, among whom such brand names as George Soros, along the way by inspiring sudden, violent and massive surges in the currency, in the vein of the Bank of Japan circa 2011.

So what is one trade that can be put on to bet on further Chinese devaluation (or outright economic collapse) with limited downside, with unlimited upside, and one which is guaranteed to be profitable if and when the local Chinese depositor herd gets out of Yuan en masse after the next 10%, 20%, 50% or more devaluation and rushes into bitcoin? Simple: do precisely what we said in September, and precisely what Corriente’s Mark Hart is saying now: buy bitcoin, because once the Chinese buying frenzy is unleashed, and $25 trillion in deposits scramble to be packed into a product with a $6.5 billion current market cap (but only when the price of a bitcoin is $430; the market cap does rise to $25 trillion if every bitcoin is worth $1.6 million) one thing will happen: the price of bitcoin will soar exponentially.


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“Democracy Is Overrated” Doug Casey’s Top 5 Reasons Not To Vote

Submitted by Doug Casey via InternationalMan.com,

Democracy is vastly overrated.

It's not like the consensus of a bunch of friends agreeing to see the same movie. Most often, it boils down to a kinder and gentler variety of mob rule, dressed in a coat and tie. The essence of positive values like personal liberty, wealth, opportunity, fraternity, and equality lies not in democracy, but in free minds and free markets where government becomes trivial. Democracy focuses people's thoughts on politics, not production; on the collective, not on their own lives.

Although democracy is just one way to structure a state, the concept has reached cult status; unassailable as political dogma. It is, as economist Joseph Schumpeter observed, "a surrogate faith for intellectuals deprived of religion." Most of the founders of America were more concerned with liberty than democracy. Tocqueville saw democracy and liberty as almost polar opposites.

Democracy can work when everyone concerned knows one another, shares the same values and goals, and abhors any form of coercion. It is the natural way of accomplishing things among small groups.

But once belief in democracy becomes a political ideology, it's necessarily transformed into majority rule. And, at that point, the majority (or even a plurality, a minority, or an individual) can enforce their will on everyone else by claiming to represent the will of the people.

The only form of democracy that suits a free society is economic democracy in the laissez-faire form, where each person votes with his money for what he wants in the marketplace. Only then can every individual obtain what he wants without compromising the interests of any other person. That's the polar opposite of the "economic democracy" of socialist pundits who have twisted the term to mean the political allocation of wealth.

But many terms in politics wind up with inverted meanings. "Liberal" is certainly one of them.

The Spectrum of Politics

The terms liberal (left) and conservative (right) define the conventional political spectrum; the terms are floating abstractions with meanings that change with every politician.

In the 19th century, a liberal was someone who believed in free speech, social mobility, limited government, and strict property rights. The term has since been appropriated by those who, although sometimes still believing in limited free speech, always support strong government and weak property rights, and who see everyone as a member of a class or group.

Conservatives have always tended to believe in strong government and nation­alism. Bismarck and Metternich were archetypes. Today's conservatives are some­times seen as defenders of economic liberty and free markets, although that is mostly true only when those concepts are perceived to coincide with the interests of big business and economic nationalism.

Bracketing political beliefs on an illogical scale, running only from left to right, results in constrained thinking. It is as if science were still attempting to define the elements with air, earth, water, and fire.

Politics is the theory and practice of government. It concerns itself with how force should be applied in controlling people, which is to say, in restricting their freedom. It should be analyzed on that basis. Since freedom is indivisible, it makes little sense to compartmentalize it; but there are two basic types of freedom: social and economic.

According to the current usage, liberals tend to allow social freedom, but restrict economic freedom, while conservatives tend to restrict social freedom and allow economic freedom. An authoritarian (they now sometimes class them­selves as "middle-of-the-roaders") is one who believes both types of freedom should be restricted.

But what do you call someone who believes in both types of freedom? Unfortunately, something without a name may get overlooked or, if the name is only known to a few, it may be ignored as unimportant. That may explain why so few people know they are libertarians.

A useful chart of the political spectrum would look like this:

A libertarian believes that individuals have a right to do anything that doesn't impinge on the common-law rights of others, namely force or fraud. Libertarians are the human equivalent of the Gamma rat, which bears a little explanation.

Some years ago, scientists experimenting with rats categorized the vast major­ity of their subjects as Beta rats. These are basically followers who get the Alpha rats' leftovers. The Alpha rats establish territories, claim the choicest mates, and generally lord it over the Betas. This pretty well-corresponded with the way the researchers thought the world worked.

But they were surprised to find a third type of rat as well: the Gamma. This creature staked out a territory and chose the pick of the litter for a mate, like the Alpha, but didn't attempt to dominate the Betas. A go-along-get-along rat. A libertarian rat, if you will.

My guess, mixed with a dollop of hope, is that as society becomes more repressive, more Gamma people will tune in to the problem and drop out as a solution. No, they won't turn into middle-aged hippies practicing basket weaving and bead stringing in remote communes. Rather, they will structure their lives so that the government—which is to say taxes, regulations, and inflation—is a non-factor. Suppose they gave a war and nobody came? Suppose they gave an election and nobody voted, gave a tax and nobody paid, or imposed a regulation and nobody obeyed it?

Libertarian beliefs have a strong following among Americans, but the Liber­tarian Party has never gained much prominence, possibly because the type of people who might support it have better things to do with their time than vote. And if they believe in voting, they tend to feel they are "wasting" their vote on someone who can't win. But voting is itself another part of the problem.

None of the Above

Until 1992, when many decided not to run, at least 98% of incumbents typically retained office. That is a higher proportion than in the Su­preme Soviet of the defunct USSR, and a lower turnover rate than in Britain's hereditary House of Lords where people lose their seats only by dying.

The political system in the United States has, like all systems which grow old and large, become moribund and corrupt.

The conventional wisdom holds a decline in voter turnout is a sign of apathy. But it may also be a sign of a renaissance in personal responsibility. It could be people saying, "I won't be fooled again, and I won't lend power to them."

Politics has always been a way of redistributing wealth from those who produce to those who are politically favored. As H.L. Mencken observed, every election amounts to no more than an advance auction on stolen goods, a process few would support if they saw its true nature.

Protesters in the 1960s had their flaws, but they were quite correct when they said, "If you're not part of the solution, you're part of the problem." If politics is the problem, what is the solution? I have an answer that may appeal to you.

The first step in solving the problem is to stop actively encouraging it.

Many Americans have intuitively recognized that government is the problem and have stopped voting. There are at least five reasons many people do not vote:

  1. Voting in a political election is unethical. The political process is one of institutionalized coercion and force. If you disapprove of those things, then you shouldn't participate in them, even indirectly.
  1. Voting compromises your privacy. It gets your name in another government computer database.
  1. Voting, as well as registering, entails hanging around government offices and dealing with petty bureaucrats. Most people can find something more enjoyable or productive to do with their time.
  1. Voting encourages politicians. A vote against one candidate—a major, and quite understandable, reason why many people vote—is always interpreted as a vote for his opponent. And even though you may be voting for the lesser of two evils, the lesser of two evils is still evil. It amounts to giving the candidate a tacit mandate to impose his will on society.
  1. Your vote doesn't count. Politicians like to say it counts because it is to their advantage to get everyone into a busybody mode. But, statistically, one vote in scores of millions makes no more difference than a single grain of sand on a beach. That's entirely apart from the fact that officials manifestly do what they want, not what you want, once they are in office.

Some of these thoughts may impress you as vaguely "unpatriotic"; that is certainly not my intention. But, unfortunately, America isn't the place it once was, either. The United States has evolved from the land of the free and the home of the brave to something more closely resembling the land of entitlements and the home of whining lawsuit filers.

The founding ideas of the country, which were highly libertarian, have been thoroughly distorted. What passes for tradition today is something against which the Founding Fathers would have led a second revolution.

This sorry, scary state of affairs is one reason some people emphasize the importance of joining the process, "working within the system" and "making your voice heard," to ensure that "the bad guys" don't get in. They seem to think that increasing the number of voters will improve the quality of their choices.

This argument compels many sincere people, who otherwise wouldn't dream of coercing their neighbors, to take part in the political process. But it only feeds power to people in politics and government, validating their existence and making them more powerful in the process.

Of course, everybody involved gets something out of it, psychologically if not monetarily. Politics gives people a sense of belonging to something bigger than themselves and so has special appeal for those who cannot find satisfaction within themselves.

We cluck in amazement at the enthusiasm shown at Hitler's giant rallies but figure what goes on here, today, is different. Well, it's never quite the same. But the mindless sloganeering, the cult of the personality, and a certainty of the masses that "their" candidate will kiss their personal lives and make them better are identical.

And even if the favored candidate doesn't help them, then at least he'll keep others from getting too much. Politics is the institutionalization of envy, a vice which proclaims "You've got something I want, and if I can't get one, I'll take yours. And if I can't have yours, I'll destroy it so you can't have it either." Participating in politics is an act of ethical bankruptcy.

The key to getting "rubes" (i.e., voters) to vote and "marks" (i.e., contribu­tors) to give is to talk in generalities while sounding specific and looking sincere and thoughtful, yet decisive. Vapid, venal party hacks can be shaped, like Silly Putty, into salable candidates. People like to kid themselves that they are voting for either "the man" or "the ideas." But few "ideas" are more than slogans artfully packaged to push the right buttons. Voting for "the man" doesn't help much either since these guys are more diligently programmed, posed, and rehearsed than any actor.

This is probably more true today than it's ever been since elections are now won on television, and television is not a forum for expressing complex ideas and philosophies. It lends itself to slogans and glib people who look and talk like game show hosts. People with really "new ideas" wouldn't dream of introducing them to politics because they know ideas can't be explained in 60 seconds.

I'm not intimating, incidentally, that people disinvolve themselves from their communities, social groups, or other voluntary organizations; just the opposite since those relationships are the lifeblood of society. But the political process, or government, is not synonymous with society or even complementary to it. Government is a dead hand on society.


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Hypocrisy Defined: Hank Paulson Tells China “Let Failing Companies Fail”

"Do as I say, not as I do" is the clear message of hypocrisy spewed forth by former US Treasury Secretary Henry Paulson this week. Having presided over the largest redistriubution of taxpayer funds to bailout the banking system, while exclaiming fire and brimstone should they not be saved, he now has some advice for an over-levered, over-capacity, systemically-stymied China"let failing companies fail."

Some other Paulson comments:

"As Americans, we shouldn't like bailouts. Where I come from, if someone takes a risk and they're going to make the profit from that risk, they shouldn't have the taxpayer pay for the losses."

 

"If the financial system collapses, it's really, really hard to put it back together again."

 

"What I've said repeatedly is, 'I think the auto industry is a very important industry.'"

But for China – screw them all…

"They can show right now they're very serious about dealing with inefficient state-owned enterprises as they take capacity out of the steel industry, coal industry and others by letting some failing companies fail," Paulson told CNBC's Squawk Box on the sidelines of an Institute of International Finance event organized in conjunction with the G20 meeting in Shanghai.


 

Of course this is exactly what China 'should' do – just as America 'should' have faced up to its own malinvestment boom, dealt with the bust, and moved on to renewed growth. But that would have meant the elites lost… and that can never happen.

Just remember, risking US taxpayer money to fill a bottomless pit of bank balance sheets was "for your own good."


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How The Seeds Of Revolution Take Root

Submitted by Charles Hugh-Smith via PeakProsperity.com,

That the dramatic upheavals of war, pestilence and environmental collapse can trigger social disorder and revolution is well-established. Indeed, this dynamic can be viewed as the standard model of social disorder/revolution: a large-scale crisis—often a bolt-from-the-blue externality—upends the status quo.

Another model identifies warring elites and imperial meddling as a source of revolution: a new elite forcibly replaces the current elite (known colloquially as meet the new boss, same as the old boss) or a dominant nation-state/empire arranges a political coup to replace the current leadership with a more compliant elite.

A third model was described by David Hackett Fischer in The Great Wave: Price Revolutions and the Rhythm of History. By assembling price and wage data stretching back hundreds of years, Fischer found that cycles of economic growth spawn population growth, resulting in more workers entering the market economy. Their earnings trigger a demand-driven expansion of essential commodities such as grain and energy (wood, coal, oil, etc.).

In the initial phase, wages rise and commodity prices remain stable as supplies of essential goods expand and the demand for labor pushes up wages.

But this virtuous cycle reverses when the supply of essentials no longer keeps pace with rising population and demand: the price of essentials begin an inexorable rise even as an oversupply of labor drives down wages.

Fisher found that this wage/price cycle often ends in transformational social upheaval.

While proponents of these models have a wealth of historical examples to draw upon, these models miss a key factor:  the vulnerability or resilience of the nation-state facing crises.

Some nations survive invasions, environmental catastrophes, epidemics and inflation without disintegrating into disorder. Something about these nation’s social/ economic /political order makes them more resilient than other nations.

So rather than accept the proximate causes of disorder as the sole factors, we should look deeper into the social order for the factors behind a nation’s relative fragility or resilience.

The Decline Of Shared Purpose

Historian Peter Turchin defined a key factor in the resilience of the social order as "the degree of solidarity felt between the commons and aristocracy," that is, the sense of purpose and identity shared by the aristocracy and commoners alike.

As Turchin explains in War and Peace and War: The Rise and Fall of Empires:

"Unlike the selfish elites of the later periods, the aristocracy of the early Republic did not spare its blood or treasure in the service of the common interest. When 50,000 Romans, a staggering one fifth of Rome’s total manpower, perished in the battle of Cannae, the senate lost almost one third of its membership. This suggests that the senatorial aristocracy was more likely to be killed in wars than the average citizen…

 

The wealthy classes were also the first to volunteer extra taxes when they were needed… A graduated scale was used in which the senators paid the most, followed by the knights, and then other citizens. In addition, officers and centurions (but not common soldiers!) served without pay, saving the state 20 percent of the legion’s payroll…

 

The richest 1 percent of the Romans during the early Republic was only 10 to 20 times as wealthy as an average Roman citizen.

Roman historians of the later age stressed the modest way of life, even poverty of the leading citizens. For example, when Cincinnatus was summoned to be dictator, while working at the plow, he reportedly exclaimed, 'My land will not be sown this year and so we shall run the risk of not having enough to eat!'"

Once the aristocracy’s ethic of public unity and service was replaced by personal greed and pursuit of self-interest, the empire lost its social resilience.

Turchin also identified rising wealth inequality as a factor in weakening social solidarity. By the end-days of the Western Roman Empire, elites held not 10 times as much wealth commoners but 10,000 times as much as average citizens.

Wealth inequality is both a cause and a symptom: it is a cause of weakening social resilience, but it also symptomatic of a system that enables the concentration of wealth and power in the hands of the few at the expense of the many.

Diminishing Returns On Complexity & Expansion

Thomas Homer-Dixon’s excellent book The Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization  outlines two systemic sources of increasing fragility: diminishing returns on complexity and the rising costs of continuing strategies that worked well in the past but no longer yield positive results.

Successful economies generate surpluses that are skimmed by various elites to support new layers of complexity: temple priests, state bureaucracies, standing armies, etc.

All this complexity adds cost but beyond the initial positive impact of rationalizing production, it reduces productivity by draining potentially productive investments from the economy.

Building temple complexes and vast palaces for the aristocracy appears affordable in the initial surge of productivity, but as investment in productivity declines and the population of state dependents expands, surpluses shrink while costs rise.

Meanwhile, strategies that boosted yields in the beginning also suffer diminishing returns. Conquering nearby lands and extracting their wealth paid off handsomely at first, but as the distance to newly conquered territories lengthen, the payoff declines: supplying distant armies to maintain control over distant lands costs more, while the yield on marginal new conquests drops.

Expanding land under production was easy in the river valley, but once water has to be carried up hillsides, the net yield plummets.

What worked well at first no longer works well, but those in charge are wedded to the existing system; why change what has worked so brilliantly?

As the costs of complexity and state dependents rise, productive people grow tired of supporting an economy suffering from terminal diminishing returns.

Empires do not just suddenly collapse; they are abandoned by the productive citizenry as the burdens become unbearable. The independent class of tradespeople (a.k.a. the middle class), driven into serfdom by taxes, lose their shared identity with the aristocracy. Beneath the surface, social cohesion frays. Once the benefits of the status quo no longer outweigh its costs, the system is vulnerable to an external disruption that would have been easily handled in previous eras.

The Suppression Of Social Mobility

There is another key factor in the resilience or fragility of social order: the permeability of the barrier between the ruling class and everyone below. We call this permeability social mobility: how easy is it for a working class family to rise up to the middle class, and how easy is it for a middle class family to enter the political and financial aristocracy?

I recently read Venice: A New History, a fascinating account of Venice's rise to regional empire and its decline to tourist destination.

What struck me most powerfully was Venice's long success as a republic: it was the world's only republic for roughly 1,000 years.

How did the Venetians manage this?  Their system of participatory democracy accreted over time, and was by no means perfect; only men of substance had much of a say. But strikingly, key political turning points were often triggered by mass gatherings of craftsmen and laborers.

Most importantly, the system was carefully designed to enable new blood to enter the higher levels of power. Commoners could rise to power (and take their families with them if their wealth outlasted the founding generation) via commercial success or military service.

The Republic also developed a culture that frowned on personal glorification and cults of personality: the nobility and commoners alike deferred to the Republic rather than any one leader.

In Venice, the political leadership (the doge and the Council) were elected via a convoluted series of steps that made it essentially impossible for one clique to control the entire process.

The doge was elected for a term, not for life, and he had to be acceptable not just to the elites but to the much larger class of movers and shakers–roughly 1,000 people in a city of at most 150,000.

Venice's crises emerged when the upwelling of social and financial mobility was capped by elites who were over-zealous in their pursuit of hegemony: all those blocked from rising to power/influence became the source of political revolt.

If you cap the volcano, eventually the pressure beneath rises to the point that the cap gets blown off in spectacular fashion.

The suppression of social mobility and the monopolization of power by the few at the expense of the many are universal dynamics in social orders.

Broadly speaking, Venice's 1,000-year Republican government, with its complex rules to limit concentrations of power and insure the boundaries between elites and commoners were porous enough to diffuse revolution and social disorder, speak to what is once again in play around the world: social unrest due to the concentration of power and the suppression of social mobility.

I don't think it's a stretch to say that the greater the concentration of power, the lower the social mobility, the greater the odds that the system will collapse when faced with crisis.

When the entire economy is expanding faster than population, and this tide is raising all ships, the majority of people feel their chances of getting ahead are positive.

But when the economy is stagnating, and those in power are amassing most of the gains, the majority realizes their chances of securing a better life are declining. This is the pressure that is being capped by the status quo that first and foremost protects the privileged.

How porous are the barriers to social mobility in our society? That a few people become billionaires from technological innovations that scale globally is not a real measure of social mobility for the masses.

In Part 2 we identify the wellspring of revolution, and reach a conclusion that may surprise many.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

 


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Vacancies Abound In These 5 American “Ghost Cities”

We’ve written quite a bit about the decline of America’s once proud manufacturing industry which is now but a shadow of its former self and long ago ceded its place in the public’s heart and mind to the service industry, as US citizens are far more concerned with whether they can get a $6 latte than with whether the economy provides enough breadwinner jobs to keep the majority of the population from having to… well, serve $6 lattes for a living.

And if it was already bad, it’s getting worse.

n fact, as we noted just days ago, the last time manufacturing was this bad in the US, Ben Bernanke introduced QE3. 

Make no mistake, the decline of American industry isn’t something that can be reversed.

In other words, no populist presidential candidate promising to “make the country great again” is going to turn this around – and it won’t be for lack of effort. It’s just economics. The jobs aren’t coming back from China and the “made in America” stamp is a relic a bygone era. The American economy is now a bartender and waiter creation machine and it’s come at the expense of the still declining manufacturing sector. 

Needless to say, this has gutted America’s Rust Belt, which is now nothing more than a now desolate reminder of a golden era in America’s history that has long since passed and as RealtyTrac reports, “among 147 metropolitan statistical areas with at least 100,000 residential properties, those with the highest share of vacant properties were [unsurprisingly] Flint, Michigan (7.5 percent), Detroit (5.3 percent), Youngstown, Ohio (4.4 percent), Beaumont-Port Arthur, Texas (3.8 percent), and Atlantic City, New Jersey (3.7 percent).”

Port Arthur has never been a bastion of stability and the decline of Atlantic City has been well documented, but the malaise in Flint, Detroit, and Youngstown clearly reflects the decline in American industry and suggests the pain (exacerbated by China’s acute overcapacity problem) is only beginning.

Below, find a graphic from RealtyTrac which documents the struggle:

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Blame China? 


via Zero Hedge http://ift.tt/1WPgPt8 Tyler Durden

The Week in Review for Financial Markets 2 26 2016 (Video)

By EconMatters

A positive week for risk assets, we consolidated recent gains and even finished the week higher in most risk assets. Gasoline had a stellar week, and points to a bottom in the Oil Market.

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