The Big Picture

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• East Asian Kerfuffle
• Governments Admit They Carry Out False Flag Terror
• Open Thread: Make the Bear Case
• Peter Lynch: Investor/Author/Philanthropist on Charlie Rose
• 10 Sunday Reads
• Regulations Are Entirely to Blame for Unemployment and a Leading Cause of Death in the United States

East Asian Kerfuffle Posted: 09 Dec 2013 02:00 AM PST East Asian Kerfuffle David R. Kotok Cumberland, December 8, 2013     Ieodo is a manmade platform affixed to an undersea rock (named Socotra) in the Yellow Sea. For a map and an aerial photo see Cumberland's website, www.cumber.com. The direct link is http://www.cumber.com/content/special/ieodo-1.jpg. The platform is Korean, and the facility is an oceanographic research station. South Korea built the platform and claims jurisdiction, but China claims jurisdiction, too. International maritime law stipulates that undersea structures are not nationally territorial while above-sea-level structures are subject to claims. Ieodo is situated in the area where South Korea, China, and Japan are engaged in asserting claims over Air Defense Identification Zones (ADIZ). The airspace zones claimed by the three countries overlap. And now there is an occasional scrambling of military aircraft when planes enter the zones. Civilian aircraft and unarmed military or research aircraft face the choice of lengthening routes to bypass the zones or acknowledging them by advance filing of flight plans with the respective governments. And those governments face similar choices. Do they respect the zone of another country with which they disagree and file their own flight plans? Or do they ignore the claim of another country, which they contest, and thereby add to the risk of confrontation? Thus we have a geopolitical test of wills at work in East Asia. The initial US response to competing claims was to support Japan and fly two B-52s into the zone the Chinese claim, without notifying China. That move ratcheted up the Chinese response, and the Chinese scrambled fighter escorts. The incident triggered more responses and drew Korea into the kerfuffle. The latest news suggests that Japan is willing to engage in discussions with China and Korea. This may lead to a negotiated settlement, but that is doubtful. Meanwhile, North Korea's petulant young leader is again starting to activate his nuclear ambitions. It seems that he cannot stand not being the center of attention in the region. America's VP, Joe Biden, serves as the US envoy to all of the regional players, and it is his task to ratchet down the regional tensions. We see the analysis of Night Watch (December 5) as instructive. "When world powers disagree on an issue they tend to spotlight minor points, such as treatment of journalists. While that is important, it does not threaten conflict in the same way as scrambling fighter jets in an air defense identification zone, which China has done. The Chinese made no compromises to the US Vice President about their declaration of an air defense identification zone. The Vice President said he was very direct with the Chinese, but North Korea and economic issues appear to have been more prominent in the talks, based on the press coverage. The Chinese seldom admit mistakes, almost never issue retractions and would never compromise on a national sovereignty issue for the US or any other nation. The Biden visit was mostly for show. Nothing serious appears to have been accomplished, which should surprise no one." Markets are dismissing the risks involved in the East Asia situation, as can be seen from various market reactions that are sending stock prices higher. Geopolitical risk premia are very hard to measure before some event triggers a change in pricing. Right now, it would appear there is no risk premium in the markets when it comes to the East Asian kerfuffle, even though the three largest economies (by GDP) in the world (the US, China, and Japan) are engaged in it. The ADIZ dispute also covers the geography of the Senkaku Islands (as named by Japan). The Chinese claim them as well and call them the Diaoyu Islands. The ADIZ controversy started over this disputed claim, and the delineation of the zones brought in South Korea. Much has been publicized about this, so we will not repeat all that here. A few final thoughts, and then we will get to some market strategy. The world's dominant currency used in trade is the US dollar. China's currency, the yuan, has just surpassed others to become number two in global trade. China is slowly evolving its global role and aiming at world reserve-currency status. It is starting to issue yuan-denominated debt. It is opening up its financial markets. We will soon witness 50 Chinese initial public offerings (IPOs) that are approved for release. Make no mistake, China is now a major world player. When it comes to the production of goods (not services), it has surpassed the US and other economies and is now the world's largest manufacturer. The demographics in all three places are influencing the behaviors and outcomes of the kerfuffle. The US has permitted limited immigration – not enough in our view, but some. Japan has a closed society, little immigration, and a rapidly aging population. China has recently changed its policy towards demographics and permitted more than one child. The emphasis on demographic policy in China led to an overabundance of men relative to women. The oligarchs in Beijing know they have too many young men now. Some of them think that large numbers of young men in military uniform serving in a more disciplined way would benefit their society. Others in the oligarchy disagree. Political disagreements in China do not evidence themselves in the same way that they do in boisterous democracies like the US, Japan, or Korea. History shows that functioning democracies like the US, Japan, and South Korea are adept at defending themselves when external threats and pressures intensify to the point that defense is required. The same democracies are less likely to engage in military adventurism and to wage war with each other if they perceive that the war is avoidable. Those democracies will wage war in other regions and with non-democracies. The US actions in Iraq and Afghanistan are examples. China is not a functioning democracy like the US or Japan. The decision-making hierarchy in China is more capable of moving in a militaristic direction that could intensify geopolitical risk. On the other hand, China also wants to open up and become a market-based capitalistic system. How to do both without sacrificing either is the policy dilemma for China and a diplomatic challenge for Japan and the US. Meanwhile, the Japanese regime is very intense and nationalistic when it comes to the preservation of its geographical view. The Japanese-Chinese enmity is ancient and deeply rooted. Remember that Japan, since WWII, has favored unilateral disarmament. Japan's technological capability, which allows for current state-of-the-art military technology, is widely recognized. Japan, for example, could have functioning nuclear weapons very quickly if it wished. It also has the skills and capability to ratchet up its military prowess. But Japan faces the population issue. It would have to use the most advanced technologies to assert itself militarily, given the fact that its population is both aging and shrinking. Contrast that with China's abundance of young men and its evolving military force. Japan has fewer men and women to serve in the uniformed services, but it has capacity to quickly upgrade to a more intensely technological and modernized military. The US has demographics that fall somewhere in the middle and the highest form of technological capability, but the US is currently led by a weakened president whose Defense Department is in the throes of the budget fight. Let's not forget South Korea, which maintains constant vigilance with regard to its northern cousin. South Korea is always in some state of readiness for war. What does this mean for markets? Four reserve currencies matter worldwide. They are the euro, the pound, the yen, and the US dollar. Two of the countries that preside over them are involved in this dispute, and China is aspiring to world reserve currency status. While the Eurozone and UK are primarily observers in the dispute, each has its own financial and economic problems. There is rising geopolitical risk when the three largest economies in the world are involved and two (soon to be three) key world reserve currencies are involved. For investors today, the fraught political situation requires vigilance and a contingency plan. We would not sell securities in anticipation of a future additional military confrontation. We would however carefully observe all actions taking place in this East Asian kerfuffle. We would act very quickly were there a ratcheting up of additional activities. We are now going to see fighter planes of one party flying very close to unarmed or armed aircraft of another. There will be a test of wills, skills, and the ability to patrol airspace. These tests will be negotiated with swiftness and technological capacity that many of us in the civilian arena can only read about and attempt to understand. Our current market position of overweighting Japan, looking for the yen to weaken, and looking for the Japanese stock market to rise is the best course to stay on. We are on that course. Our portfolios at Cumberland Advisors in the international arena are positioned accordingly and have been for some time. As of today, there is no change. In the US, the stock market reflects an upward bias as long as the Federal Reserve's policy continues along the present lines. We do not expect Chair Yellen, the new Fed Board of Governors, or the Federal Open Market Committee to make any abrupt, shock-inducing policy changes. It is not in the Fed's best interest or the nation's best interest to do so, and policy makers know it. The onset of predictable Fed tapering is not a policy shock if it is transparent and undertaken gradually. The unknown element here is China. We do not know how far Chinese leadership is willing to go to assert their claims. We will get mixed messages purposefully sent to us by the leaders in Beijing. Remember, it is the mixed message that puts the other side on a risk-aversion course. North Korea, for its part, is unpredictable. Who'd a thunk it? Ieodo and Socotra Rock are now the center of an East Asian kerfuffle. This writer's personal note: The word kerfuffle derives from a wonderful 19th century British (Scot, really) term for a dispute, altercation, brouhaha, or disturbance: carfuffle. A kerfuffle may lead to serous beatings, or it may lead to some shouting and then a "standing down." The term is defined in the modern version of Merriam-Webster, which cites its origin (as currently spelled) in the post-World War II period. I checked an older version of Webster's Unabridged, and the word kerfuffle did not appear. Oh joy! Oh, joy! We have a writer's delight! We have used a new word. Were Shaye Kotok, my deceased mother, who was a serious and respected English teacher, still alive, I suspect she would be smiling. Mom, I thought of you today. ~~~ David R. Kotok, Chairman and Chief Investment Officer Cumberland

Governments Admit They Carry Out False Flag Terror Posted: 08 Dec 2013 10:30 PM PST Governments from around the world admit they carry out false flag terror: A major with the Nazi SS admitted at the Nuremberg trials that – under orders from the chief of the Gestapo – he and some other Nazi operatives faked attacks on their own people and resources which they blamed on the Poles, to justify the invasion of Poland. Nazi general Franz Halder also testified at the Nuremberg trials that Nazi leader Hermann Goering admitted to setting fire to the German parliament building, and then falsely blaming the communists for the arson Soviet leader  Nikita Khrushchev admitted in writing that the Soviet Union's Red Army shelled the Russian village of Mainila in 1939, and declared that the fire originated from Finland as a basis launching the Winter War four days later Israel admits that an Israeli terrorist cell operating in Egypt planted bombs in several buildings, including U.S. diplomatic facilities, then left behind "evidence" implicating the Arabs as the culprits (one of the bombs detonated prematurely, allowing the Egyptians to identify the bombers, and several of the Israelis later confessed) (and see this and this) The CIA admits that it hired Iranians in the 1950′s to pose as Communists and stage bombings in Iran in order to turn the country against its democratically-elected prime minister The former Italian Prime Minister, an Italian judge, and the former head of Italian counterintelligence admit that NATO, with the help of the Pentagon and CIA, carried out terror bombings in Italy and other European countries in the 1950s and blamed the communists, in order to rally people's support for their governments in Europe in their fight against communism. As one participant in this formerly-secret program stated: "You had to attack civilians, people, women, children, innocent people, unknown people far removed from any political game. The reason was quite simple. They were supposed to force these people, the Italian public, to turn to the state to ask for greater security" (and see this)(Italy and other European countries subject to the terror campaign had joined NATO before the bombings occurred). And watch this BBC special As admitted by the U.S. government, recently declassified documents show that in the 1960′s, the American Joint Chiefs of Staff signed off on a plan to blow up AMERICAN airplanes (using an elaborate plan involving the switching of airplanes), and also to commit terrorist acts on American soil, and then to blame it on the Cubans in order to justify an invasion of Cuba. See the following ABC news report; the official documents; and watch this interview with the former Washington Investigative Producer for ABC's World News Tonight with Peter Jennings. 2 years before, American Senator George Smathers had suggested that the U.S. make "a false attack made on Guantanamo Bay which would give us the excuse of actually fomenting a fight which would then give us the excuse to go in and [overthrow Castro]". And Official State Department documents show that – only nine months before the Joint Chiefs of Staff plan was proposed – the head of the Joint Chiefs and other high-level officials discussed blowing up a consulate in the Dominican Republic in order to justify an invasion of that country. The 3 plans were not carried out, but they were all discussed as serious proposals The South African Truth and Reconciliation Council found that, in 1989, the Civil Cooperation Bureau (a covert branch of the South African Defense Force) approached an explosives expert and asked him "to participate in an operation aimed at discrediting the ANC [the African National Congress] by bombing the police vehicle of the investigating officer into the murder incident", thus framing the ANC for the bombing An Algerian diplomat and several officers in the Algerian army admit that, in the 1990s, the Algerian army frequently massacred Algerian civilians and then blamed Islamic militants for the killings (and see this video; and Agence France-Presse, 9/27/2002, French Court Dismisses Algerian Defamation Suit Against Author) Senior Russian Senior military and intelligence officers admit that the KGB blew up Russian apartment buildings and falsely blamed it on Chechens, in order to justify an invasion of Chechnya (and see this report and this discussion) According to the Washington Post, Indonesian police admit that the Indonesian military killed American teachers in Papua in 2002 and blamed the murders on a Papuan separatist group in order to get that group listed as a terrorist organization. The well-respected former Indonesian president also admits that the government probably had a role in the Bali bombings As reported by BBC, the New York Times, and Associated Press, Macedonian officials admit that the government murdered 7 innocent immigrants in cold blood and pretended that they were Al Qaeda soldiers attempting to assassinate Macedonian police, in order to join the "war on terror". Although the FBI now admits that the 2001 anthrax attacks were carried out by one or more U.S. government scientists, a senior FBI official says that the FBI was actually told to blame the Anthrax attacks on Al Qaeda by White House officials (remember what the anthrax letters looked like). Government officials also confirm that the white House tried to link the anthrax to Iraq as a justification for regime change in that country Former Department of Justice lawyer John Yoo suggested in 2005 that the US should go on the offensive against al-Qaeda, having "our intelligence agencies create a false terrorist organization. It could have its own websites, recruitment centers, training camps, and fundraising operations. It could launch fake terrorist operations and claim credit for real terrorist strikes, helping to sow confusion within al-Qaeda's ranks, causing operatives to doubt others' identities and to question the validity of communications." United Press International reported in June 2005: U.S. intelligence officers are reporting that some of the insurgents in Iraq are using recent-model Beretta 92 pistols, but the pistols seem to have had their serial numbers erased. The numbers do not appear to have been physically removed; the pistols seem to have come off a production line without any serial numbers. Analysts suggest the lack of serial numbers indicates that the weapons were intended for intelligence operations or terrorist cells with substantial government backing. Analysts speculate that these guns are probably from either Mossad or the CIA. Analysts speculate that agent provocateurs may be using the untraceable weapons even as U.S. authorities use insurgent attacks against civilians as evidence of the illegitimacy of the resistance. Undercover Israeli soldiers admitted in 2005 to throwing stones at other Israeli soldiers so they could blame it on Palestinians, as an excuse to crack down on peaceful protests by the Palestinians Quebec police admitted that, in 2007, thugs carrying rocks to a peaceful protest were actually undercover Quebec police officers (and see this) At the G20 protests in London in 2009, a British member of parliament saw plain clothes police officers attempting to incite the crowd to violence A Colombian army colonel has admitted that his unit murdered 57 civilians, then dressed them in uniforms and claimed they were rebels killed in combat U.S. soldiers have admitted that if they kill innocent Iraqis and Afghanis, they then "drop" automatic weapons near their body so they can pretend they were militants The highly-respected writer for the Telegraph Ambrose Evans-Pritchard says that the head of Saudi intelligence – Prince Bandar – admitted last the Saudi government controls "Chechen" terrorists So Common … There's a Name for It This tactic is so common that it was given a name for hundreds of years ago. "False flag terrorism" is defined as a government attacking its own people, then blaming others in order to justify going to war against the people it blames. Or as Wikipedia defines it: False flag operations are covert operations conducted by governments, corporations, or other organizations, which are designed to appear as if they are being carried out by other entities. The name is derived from the military concept of flying false colors; that is, flying the flag of a country other than one's own. False flag operations are not limited to war and counter-insurgency operations, and have been used in peace-time; for example, during Italy's strategy of tension. The term comes from the old days of wooden ships, when one ship would hang the flag of its enemy before attacking another ship in its own navy. Because the enemy's flag, instead of the flag of the real country of the attacking ship, was hung, it was called a "false flag" attack. Indeed, this concept is so well-accepted that rules of engagement for naval, air and land warfare all prohibit false flag attacks. Leaders Throughout History Have Acknowledged False Flags Leaders throughout history have acknowledged the danger of false flags: "This and no other is the root from which a tyrant springs; when he first appears he is a protector." - Plato "If Tyranny and Oppression come to this land, it will be in the guise of fighting a foreign enemy." - U.S. President James Madison "A history of false flag attacks used to manipulate the minds of the people! "In individuals, insanity is rare; but in groups, parties, nations, and epochs it is the rule." ― Friedrich Nietzsche "Terrorism is the best political weapon for nothing drives people harder than a fear of sudden death". - Adolph Hitler "Why of course the people don't want war … But after all it is the leaders of the country who determine the policy, and it is always a simple matter to drag the people along, whether it is a democracy, or a fascist dictatorship, or a parliament, or a communist dictatorship … Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is to tell them they are being attacked, and denounce the pacifists for lack of patriotism and exposing the country to danger. It works the same in any country." - Hermann Goering, Nazi leader. "The easiest way to gain control of a population is to carry out acts of terror. [The public] will clamor for such laws if their personal security is threatened". - Josef Stalin People Are Waking Up to False Flags People are slowly waking up to this whole con job by governments who want to justify war. More people are talking about the phrase "false flag" than ever before.

Open Thread: Make the Bear Case Posted: 08 Dec 2013 02:00 PM PST The past few weeks, I have been arguing against the notion that we are in a bubble. Let’s look at the other side of the argument: What is the (rational) bear case? We know stocks are no longer cheap, and this bull — already up 160%+ — is on the high end of the range. What are the legitimate bear arguments? This is an open thread — make your best case!

Peter Lynch: Investor/Author/Philanthropist on Charlie Rose Posted: 08 Dec 2013 08:30 AM PST Air Date 12/3/2013

10 Sunday Reads Posted: 08 Dec 2013 03:15 AM PST Good Sunday morning. These are the items that will be setting the tone for this week’s action. • Hedge Funds Trail Stocks by the Widest Margin Since 2005 (Bloomberg) but see Smart beta-blocking (FT Alphaville) • Google Puts Money on Robots, Using the Man Behind Android (NY Times) • Stocks are Not Done Yet (Barron’s) see also Hope for the Future (Above the Market) • Wiesenthal: I’m Changing My Mind About Bitcoin (Business Insider) • Time to dump bonds? Don’t be so sure. (WSJ) see also Individual bonds are an investment, not an Ark (Reuters) • Favorite stocks to play big trends like our smartphone society and fracking. (WSJ) • Does QE cause deflation? (Not Quite Noahpinion) see also Stressed out about deflation (FT Alphaville) • The Man Who Took On Merrill (Businessweek) • People At CNBC Are Relieved That Maria Bartiromo Left (Business Insider) see also The business of cable-TV business news isn’t what it used to be (WSJ) • This is how your brain tells time (Salon) Whats for brunch?   Euro Displays Uncommon Strength Source: WSJ

Regulations Are Entirely to Blame for Unemployment and a Leading Cause of Death in the United States Posted: 08 Dec 2013 02:00 AM PST

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