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WHO ME WORRY?

After  yesterday’s  comments in the Investment Strategy Letter about my concern about a unexpected event, I have been asked to comment on what kind of events am I worried about? So, here goes!

Banks:  First of all, I’m worried about the banks. Whereas most banks let’s say 75% of them are theoretically in good shape, the 10 or 12 largest banks in the world I believe are undercapitalized and have taken on enormous risks by issuing derivatives. In today’s stock market in Europe bank stocks are down 1 ½%. There is concern about in a strong dollar, low oil prices, and US Fed policy. Then of course there is Greece, and its potential for bringing chaos to the European economic system. In the other problem in Europe is its ability to handle Muslim immigrant, who are coming into their borders by the millions. This is a long-term problem, but is just one more problem that Europe seems not be able to solve.

Cyberspace attack: Today’s New York Times has an article entitled Preparing for Warfare in Cyberspace. Just as we were unprepared for 9/11 the Pentagon doesn’t want to be left flat-footed again and has issued a new 33 page cyber security strategy to prepare the United States to retaliate, if necessary, against cyber attacks and is developing weapons to do so. The strategy document provides some transparency about the problem for which the military is expected to increase 6200 workers in a few years to help prepare us. As cyber threats have been increasing in severity and sophistication this report seems to be closing the barn door after the horses of already escaped. In my opinion, this effort is too little and too late and should be viewed as a global issue, not just a US problem.

Spoofing, And then of course we have our unintentional homegrown terrorists that manipulate markets, which can contribute to such disasters as the flash crash of May 6, 2010. Navinder Sarao, a British trader, working out of his parent’s home outside London, disrupted markets worldwide, by using spoofing techniques, or placing orders that he intended to cancel before they were filled. This is high-speed strategies  that exploits the fragmented nature of our trading system to make profits purely on time and speed. If this kind of damage can be done by someone who unintentionally damaged our marketplace,think of what kind of harm could be done intentionally with a cyberspace attack.

TERRORIST SURPRISES Recent events in Paris, added new uncertainty to the marketplace. We have all heard of the Black Swan. THE BLACK ELEPHANT is similar to the Black Swan, as it is something we had not expected. The differences is that THE BLACK ELEPHANT, was there the whole time right in front of us for all of us to see, but we choose not to see it.( More properly it should have been called  ‘the gorilla in the room’ but the New York Times coined  BLACK ELEPHANT). The markets so far have chosen to ignore some really negative factors that I see so plainly and so far the market just goes higher!

The radical Muslim world, has found a new way to terrorize the ‘infidels’ in the West. Rather than staging huge terrorist acts, such as 9/11, this new activity of random terrorize acts in various places throughout the globe could unstablize  our Western economies. Events such as the savagery of ISIS, beheadings, the Boston marathon attack, the female genital mutilation’s, the abduction of girls in Nigeria, the execution of the  innocence in Iran, the slaughtering and enslaving of Christians in Egypt and Africa, and various other crimes against humanity committed by those who claim to represent Islam, have so far seemed at a distance from most of us. However, the recent events in Paris could happen anywhere: in our local grocery stores or theaters or sporting events. If these kind of events persist or increase, economic disruptions may occur. Then there is the ‘gorilla in the room’ and the ultimate BLACK ELEPHANT that everyone one is thinking about, but not talking about and that is the use of a ‘dirty nuclear devise” in a major city. Sorry, but in my opinion, I have to mention that the possibility of this occurring is high!

Dirty Bomb or Worse!  It is no secret, that building a bomb such as we exploded over Hiroshima  is a matter primarily of obtaining the right kind of plutonium. Once obtained, a critical mass and explosion can result by just dropping half the required product on the other half.  Radical religious fanatics and the nuclear age are not a good combination. So, is very important that weapons grade uranium stay out of the hands of terrorists. All of our, the US, weapons grade uranium, is fabricated and stored in Oak Ridge Tennessee in a facility called Y – 12. As you would imagine, this facility is guarded with extreme care for by some 500 security officers authorized to use lethal force within its protected area. Y – 12 is called the Fort Knox of uranium storage. However, as reported in a March 9, 2015 New Yorker  Magazine article, three people,  belonging to the Plowshares organization ( inspired by the legendary pacifist  Dorothy  Day) were able to elude all these defenses and on July 28, 2012 spray-painted the storage facility. What makes this breach of security even more unbelievable is that all three people were elderly and one, was an 82-year-old nun named Macon Rice. If this is how insecure our plutonium is, one can only imagine what it is like in places like Pakistan and Russia.

In the Economist Magazine dated March 7, 2015 their cover picture had to intercontinental missiles in flight. Entitled the new nuclear age. They indicated that every nuclear power is spending lavishly to upgrade its atomic arsenals; Russia’s defense budget has grown by over 50% of which a third is devoted to nuclear weapons. France and China are adding to its stocks and investing heavily in submarine and mobile missile batteries. Pakistan is amassing dozens of battlefield nukes to make up for its inferiority to India. The United States has asked for $350 billion to undertake a decade-long program of modernization of America’s arsenal. The new arsenal includes low level tactical nuclear delivery systems. Why is this happening?  Some countries want nuclear weapons to prop up a tottering state. Others want nuclear weapons not to freeze the status quo but to change it. China’s nuclear expansion is designed to give them a chance to retaliate using a second strike, should American attempt to destroy its arsenal. Taiwan could escalate alarmingly. According to the Economist Magazine, using nuclear weapons in a limited way is being reconsidered as an alternative to conventional military weapons.

‘CLIMATE CHANGE’, OR AS I LIKE TO CALL IT ‘GLOBAL WARMING’!

Whereas there is a wide scale difference of opinion of what causes climate change, there seems to be no question that is happening. Even Pope Francis has announced that he is going to issue an encyclical about our responsibilities to deal with this problem on a worldwide basis. From the church that burned Bruno at the stake and threatened to excommunicate Galileo, historically this is quite a nod to the advantage of scientific method, discovery and problem solving. According to many scientists, the effects of global warming, because of increased carbon dioxide in our atmosphere, is now inevitable. Most people believe that global warming will not affect our generation. However California, our agricultural Eden, is quickly turning into a desert. Without the irrigation from a diminished Colorado River our food sources would be cut in half. Expect surprises.

THE BLACK SWAN

As our once Secretary of Defense Rumsfeld said,” it’s not what you don’t know, it’s what you don’t, know that you don’t know.” All the other problems above are problems that we recognize. However sometimes, there are problems that are not on our radar screen and unexpected that can occur. What comes to mind first, is a meteorite or excessive volcanic disruptions? When one is younger, one tends to dam the torpedoes. However, as one ages, one realizes that the veil that covers civilization is very thin and can be disrupted easily. I have been an optimist my whole life. But I have not in my lifetime experienced such hubris and overconfidence. In a current book by David Brooks entitled Road to Character, he is concerned about the percentage of high school students within A average or better that  have increased by more than 80% in two generations. In a Gallup poll from 1950 high school students were asked if they considered themselves very important. In 1950 the average was 12% while by 2005 the figure was 80% and a more recent survey of middle schoolgirls nearly twice as many said they wanted to be a personal assistant to a celebrity, than to be the president of Harvard, and the person they most wanted to be like was Jennifer Lopez. The scenario I am pointing out will appear as impossible to the new generation. They have very little experience in handling problems by themselves as they have had everything handed to them by their hovering helicopter parents. The struggles of the depression, world war, equal rights and gender rights are not part of their upbringing. However, It is my hope, in facing any disastrous future events; they will rise up as have past generations, to the heights and become the new ‘Greatest Generation’.

Carl M Birkelbach 4/28/15

 Current  Dow NASDAQ S&P 500
18,099 5,070 2,114
Short Term UP UP UP
Int. Term UP UP UP
Long Term UP UP UP
ForecastedTrendd  DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term ? ? ?
Long Term Sideways? Sideways? Sideways?
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 18,288 5,101 2,120
Short Term Down (Support) 17,147/17,0000 4605/4,5455     1,991/1,9733
Int. Term Up (Resistance) 18,974 See Fibonacci Projections above 5,002 See Fibonacci Projections above 2,486 See Fibonacci Projections above
Int. Term Down (Support)  15,855         /15,356 /14,688 4,166 3,986/3294 1,820 /1,560
Long Term Up (Resistance) 18,974 5,132 3,044
Long Term Down Fibonacci Support 50%12,000  62% 10,750       50%2,958  62% 2,555 50%1,390 62% 1,177
 10 yr Treasury 1.92 Gold 2.001 Oil 56.69  
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