Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

WHEN COMPLEX SYSTEMS FAIL

Sometimes, unfortunately, a complex system fails. Despite the best efforts to keep an evolving system together through coordinated management, and attempts to provide fail-safe mechanisms along its evolutionary path, the system can weaken, degrade, and fail. Due to its enormity and multi-faceted nature, changes occur slowly and are perceived to evolve in an orderly manner. A strange public trust is instilled along the pathogenesis of breakdown, but official statements, encouragement, and assurance of constant tweaks to controls put aside public concern. The consequential impact from the potential failure can be beyond measure. Hyperbolic words such as “enormous” or “magnificent” or “staggering” really fall short in their description of the fallout damage. Experience through past crises, and reactions to them, tend to render the system more fragile and weakened, not more secure and efficient. It becomes more subject to stagnation and a pathetic state of near breakdown, which ironically comes to be accepted as the “normal” situation. Successive crises have indeed worsened over time. A worthwhile exercise might be to review a clinical treatise on the nature and evaluation of systemic failure.

The US Economy, stock & bond markets, futures contracts leveraged to them, and great derivative gears hold together the USDollar, the US Treasury Bonds, mortgages, major metals & energy commodities, and more. Many devices are designed to keep a limiting cap on prices and rates, like a huge rooftop atop a house or giant pyramid shrubs surrounding it. The entire system grows to become tremendously complex. It has evolved over several decades, and has responded to numerous unintended disturbances. Central banks provide the backdrop fail safe in a highly visible overt fashion. Derivatives provide the foundation underpinning in more secretive collusive fashion. System foundations date back to the post-Depression, post-WWII era. Latent growth and solidification took place until the gold anchor was abandoned, as the Bretton Woods Accord linking the USDollar to gold was defaulted in 1971. Most crises date back to that key event in their origins, a simple fact almost uniformly overlooked by a corrupted economic advisory function to this day. Shocks have been endured in many recent years. Small shocks occur almost on a monthly basis. The system continues, so the public regards the system as functionally capably. How many times must we hear “the system has not broken yet”?

Black Monday 1987 delivered a serious shock to stocks after the USDollar fell as directed by the 1985 Plaza Accord. Their joint international accord plan was to reverse the dangerous situation whereby the US manufacturing base had seen significant abandonment in the early 1980 decade. The USDollar had appreciated from monetary colossal stimulus to lift the economy from its recessionary shackles. The inflation and its effects attracted too much foreign money, an unintended consequence. The age of currency aggravations and distortions had begun to wreak its havoc! Huge trade gaps had delivered capital flows to Asia. The entire US Economy over-invested in stocks, real estate, and military industrial equipment. In 1989, Japan stock and housing markets completely collapsed. The system continued to pour US exported inflation to Asia in response, essentially ignoring the Japanese experience almost completely. We reasoned that Asia was bigger than Japan, whose island powerhouse had gone crazy with speculation. “They got what they deserved” was the battle cry in rationalization. Hardly a competent analysis was directed toward true effective change. Instead, roughly $600 billion in Japanese capital hit the shores of the USA. We repeated Japanese errors, only with utter arrogance of superiority. The only thing superior is the size of our bubbles and the intricacy of its machinery.

The 1997 Asian Meltdown delivered a more serious worldwide shock to currencys and stocks. Mindlessly and with incredible bravado mixed with childlike naïvete, most US so-called sophomoric experts (like the oaf Barton Biggs) regarded the Asian hardship as serving the US supply needs like to a “sweet spot.” One year later, the Russian Default combined with the leveraged hedge fund Long Term Capital Management failure to threaten seizure of the entire New York City megacenter bank system. So much for the sweet spot service from Asia. Back then my view of the meltdown was more of a financial virus encircling the globe, a direct systemic response to the complete yield to irrational exuberance in search of icon hero status. Yet these experts continue to ply their trade. The likes of Biggs, Galvin, Yarmeni, Garzarelli, and AbbyJo Cohen provide extremely high-priced guidance with no discernible track record of excellence.

The 2000 stock and telecom bust was the most recent shock delivered to the system. Greenspan succumbed to irrational exuberance in 1996 almost immediately after correctly labeling it as such. His policy focused on world economic growth, and the premier role of the US Economy with its advanced financial engineering machinery. Liquidity was the watchword, the stuff of fortunes. It was inflation and nothing more, well, except for accounting fraud and advanced gamesmanship with pro-forma techniques. Earnings were exaggerated to conceal a decline in corporate profits since 1985, amidst a great technology dawn. What followed was the worst financial market collapse in world history. The Federal Reserve acted as the great monetary spigot for the complex system, in yet another misjudgment. Even easier monetary supply was the response, which has created the Treasury bond and mortgage bond and housing bubbles. A weak system continues to weaken further, even as fail safe devices are deployed at a more rapid pace than ever envisioned.

After each tremor, the system responded, as a system should. The typical change was greater magnitude in money supply infusions and lowered interest rates. Also, greater magnitude in derivative gearing was provided to prevent damaging bond and currency movement, as directed by the largest of the world banks. At the same time, vast central bank support (mostly Asian, but also from Europe) occurred which began to take on the appearance of subsidy for the entire US Economy. The system has grown in complexity, under the rubric of normalcy and flexibility. This was a dangerous development and change to a large unstable system. Its risks were NOT assessed, either to the system or to the US Economy, whose currency has been totally and unequivocally subverted. The USDollar and its sidekick USTBond had become worldwide insurance money. Today, we sit with regular and routine accidents occurring, seemingly a new event with each passing week. The system has come to accept them as, well, “acceptable and routine.” The most feeble of reasons for justifying the inherent effectiveness is often given:  the system still stands with no obvious collapse.

The United States has fully embraced the mantle to underwrite any and all international financial or economic accidents. We do not seem to adapt to change. Instead, we apply old methods to new situations and expect similar outcomes as in the past. The system has been forced to adapt during a time when the normal business cycle has been altered, if not broken. The presence of China stands clearly as the greatest new wrinkle within the system.

Large complex systems can be identified with human biochemical organisms, with natural ecosystems (the earth itself), with computer networks, with telecommunication networks, with business supply chains, with regional bank centers, and with international financial systems. They can and should be analyzed and viewed as complex systems, with much in common. Along those lines, an interesting and illuminating document came to my attention recently from the Cognitive Technologies Laboratory at the University of Chicago on the subject. When spotted, “How Complex Systems Fail” struck me as just what the doctor ordered for a review by the curious in a clinical light. Its relevance to the US Economy and financial network gave me pause, even prompted a deeper realization of the scientific dynamics at work. Feedback, risk assessment, post-crisis analysis, policy effect, political interference, these all work to alter the system as though an organism unto itself. Although originally directed at human patients, the parallel to societal systems is unmistakable in the following list of factors.

1) Complex systems are intrinsically hazardous systems.

All of the interesting systems (e.g. transportation, healthcare, power generation) are inherently and unavoidably hazardous by the own nature. The frequency of hazard exposure can sometimes be changed but the processes involved in the system are themselves intrinsically and irreducibly hazardous. It is the presence of these hazards that drives the creation of defenses against hazard that characterize these systems.

Economic recessions used to occur every 8 to 10 years. In the modern era, a bubble formed every time a new recession is due. Stock busts like 1987 and 2000 are deemed unacceptable. Therein lie the hazards, with recessions and stock busts, where people lose jobs and lose investments. Entire pensions are blown away. People at one time would jump out of tall buildings during stock crashes. Now, in a more constructive vein, they go shopping with money they do not have, to purchase things we do not make, which often are not needed at all, only to end up in basements, attics, and garages. Our banking system and federal relief system have responded to enact measures such as monetary stimulus (lower interest rates) and fiscal stimulus (tax breaks). The investment community has grown dependent upon them.

2) Complex systems are heavily and successfully defended against failure.

The high consequences of failure lead over time to the construction of multiple layers of defense against failure. These defenses include obvious technical components (e.g. backup systems, ‘safety’ features of equipment) and human components (e.g. training, knowledge) but also a variety of organizational, institutional, and regulatory defenses (e.g. policies and procedures, certification, work rules, team training). The effect of these measures is to provide a series of shields that normally divert operations away from accidents.

We call it “off-loaded risk” in the banking world. Derivatives ratchet the rooftops with levers and gears so that the weighed down roof does not collapse. With a small amount of money, even counterfeit money off the electronic printing press, large amounts of bonds can be bought in order to prevent rapidly rising interest rates, or to prevent a disorderly decline in the USDollar, or to prevent a frightening alarm with a shooting gold price. Foreign central banks provide the subsidy necessary, so as to preserve the international imbalances and ward off natural corrections, much like tectonic shifts would to create earthquakes. The Working Group for Financial Markets (aka the Plunge Protection Team) operates to save the day with stocks. Training comes in the form of indoctrination and outright propaganda, to teach Orwellian chapters from economic textbooks on topics ranging from inflation, legitimate income sources, and flexibility. Economic aggregate statistics serve as the final shield. Unfortunately, they are more a prism of deception.

3) Catastrophe requires multiple failures – single point failures are not enough.

The array of defenses works. System operations are generally successful. Overt catastrophic failure occurs when small, apparently innocuous failures join to create opportunity for a systemic accident. Each of these small failures is necessary to cause catastrophe but only the combination is sufficient to permit failure. Put another way, there are many more failure opportunities than overt system accidents. Most initial failure trajectories are blocked by designed system safety components. Trajectories that reach the operational level are mostly blocked, usually by practitioners.

Since 2000 many detrimental events have occurred, none of which can singly bring down the system. They sure make their mark though. Fanny Mae & Freddy Mac accounting fraud combined with massive bond hedge losses and probable executive indictments. The USDollar bear market stands as a gradual failure in mega-trend shift. Sharply rising commodity prices, most notably in energy, drag down the economy as a direct effect. Colossal trade gaps and federal deficits put great strain on the international dependence, which the United States has come to rely upon. Stock index declines invite PPT response. The World Trade Center attack itself was a very visible shock, met with action. Each represents a failure of sorts. Disturbance to the insurance business (bid rigging), mutual fund business (after-hours pricing), brokerage business (IPO kickbacks), and countless corporate accounting fraud makes for financial sector strife. The FDA corrupted process for drug product approval is the latest link in the chain of failures. Through all these, we trudge on.

4) Complex systems contain changing mixtures of failures latent within them.

The complexity of these systems makes it impossible for them to run without multiple flaws being present. Because these are individually insufficient to cause failure they are regarded as minor factors during operations. Eradication of all latent failures is limited primarily by economic cost but also because it is difficult before the fact to see how such failures might contribute to an accident. The failures change constantly because of changing technology, work organization, and efforts to eradicate failures.

Flaws are omnipresent and fully minimized in importance. We have failed derivative “houses of cards” right before us, treated by sanitization procedures behind closed doors. We have households with negative savings, after putting aside moronic adjustments like self-paid homeowner rent and self-paid checking account services. We have inflation raging to keep an entire nation afloat when all contrived measures say the opposite. We have a nation requiring almost $2 billion per day of foreign subsidy. We have trends toward inefficient cars and heavy gasoline usage while energy prices rise. In most cases, additional debt and new leverage to supply credit are the technological tools we use in reaction, which are from the wondrous evolving financial engineering toolbag.

5) Complex systems run in degraded mode.

A corollary to the preceding point is that complex systems run as broken systems. The system continues to function because it contains so many redundancies and because people can make it function, despite the presence of many flaws. After accident reviews nearly always note that the system has a history of prior ‘proto-accidents’ that nearly generated catastrophe. Arguments that these degraded conditions should have been recognized before the overt accident are usually predicated on naïve notions of system performance. System operations are dynamic, with components (organizational, human, technical) failing and being replaced continuously.

The 1989 Savings & Loan debacle came and went, with the Fanny Mae “new & improved” mortgage centrifuge put to work.  The 1998 LTCM fiasco came and went in delayed reaction to the Asian Meltdown, with the much larger derivative pyramid built constructed, primarily by JPMorgan and its three lesser accomplices. The 2000 stock bust came and went, with the much larger bond & housing bubbles, justified as dealing with the stock loss effects but not the cause. To be sure, our financial system is degraded, runs as a broken system, and enjoys frequent, regular fixes, some with newfangled devices.

6) Catastrophe is always just around the corner.

Complex systems possess potential for catastrophic failure. Human practitioners are nearly always in close physical and temporal proximity to these potential failures – disaster can occur at any time and in nearly any place. The potential for catastrophic outcome is a hallmark of complex systems. It is impossible to eliminate the potential for such catastrophic failure; the potential for such failure is always present by the system’s own nature.

In 1998 a common view was held, the next US Economic recession would bring down the system. In 2002 a common view was the US current account deficit over 5% of GDP would lead to a currency correction likely to cause system collapse. The raging derivative monstrosity, now at least five times larger than 15 to 20 years ago, could tip over and crush the financial system with sufficient triggered provocation. Fed Governor Poole in 2003 stated his concern that failure by Fanny Mae could set off an economic meltdown, as is capital foundation was entirely inadequate. Now Roach of Morgan Stanley sees threats to the USDollar and the need for fast rising interest rates as a trigger for economic catastrophe. We seem to live on the edge constantly.

7) Post-accident attribution accident to a ‘root cause’ is fundamentally wrong.

Because overt failure requires multiple faults, there is no isolated ‘cause’ of an accident. There are multiple contributors to accidents. Each of these is necessary insufficient in itself to create an accident. Only jointly are these causes sufficient to create an accident. Indeed, it is the linking of these causes together that creates the circumstances required for the accident. Thus, no isolation of the ‘root cause’ of an accident is possible. The evaluations based on such reasoning as ‘root cause’ do not reflect a technical understanding of the nature of failure but rather the social, cultural need to blame specific, localized forces or events for outcomes.

Debate rages over the root cause of the Great Depression. Was it too much debt and leverage and speculation? Was it too little response with lower interest rates and floods of liquidity? This accident stands as the event of extreme primacy studied, explained, and revised according to political motives and agenda pushed upon policy makers. It might be argued that the USA does not bother to analyze accidents much at all. Reform conflicts with the power structure and the ruling elite. We simply move to the next accident merrily, and boast of flexible response.

8) Hindsight biases post-accident assessments of human performance.

Knowledge of the outcome makes it seem that events leading to the outcome should have appeared more salient to practitioners at the time than was actually the case. This means that ex post facto accident analysis of human performance is inaccurate. The outcome knowledge poisons the ability of after-accident observers to recreate the view of practitioners before the accident of those same factors. It seems that practitioners “should have known” that the factors would “inevitably” lead to an accident. (Hindsight bias remains the primary obstacle to accident investigation, especially when expert human performance is involved.)

In hindsight, most analyses of past accidents appear to this analyst to be justified as a small price to pay for our capitalist system, chock full of opportunity, freedom to invest and apply credit, and a remarkable showcase to our innovation and flexibility. Our official analyses seem to be corrupted by the current agenda and by those in power to influence and dictate policy. We are too busy inflating, speculating, and building the next financial contraptions to be bothered with much objective expert post-accident analysis at all. Greater future opportunity lies over the horizon. Why waste time with the past?

9) Human operators have dual roles: as producers & as defenders against failure.

The system practitioners operate the system in order to produce its desired product and also work to forestall accidents. This dynamic quality of system operation, the balancing of demands for production against the possibility of incipient failure is unavoidable. Outsiders rarely acknowledge the duality of this role. In non-accident filled times, the production role is emphasized. After accidents, the defense against failure role is emphasized. At either time, the outsider’s view misapprehends the operator’s constant, simultaneous engagement with both roles.

Are the Federal Reserve and Chairman Greenspan the cause of the problems or the primary agents of remedy? Most benefiting participants see them as agents of remedy. Most victims see them as causes of the problem. Greenspan ignored his own warning of irrational exuberance in 1996, yet is assigned little blame for the greatest stock bust in world history only four years later. The same villain & hero roles go with Franklin Raines of Fanny Mae (still there) and with John Meriwether of LTCM (in new hedge fund), even Robert Rubin of the Dept of Treasury (now at Citigroup). On a systemic level, the same goes for the Bank of Japan, which perpetuates the grand imbalances. Toss in some villainous practices, not people, such as zero percent finance deals. They led to sustained retail sales but also to gargantuan trade gaps. Also, the wizards controlling vast derivative gears on bonds and currencys tinker with their levers, contribute to the problem, yet are called upon to offer counsel and to enact the cures.

10) All practitioner actions are gambles.

After accidents, the overt failure often appears to have been inevitable and the practitioner’s actions as blunders or deliberate willful disregard of certain impending failure. But all practitioner actions are actually gambles, that is, acts that take place in the face of uncertain outcomes. The degree of uncertainty may change from moment to moment. That practitioner actions are gambles appears clear after accidents; in general, post hoc analysis regards these gambles as poor ones. But the converse: that successful outcomes are also the result of gambles; is not widely appreciated.

When Greenspan bailed out LTCM in 1998, he took a gamble that failed. When Greenspan released huge liquidity in the face of the new millennium Y2K bug threat, he took a gamble that failed. When Greenspan took down interest rates in 2001, he took a gamble that is the process of failing, not fully recognized yet. When he compounded the policy by urging down the long-term rates, he doubled down on the gamble, only to double the ultimate damage. Outcomes were indeed uncertain. Permitting bond & housing bubbles seemed the desired and urged approach at the time. After these bubbles give off gas, the perception on the policy will not be so forgiving. On the other hand, the Resolution Trust Corporation, which gathered, sold, and administered the bankrupt dissolved banks from the S&L debacle in 1989 turned out to be an excellent risk and successful cleanup. It made Bill Siedman’s career, who headed the Federal Deposit Insurance Corporation. At the local level, people gamble with their home equity, their savings, and their pensions.

11) Actions at the sharp end resolve all ambiguity.

Organizations are ambiguous, often intentionally, about the relationship between production targets, efficient use of resources, economy and costs of operations, and acceptable risks of low and high consequence accidents. All ambiguity is resolved by actions of practitioners at the sharp end of the system. After an accident, practitioner actions may be regarded as ‘errors’ or ‘violations’ but these evaluations are heavily biased by hindsight and ignore the other driving forces, especially production pressure.

Changes in Fed policy, to begin tightening cycles, to begin easing cycles, to enable high profile rescues, these are actions at the sharp end. There is no ambiguity when interest rates change course. If the Fed is forced to raise interest rates sharply in response to a USDollar in freefall, again actions would contain little ambiguity. It is my firm belief that the Fed would, however, attempt to muddy the waters of perception with claims of a stronger US Economy at the same time of policy change. Actions taken by prosecutors directed at fraud are unambiguous. Actions taken to remove drug products from the marketplace are also very clear. Again, objective examination of root violations is sorely lacking. Watch the FDA process to change not at all.

12) Human practitioners are the adaptable element of complex systems.

Practitioners and first line management actively adapt the system to maximize production and minimize accidents. These adaptations often occur on a moment by moment basis. Some of these adaptations include: (1) Restructuring the system in order to reduce exposure of vulnerable parts to failure. (2) Concentrating critical resources in areas of expected high demand. (3) Providing pathways for retreat or recovery from expected and unexpected faults. (4) Establishing means for early detection of changed system performance in order to allow graceful cutbacks in production or other means of increasing resiliency.

The Federal Reserve has reportedly, in clandestine fashion, taken over JPMorgan and its dangerous, potentially catastrophic derivative book. The merger agreement between JPMorgan and the giant Japanese bank Sumitomo in 2003 constituted a restructure along the lines of item #1, a marriage ordered complete with a $1500 million cash dowry. The Dept of Treasury and SEC are in the process of assisting Fanny Mae with its mortgage books. The high demand for mortgage financing requires a concentration of resources to sustain the important housing market along the lines of item #2. Without the housing boom, the US Economy would go into deep recession. Big dangers currently loom in bogus economic reporting (item #3) and early detection for cutbacks (item #4). A pathway for retreat is difficult with false aggregate data, which typically justifies current policy and overwhelms the need for prudent cutback at all. Therein lie great risks.

13) Human expertise in complex systems is constantly changing.

Complex systems require substantial human expertise in their operation and management. This expertise changes in character as technology changes but it also changes because of the need to replace experts who leave. In every case, training and refinement of skill and expertise is one part of the function of the system itself. At any moment, therefore, a given complex system will contain practitioners and trainees with varying degrees of expertise. Critical issues related to expertise arise from (1) the need to use scarce expertise as a resource for the most difficult or demanding production needs and (2) the need to develop expertise for future use.

When Veneroso departed his role as consultant to Western central bankers, great expertise was lost in managing the gold versus currency versus bonds complex. When former Treasury Secy Rubin left his role in managing the USDollar, great expertise was lost. John Snow is but a shadow of Rubin in specialty skills. His predecessor O’Neil was replaced due to competence, honesty, and outspokenness. The USDollar has begun its frightening decline. When professionals accept new jobs in the lucrative hedge fund business, and leave behind their speculative desks on Wall Street, again expertise is lost. Responsibility for juggling in the great game falls on less skilled, less experienced, and less connected individuals. Variation in competence grows tremendously, putting the system at greater risk to respond. 

14) Change introduces new forms of failure.

The low rate of overt accidents in reliable systems may encourage changes, especially the use of new technology, to decrease the number of low consequence but high frequency failures. These changes maybe actually create opportunities for new, low frequency but high consequence failures. When new technologies are used to eliminate well understood system failures or to gain high precision performance they often introduce new pathways to large scale, catastrophic failures. Not uncommonly, these new, rare catastrophes have even greater impact than those eliminated by the new technology. These new forms of failure are difficult to see before the fact; attention is paid mostly to the putative beneficial characteristics of the changes. Because these new, high consequence accidents occur at a low rate, multiple system changes may occur before an accident, making it hard to see the contribution of technology to the failure.

Derivative contracts, heavily used in risk offload, stand as the quintessential high-risk financial security instrument in today’s financial world. With such new technology comes low frequency but high consequence failures. Mortgage bond derivatives known as real estate mortgage investment conduit (REMIC) apply leverage to contain mortgage rates. They employ “strips” and “floaters” which conjure up images of nightclub bondage more than financial securities. Years ago, the mortgage backed security (MBS) was a new device to sell into the bond market large portfolios of homeowner mortgages. The technology has advanced. Numerous other examples exist as change occurs, crises are averted, and new devices become invented. The newest device is the gold exchange traded fund (ETF). Could it assist in ushering the arrival of the upcoming USDollar crisis?

15) Views of ‘cause’ limit the effectiveness of defenses against future events.

Post-accident remedies for “human error” are usually predicated on obstructing activities that can “cause” accidents. These end-of-the-chain measures do little to reduce the likelihood of further accidents. In fact that likelihood of an identical accident is already extraordinarily low because the pattern of latent failures changes constantly. Instead of increasing safety, post-accident remedies usually increase the coupling and complexity of the system. This increases the potential number of latent failures and also makes the detection and blocking of accident trajectories more difficult.

In the wake of Black Monday, S&L debacle, Mexican Peso crisis, Asian Meltdown, LTCM fiasco, Tech/Telecom stock bust, as well as the Great Depression, measures were put into place to protect the system. Little resistance is laid in the path of new tinkering to install safety measures. Coming in the form of leveraged futures contracts, bond derivatives, exotic contracts linking at least two commodities, government teams for market reaction, trade protection, such safety measures surely increase the coupling and complexity in hidden ways. Detection of accident pathways is rendered almost impossible.

16) Safety is a characteristic of systems and not of their components.

Safety is an emergent property of systems; it does not reside in a person, device or department of an organization or system. Safety cannot be purchased or manufactured; it is not a feature that is separate from the other components of the system. This means that safety cannot be manipulated like a feedstock or raw material. The state of safety in any system is always dynamic; continuous systemic change insures that hazard and its management are constantly changing.

The mere claim of risk assessment in today’s complex economic and financial system is not possible. Gold miner firms hire external consultants just to assess their own risk from hedge books, otherwise known as derivatives. The Dept of Treasury in all likelihood was unable to assess the risk or even the current status of the Fanny Mae derivative book contraptions. Warren Buffet required two years to assess the risk and financial status of his acquired General Re insurance firm, beset by derivatives, which he himself labeled as “financial sewage.” Safety is the byproduct of managed risk. It is not measurable, nor can it be manipulated with assurance of safety. Our system reacts. It must be constantly administered and managed. External change is too regular and constant. Breakdowns are too regular and constant. Unwise human behavior is too regular and constant.

17) People continuously create safety.

Failure free operations are the result of activities of people who work to keep the system within the boundaries of tolerable performance. These activities are, for the most part, part of normal operations and superficially straightforward. But because system operations are never trouble free, human practitioner adaptations to changing conditions actually create safety from moment to moment. These adaptations often amount to just the selection of a well-rehearsed routine from a store of available responses; sometimes, however, the adaptations are novel combinations or de novo creations of new approaches.

When my newsletter was contemplated, a concern rose over adequate material to cover each and every month. A light bulb went on. Ongoing events require our wizards to provide a safe environment for commerce and investment, as change unfolds day to day. My new online business is free to analyze the steady parade of crises, poor analysis, vested interest promotion, widespread deception, and the burlesque that has become our economy. As policy makers and captains of industry work to keep the system within the boundaries of tolerable performance, the disorder grows and safety grows more elusive. There is plenty to write about and analyze, even as investment opportunity grows in magnificent fashion. My own research is part of the adaptation.

18) Failure free operations require experience with failure.

Recognizing hazard and successfully manipulating system operations to remain inside the tolerable performance boundaries requires intimate contact with failure. More robust system performance is likely to arise in systems where operators can discern the “edge of the envelope”. This is where system performance begins to deteriorate, becomes difficult to predict, or cannot be readily recovered. In intrinsically hazardous systems, operators are expected to encounter and appreciate hazards in ways that lead to overall performance that is desirable. Improved safety depends on providing operators with calibrated views of the hazards. It also depends on providing calibration about how their actions move system performance towards or away from the edge of the envelope.

That should not be a problem. Plenty of experience with failure to go around.
We as a collective nation tend to minimize the risks, falsely identify the boundaries.
Is that the edge of the envelope or the edge to the abyss???
Prepare your own life, and that of your family, by building your own safety pillbox.
Ignore the mainstream. Purchase mining and energy stocks, or physical supplies.
The coming storm will provide real shock & awe. So be ready.
Listen to those who can guide you through the inevitable storm, which lies directly ahead.

MARKET TIDBITS

The US economic outlook dimmed somewhat. Reports said business productivity grew more slowly in the third quarter than first estimated, labor costs rose, and other indicators signaled softening activity. The Labor Department said non-farm business productivity, or worker output per hour, grew at a 1.8% annual rate in the July-to-September period, the slowest clip since the fourth quarter of 2002. It also revised growth in unit labor costs up to a 1.8% pace in a potential boost to inflation. Wall Street had expected an upward revision to productivity growth to a 2.0% clip from 3.9% in the second quarter as worker efficiency moderated and US businesses boosted hiring to maintain output. The slowdown in productivity was traced to a rise in hours worked, which grew at a rate of 2.4% in the third quarter, the fastest pace since third quarter of 1999. Companies ran operations for longer hours in order to maintain output.

The USDollar fell to a new record low against the euro as investors, tiring of tough talk on exchange rates by European officials, dismissed new warnings from euro zone officials. As the USDollar slid, the euro reached a new high of around $1.3470 (EUR=). Oil prices fell more than $1 to a three-month low as mild winter weather sapped demand in the heavy energy consuming US Northeast. The US light crude price has broken below $42 for the first time since August 31. The Japanese Nikkei share average fell after the US$ retreat below 103 yen put pressure on exporters such as Sony Corp. Selling spilled over to other sectors after government data in the afternoon suggested a gloomy outlook for the world's second-biggest economy. “An initial cue for selling was the USDollar fall below 103 yen after the lunch break,” said Ken Masuda, senior dealer in equities at Shinko Securities. He went on to say “It looks like fewer people are now willing to test the upside, as the Nikkei was firmly capped at 11,000 this morning.” The Nikkei fell almost 1.0% or 108.33 points.

The United States said it may soon take legal action in a trade rift over government help for Airbus and Boeing, particularly as the European aircraft maker was seeking support for a new project. Washington and Brussels have so far resisted launching legal action at the World Trade Organization in their battle over allegations of illegal subsidies to the aviation rivals, but that option may now be just weeks away. Lenovo, the largest Chinese personal computer maker, could announce soon that it is buying control of the IBM PC business for up to $2 billion. In its first disclosure that a deal may be imminent, Lenovo said it was in acquisition talks with a major technology company, without identifying the firm.

Intel will miss its 2004 product cost reduction targets because of a widely publicized string of product delays and problems, but those missteps are largely behind it now. “We have recovered from those missteps and the machine is firing on all eight cylinders in terms of new product introductions,” Intel Chief Executive Craig Barrett told analysts in a New York. The Hewlett-Packard board of directors considered on three separate occasions whether to break up the company, but each time directors unanimously concluded it would be best to keep the corporation united together, according to their chief executive and chairman Carly Fiorina. Current business operations encompass laptops & servers, business consulting services, and printers & ink, which is by far its most lucrative division. Wall Street analysts have speculated in recent months that spinning off the printing division could be a windfall for stock owners and senior executives on both sides of the company.

Health care and consumer products maker Johnson & Johnson is in negotiations to acquire medical device maker Guidant Corp. The long-rumored deal could be worth more than $24 billion, according to The New York Times. US health officials, taking another step to ease the flu shot shortage, approved the importation of up to 4 million flu shot doses from Europe for patients willing to sign a consent form. The government will immediately buy 1.2 million doses made by Glaxo Smith Kline at a plant in Germany and distribute them to needy areas, as per Health & Human Services Secretary Tommy Thompson. Another 2.8 million doses from the company are available for later in the flu season. European insurers could appeal against a US jury decision that treats the 2001 hijacked plane attacks on the World Trade Center as two separate events, potentially raising their costs. Insurance shares fell across the board following the court decision. French re-insurer Scor, which covered a portion of the Allianz policy, was the worst hit, falling as much as 8% because of its possibly insufficient reserves.

Colgate Palmolive will cut about 4400 jobs and close one third of its factories under a program aimed at fighting rising costs and focusing on higher profit areas such as oral care. Colgate, which operates 78 plants around the world, said it expects after-tax restructuring charges of $550 million to $650 million over the four-year program. The job cuts amount to 12% of their 37,000 employees. Challenger, Gray & Christmas announced 104,530 large site job layoffs for November, after 101,840 jobs shed in October. This is the first time since early 2002 that announced job cuts have exceeded 100,000 for three or more consecutive months. Anyone who regards the economy as being in recovery on a net basis needs a lobotomy. Almost all data is distorted. Half of economic growth is pure fiction, unadjusted inflation, even as jobs continue to be lost. Watch official Q4 growth statistics slow further, as gasoline prices back off, and we spend less on gasoline!!!

New York Attorney General Eliot Spitzer said he will run for governor in 2006, pledging to use the clean-up tactics he aimed at industry and Wall Street to reform Albany's government gridlock.

TODAY’S MARKET

Today the Dow Jones Industrials wrapped up at 10,441 (-106), S&P at 1177 (-13), Nasdaq at 2115 (-37), TENS yield 4.226% (-1.4 bpt). Lower energy prices helped stock prices not at all. Currencies closed with Euro at 134.30 (+0.10), JYen at 97.20 (+0.22), Can$ at 82.82 (-0.40). Metals finished with gold at 452.0 (-2.0), silver at 783.8 (-4.6), copper at 140.60 (-1.35). Energy ended with crude oil at 41.50 (-1.48), natural gas at 663.0 (-29.3), unleaded gasoline at 108.50 (-4.46). Prices are at major futures contracts.

Jim Willie CB

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us