Dear Reader,

Over the weekend, I read an article suggesting that investors separate their politics from their investment decisions. Of course, this sounds like a good idea, but in a way, it’s a bit schizophrenic. For example, how can one think – as an investor – that tax cuts are good for the economy, but politically be against them? Such a position would be intellectually fraudulent. In my opinion, it’s far worse to be dishonest than to be just plain wrong on a subject. If one’s political views don’t match reality, the next logical step would be to change views.

Political bias can negatively affect your investments – even when you’re correct about a certain policy or market movement. Bias not only obscures correct actions; it also makes us misjudge the impact of market events. For example, take tax cuts again. Very few market participants would say that tax cuts have no positive effect on the economy. If you’re unbiased, that should be pretty easy to figure out. But noticing this doesn’t put an investor ahead of the game.

The more important part is determining the impact of the tax cuts. This is where many investors trip over their biases. Few serious investors will completely dismiss tax cuts. But liberal investors typically underestimate the effects while conservative investors will overestimate them.

Bias naturally has a stronger role to play in matters of degree – one reason being the lack of an objective truth. The marketplace does not adhere to a predetermined formula that a tax cut of X% will lead to GDP growth of Y%. As a result, our subjective opinions form our expectations.

The real value of being objective is not realizing the obvious; it’s about properly evaluating the level of impact. Two people can agree on a policy move but disagree on the impact. As a result, their investment results will greatly differ. This happens almost every time that I write something positive about the Canadian dollar. I’m absolutely guaranteed a reader e-mail that starts with, “I’m from Canada. Don’t you know that they’re also printing money? The Canadian dollar is garbage. ” Then the reader makes a list of the reasons why. And the funny part is that I pretty much agree with every single reason on the list. However, I disagree with the level of impact on the Canadian dollar compared to the Federal Reserve’s action – not the basic facts.

There seems to be a lot of bias on domestic currencies. In general, U.S. readers are more bearish on the U.S. dollar, and Canadian readers are more bearish on the Canadian dollar. I guess the grass is always greener on the other side. 

One has to recognize this common personal bias and then make an objective decision. The tough part is fairly comparing the Bank of Canada to the Fed. The Bank of Canada also prints tons of money and has low rates, and all fiat currencies are in a race to the bottom. But that doesn’t mean that one currency isn’t slightly better than the other.

Yes, Canada has extremely low rates, but it’s slowly increasing them, while the U.S. hasn’t budged. Furthermore, yes, the Canadian central bank has printed tons of money, but it’s hard to match QEII. The Canadian reader emails always list the problems of the Bank of Canada. They never compare those problems to similar problems with the Federal Reserve.

Bias can occur even with the right idea in mind. Only by comparing the Bank of Canada to the Federal Reserve can we make a sound investment decision. And the marketplace has been judging the two currencies. For some time now, the Canadian dollar has been steadily gaining on the USD.

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Back to today’s news. First, Kevin Brekke will review the market’s reaction to the 1995 Kobe earthquake. Perhaps it can be a good benchmark for economic developments today. Then Doug Hornig will discuss the increasing trend of companies and the government utilizing fake personas online to push their goals.

Revisiting Post-Kobe Japan

By Kevin Brekke

I began today’s topic feeling a bit hesitant about how to approach the need to guard your investments in light of current events in Japan. As a matter of principle, I do not seek, nor advocate, to benefit from the death and suffering of others. I abhor war and violence and refuse to invest in companies playing the politics-by-other-means trade.

But there is always a seam in the ethics argument where personal principles meet the practicalities dished out by the real world. And Friday’s catastrophic earthquake in Japan was certainly such a seam. Although the loss of life and destruction in Friday’s earthquake resembled that of a battlefield, it was the product of an unpredictable geologic event and not that of a conspiracy of men. In either case, I think one has the duty to protect your wealth and investments that might stand in the path of any adverse outcomes. And that might include some near-term shorting opportunities.

The fallout from the earthquake, and the final tally of destruction in both human and dollar terms, will take months to fully comprehend. Yet, many consequences will begin to play out immediately, and among them will certainly be financial and economic uncertainties. Whether they will be short, medium or long term is hard to know, so I examined the after-effects of a similar event for clues.

I will be short on words and long on visuals in today’s article. The following charts show the effect of Japan’s 1995 Kobe earthquake on three macro-measures. It is interesting to note that in all three cases, a return to the pre-event trend was achieved in under a year.

We are always on the alert for black swans that trigger a series of events that lead to an unanticipated and unforeseen end, such as the assassination of an obscure Archduke in Sarajevo that culminated in World War I. However, my sense is that the impact of Japan’s earthquake on global finance and economies will follow a path similar to Kobe’s – brief turbulence but not a game changer.




Harry, How Do You Know Sally Is Real?

By Doug Hornig

Relationships established via the Internet can be a crap shoot. As a veteran, I can testify to that. I’ve had women misrepresent their age, post twenty-year-old pictures, and “accidentally” omit vital information. I’ve dated some duds. Yet I’ve also had some great times, met some wonderful people, and forged friendships that endured.

The one thing that never happened, though, was finding out that the match at the other end of the computer link didn’t exist.

Provided they got that far, Harry always met Sally, so to speak.

No more. Or at least you can’t count on it. Now, to the stalkers, liars and would-be identity thieves who use the Internet to prey upon our desire for social contact, add phantom personas. Not only that, these phantoms may be government sponsored!

It sounds preposterous, like something out of a sci-fi novel whose author tried to imagine an evil government plot, and this was the best he could come up with. At best, we hoped it would turn out to be another of those urban legends that does such a good job of debunking. As best we can tell, however, it’s authentic.

Phony personas are not a new idea, of course. PR firms, for instance, have been known to use them for commercial purposes, to inflate interest in a product. Internet watchdogs even have a name for them: sockpuppets. They’ve also been used to manufacture the perception of a fake upswell in sentiment on a given topic, on forums and social sites, a practice known as astroturfing. And pump-and-dump scamsters have long used sockpuppets (illegally) to advance their agenda through participation in threads devoted to a particular stock.

But Department of Defense involvement? Hadn’t heard of that one before.

Here’s the deal: Last summer, the Air Force posted a solicitation for bids on a “Persona Management Software.” The successful vendor will produce software that “will allow 10 personas per user, replete with background , history, supporting details, and cyber presences that are technically, culturally and geographically consistent. Individual applications will enable an operator to exercise a number of different online persons from the same workstation and without fear of being discovered by sophisticated adversaries. Personas must be able to appear to originate in nearly any part of the world and can interact through conventional online services and social media platforms. The service includes a user-friendly application environment to maximize the user's situational awareness by displaying real-time local information.”

We don’t know how many responses they got. Or whether the resultant software met their needs. But we doubt they’d have much difficulty recruiting users. Besides being a job in a weak economy, there’s a certain flash to it. Yes, you too can be like a CIA executive, running your network of field agents. So what if they’re fictitious?

We can see the rationale, too. It’ll be about national security. Employing members of the general population to help keep tabs on potential terrorists and infiltrate “subversive” groups, without having to meet government pay scales and provide health insurance. Plus the added benefit of having more Americans believe they’re involved in a mission of great importance.

In fact, the specific AF posting purports to be seeking something that will be used in Iraq and Afghanistan.

But is the government really only interested in software for war zones? That strains credulity. Suppose Washington wanted to shape public opinion about some policy or other. Sockpuppets could be a big help, and it would be naïve to think that they aren’t already deployed.

Further confirmation that something of the kind is in place is evident from a trove of emails pilfered from HBGary Federal – a security company that peddles investigative services to the government and private companies – and posted online. The company’s CEO made the mistake of crowing that he had successfully infiltrated the cyber protest network Anonymous and discovered details of its leadership and structure. 

Bad idea. Anonymous’s hit list is not one you want to be on. The network seized the HBGary website, stole some 50,000 emails, and claims to have full administrative access to all the company's financials and software products.

Of interest here is that the emails reveal a thorough knowledge of, if not direct involvement with, some variety of persona management projects. One employee appeared to be surprised to find the AF’s request where anyone could see it, writing: “This is open source. Are you f***ing serious?”

Other leaked documents contain details of how they would “friend” real people on Facebook as a way to convey their employers’ messages: “Those names can be cross-referenced across Facebook, Twitter, MySpace, and other social media services to collect information on each individual. Once enough information is collected, this information can be used to gain access to these individuals’ social circles.”

The document goes on to say that “even the most restrictive and security conscious of persons can be exploited. Through the targeting and information reconnaissance phase, a person’s hometown and high school will be revealed. An adversary can create a account at the same high school and year and find out people you went to high school with that do not have Facebook accounts, then create the account and send a friend request.” 

And in another email, from the CEO: “There are a variety of social media tricks we can use to add a level of realness to all fictitious personas... Using hashtags and gaming some location-based check-in services we can make it appear as if a persona was actually at a conference and introduce himself/herself to key individuals as part of the exercise, as one example.”

The so-called “bandwagon technique” is a venerable one used by propagandists in manipulating the public. Everyone understands that ten voices shouting are more effective than one. And all the evidence here suggests that government is refining yet another tool with which to extend its influence through modern social networking.

Who is that little bird tweeting out there?

Vedran Vuk here again. Well, that’s it for today. Thank you for reading and subscribing to Casey’s Daily Dispatch.

Vedran Vuk
Casey's Daily Dispatch Editor