Knights Of The State Round Table

Key fundamental changes in the USEconomy are underway. Some of these changes have motivated extreme reactions by the USGovt, regarding war to secure energy supply, strain on strategic alliances, encouragement of enemy alliances, and tight partnerships with large domestic corporations. They act much like Knights of the Round Table, privy to state secrets, cooperative to formulate strategic policy, agents to preserve the union. The geopolitical stage has morphed into a chess game, overloaded with strategic requirements, where brute force seems an unsuccessful alternative to cunning and compromise. The United States is finding itself awkwardly outside looking in, as its monolithic power has been diminished. The game is changing faster than the US is capable of adapting, so it seems. On the front of the emerging powerful state corporations, large US-based multi-national corporations have emerged. They seem less adapted to compete against Russian and Chinese adversaries, and more capable of exploit war and financial chicanery. Their prominence almost forebodes more military intrigue and more financial warfare.

The future will be interesting to observe, as US firms must strive toward cooperative alliances with the USGovt for the benefit of energy supplier nations, to improve the economies and standard of living in those nations, rather than the present setup, where their ostensible modus operandi seems to pilfer from the US taxpayer, to collude in USTBond speculation, and to serve as agents in currency & gold control games. If the United States is to secure a steady reliable source of energy supply, our nation must change the culture of its multi-national corporations. They must work toward a "win-win contract" rather than the increasingly exploitative direction of the last several years.

Russia and China have embarked on different pathways. Two very different juggernaut stories have been inserted onto the global landscape, with uncertain geopolitical consequences to come. Russia and China are building gigantic state dominated economies. The planning and execution has yet to undergo critical tests. Whether political order can be fostered via equitable distribution of wealth and beneficial exploitations of natural resource wealth in their respective nations, that is to be seen.

TIGHT RUSSIAN STATE CORPORATIONS
Russian President Putin has managed to assemble a veritable "Who's Who" of former KGB officers to lead a raft of important growing Russian corporations. Each firm appears to be following a certain blueprint business model, of state majority control, tight coordination with the Russian state government, first in line opportunity to tap national resources, and political homage to Putin without challenge. Minority interest is to be sold in numerous such firms, mostly to foreign investors. Putin has shown his cards early, as he plans to use state run firms to extend their tentacles into the West, Putin has directed progress to eliminate all competition against these selected favored firms, not only from foreign sources but from domestic sources not loyal to him. He seems hellbent to invalidate past sweet deals to his opponents, and to quash deals to anyone beholden to the West. He is as efficient as he is ruthless. He is emerging as a textbook autocrat. Time will tell whether his corporate giants are as efficient. These firms span the entire spectrum of industry. Some might call the US leadership similar in autocratic tendencies. In sharp contrast, US leaders lately are not as crafty, efficient, or skilled in the game of chess on the geopolitical stage. Conflict is growing with Russia. The war of words has reached fever pitch between Putin and US VP Cheney, as states almost never engage in smooth competition for energy historically. Putin is quoted to have said that Cheney criticism is off the mark, "He took another bad shot, just like on his hunting trip." Ouch.

Gazprom, the giant natural gas producer in Russia, has a market cap of $225 billion, bigger than Wal-Mart. Its CEO is Alexei Miller, who worked with Putin in the St Pete mayor office fifteen years ago. From the same office comes Dmitry Medvedev, Chairman of Gazprom, and Igor Sechin, chairman of the recent controversial Rosneft which had a London IPO. Doubling as deputy prime minister, Gazprom's Medvedev is widely regarded to be the chosen successor to Putin himself. Another friend from that era, Dmitry Yakunin is CEO of Russian Railways. Vicktor Ivanov, former KGB officer, is chairman of Aeroflot. Former KGB officer Sergei Prikhodko is chairman of TVEL, a leading worldwide nuclear fuel producer. Former KGB officer Sergei Chemezov is chairman of Rosoboron Export, a state arms exporter with $5 billion in foreign sales last year. State energy revenues have filled the coffers of the Russian Stabilization Fund, whose $60 billion will help to rebuild airports and perhaps offer assistance to United Aircraft Corp. The new UAC is in line to compete with Boeing and Airbus, sure to supply the ageing Russian fleet of commercial jets planes. The titanium giant VMSPO Avisma is ready to fall under state control also, ensuring structural metal supply.

In a critical viewpoint expressed, the former prime minister Boris Nemtsov offers "The 1990 oligarchs have ceased to be oligarchs and just become businessmen. Now we have a chekist oligarchy," referring to an expression for Russian secret police. Political opponents to Putin are charged typically with fraud, tax evasion, and more, reminiscent of a crime syndicate tactics. Any former oligarchs who have not been liquidated and ruined recognize they continue at the pleasure of the Kremlin. Putin friends who lent money for shares now own large stock positions and executive posts in important companies, a generous reward. Putin claims to value key financial assistance and management skill. Critics claim that the growing state role limits initiative, risk taking, and entrepreneurial spirit. Business skill and acumen might now rank second to lobbying skill. Judges used to be bought by key business leaders in the past. Now judges curry favor in favorable state decisions, believing they do the right thing. Inefficiency results.

In 2005, Russian state acquisitions totaled $40.5 billion, according to KPMG. The European Bank for Reconstruction & Development estimates the Russian state public share of their economy rose from 30% to 35% last year. Russia qualifies as a state economy, much like Cuba qualifies as a police state. Putin supporters and cronies will strive to ensure a compatible successor in 2008 in their next "rigged" election. They wish to avoid a vicious circle of asset redistribution and rotating oligarchies. Unlike the United States, where states control the suspicious counting of votes in certain states like Ohio and Florida, in Russia we actually saw Putin block candidates from appearing on the ballot altogether. That is more effective but makes it difficult to claim a democracy, as we saw in the G8 Meeting hosted by St Pete Russia. Putin was denied and humiliated on his bid for World Trade Org entry.

Russia uses its state corporations in coordinated fashion to forge deals which provide military components. See Iran and West Africa. So as to compete against Russian state corporations, the USGovt has been induced to form partnerships of its own, inefficient and fraud ridden as they are. In a sense Russia (and China) have exported the state merged firm concept to our shores, complete with its innate problems.

STATE FIRMS IN MORE LIBERAL CHINA
China, on the other hand, has a similar array of state dominated corporations, which are selling minority shareholder interest to investors. Foreigners are sure to step up to invest in such firms, especially after Goldman Sachs assures of legitimate financial balance sheets. Nevermind the fees earned by GS big wigs. The major difference is that Beijing has opened the door to the West to such a grand extent in partnerships that competition is ripe between multi-nationals and Chinese corporations. Whereas Russia obstructs competition with Western firms, or dishonors contracts, China has done much better is forging cooperative partnerships, exchange of technology, and seed capital. Already, much strain has been seen and noted; Chinese firms in direct rivalry have not fared well. Not only is the Chinese economy much more diverse, much more development growth than Russia's, but the degree of competition has rendered the less mature, less experienced Chinese state dominated firms as very vulnerable. Tensions are sure to drive a wedge into geopolitical relations. On the US side, tensions are escalating for job outsourcing, TBond debt accumulation, copyright royalty collection, and competing demand for natural resource supply. Whereas Moscow is designing and executing a monopoly in blatant bad faith, Beijing is encouraging in good faith competition in which its favored child corporations are unlikely to prevail but its dually led export corporations (US & China) will dominate.

The Chinese National Offshore Oil Company (CNOOC) and the China Petrochemical Corp (Sinopec) are the two prominent firms in the public view. They have cut numerous deals with former Soviet Republics, Nigeria, Saudi Arabia, and Iran, among others. CNOOC was denied its acquisition of Unocal, the US energy company eventually nabbed by Chevron. Could it be that Unocal, a consultant for which was Harman Karzai (president of Afghanistan) was deemed untouchable by US Secy State Rice (former executive at Chevron)? Perhaps Unocal had many secrets in its possession, such as sticky substance used in industrial bodies, and sticky substance abused within human bodies.

The following quote from a US Congressman summarizes the growing sentiment. "We are dealing now with a brand new international animal called state owned enterprises that are looking to spend a lot of money abroad. They are not capitalistic. They are not free market. They are not bound by the rules of profit and loss, and they are going to gobble up international businesses as we know them." So said Illinois Rep Manzullo. We approve when state owned agencys intervene and rescue the USDollar and USTBond, but they are not permitted to use such money as legal tender in acquisitions. Such is a dilemma founded in a shade of hypocrisy. The benefits from cheap foreign products might seem more costly when our own employer is acquired by a foreign entity, especially a state owned one. Such is what can be called the rub or friction in the one-way street. Imagine working for a Gulf of Mexico oil rig service firm which is owned by Sinopec!!!

See "Global Trade War Update" from May 2006 for a related discussion, which covers some of the Chinese and Russian strategies, relevant to the nature of state dominated corporate tactics toward expansion. Most of their strategic ventures involve energy development and supply.

The point is that state owned Russian and Chinese firms are difficult to compete against by mere US multi-national corporations. When Russia and China lead with these firms, they use leverage of arms sales, military support, and trade concessions in order to secure the deal. Worse still, these two former communist monolith nations can dip into their vast wellspring of foreign reserves, their piggy bank. Russia's reserves of $245 billion are fed by energy exports. China's reserves of $920 billion are fed by factory exports, in addition to Army illicit pirate production in violation of Western copyrights. The trend is clear. Large US corporations will increasingly merge interests with the USGovt, whether effective shining examples of capitalism or not. The efficient deployment of capital, usage of equipment, and management of labor oftentimes is of secondary importance. Fraud, high cost, no-bid contracts, poor product quality, and blatant conflict of interest are part of the heavy damage from this disadvantageous trend toward merger of state and corporate interests, known as the Italian (Mussolini) Fascist Model. Expect the trend to continue, complete with great harm done to rival firms not in the USGovt family fold which cannot effectively handle the competition and favoritism. The other risk is political, as the landscape usually slides toward the imperial platform, and away from democracy.

For three decades the Chinese Army Corp has infringed upon intellectual property copyright for books, music, software, and movies. They grossly underpay royalties, to the tune of a $60 billion annual shortfall to the United States. That money goes into their reserves and general operational funds, subsidizing grants, contracts, and acquisitions. Rumors are ripe that official export also includes human organs (e.g. liver, kidney) extracted from Chinese prisoners, especially those scheduled for execution. The Chinese govt is certainly profiting from adoption exports of children. In fact, China exports adopted healthy little girls, while Russia generally exports terribly sick children from orphanages. My personal life has seen at least three such little Chinese girls of this type, and five such little Russian kids of this type.

IMPLICATIONS FROM MALINVESTMENT
The entire long dark shadow of state corporations encourages massive malinvestment, even outside the international arena. One can point to any number of strange continual supports which do not seem in the national interest, but much more to big corporate interest. The oil industry might have stymied development of uranium, a surefire relief from today's ugly bloody pursuit of oil. The financial industry might have exploited the era of inflation from the 1970's to today, as they benefit from the unusual bond dog which wags the economic tail in rampant speculation. The car industry is inextricably linked to the interstate highway system and its army of road builder contractors.

A glaring example of malinvestment is the 2005 Transportation Bill, whose $250 billion in pork will feed 200 largely useless projects. Big corporations are involved in most projects, often with cozy relationships. Local senators continue to push for an unnecessary railway in the Gulf Coast region. After the late summer hurricanes Katrina and Rita wrecked damage which will remain essentially unrepaired for a full decade despite noteworthy efforts, a chance was given for the US Congress to divert the funding to the hurricane relief and reconstruction. They did not. In fact, not only is the pork still on the table, but massive inefficiency, fraud, and waste prevailed in New Orleans and neighboring territories. Rooftop repair at $150 per sqft was subcontracted on the order of five times in succession, down to $20/sqft, resulting in a final solution of shoddy plastic tarp covering. Unwanted Alaskan bridges will be built to service 50 people on an island which prefers their tiny airport. Anyone who thinks, as Doug Noland of Prudent Bear does, that the USGovt and US industry will reverse course and embark on a massive energy investment for R&D and product development has been smoking crack cocaine, popping stupid pills, and been asleep at the wheel. The system in the United States is not fixing its proper direction, not redirecting priorities, not addressing fraud, not eliminating undue lobbyist influence, not moving away from dead ends.

US energy prices will head higher and higher, while European and Asian energy prices will rise more slowly as their currencys rise versus the USDollar. Inside and outside the US, gold will see demand for a multitude of reasons. Gold will thus continue to compete with USTreasury Bonds. The gold community continues to expect much higher US interest rates, which will not necessarily arrive for a prolonged period of time, since most price inflation within the USEconomy occurs on the cost side of the equation. Being more critical to the economic lifeblood, energy will see demand from basic industrial activity, office function, transportation, home utilities, AND MILITARY OPERATIONS. Motive for demand will be universal across the globe, but here too, foreigners will receive a price discount as their currencys rise. The major rub might be increasingly resilient foreign economies and their incipient rising price inflation, accompanied by wage growth, which stands in sharp contrast to the opposite US situation. They have depended upon asset bubbles less than the United States has. Against such a backdrop, US long-term rates will struggle to stay ahead of European rates. US cost inflation and lost jobs will work to keep USTNote 10-yr yield down, sending them eventually below the EuroBond yield. Other forces will conspire to lift the 10-yr yield, as price inflation escalates from passed on costs, as import prices rise from a saggy USDollar, as foreigners shed more reserves held in USTBonds. The results will be more bond volatility and confusion.

USGOVT BUILDS TIES WITH CORPORATIONS
Imagine Exxon/Mobil or Chevron/Texaco or British Petroleum entering into a competition for a Nigerian or Kazakhstan or Angolan untapped oil deposit. Can they promise troops to protect the unstable govt leaders? By offering Iran a combination of capital funding for natural gas field project development, state-of-the-art missiles for coastal protection, and troops in defense of attack, Russia has neutralized the US military advantage by means of energy leverage. By offering Nigeria troop protection along the coast from bandits, China has circumvented the US military advantage to obtain energy supply. Examples are becoming commonplace for such leveraged deals containing a military component. See Angola and Chad for deals over the edge, the former for its lofty cash incentive to explore offshore oil deposits, the latter for strong-arm tactics in league with murderers to influence an existing oil pipeline flow. Without much conscience, China plows ahead with deals in West Africa. US influence attempts to preserve shreds of democratic hamlets in the region.

The list of corporations gradually merging corporate interests with the USGovt is growing. JPMorgan in finance banking, Goldman Sachs in currency management and bond balancing, Halliburton in energy development, Bechtel in construction, and Fanny Mae in mortgage finance. The risk is for these companies to acquire rivals, to grow larger and less efficient, to be permitted fraud, to extract higher fees from public contracts, and to undermine the competitive environment. See the JPMorgan acquisitions of Chase Manhattan and Bank One. Some argue that the trend is a necessary sacrifice in the interest of national security. My view is that it identifies a gradual slide into worldwide statism and deteriorating liberty. Interestingly, in my travels, not 10% of the people engaged in conversation can describe what totalitarianism or fascism even is.

The days of cooperative foreign corporate conglomerates might be over, dead, finished. Enter the age of competitive conglomerates. The Saudi Aramco giant is the friendly state owned corporation in the petroleum industry with positive ties to the former Seven Sisters of the US Oil industry. The entire Arab group of oil producers consists of friendly state owned corporations. Non-Arab oil producing nations remain hostile, such as Iran. To some extent Indonesia is becoming hostile, where a strike at their Escondida copper mine operations owned by BHP Billiton has interrupted 7% of the world copper supply. In order to compete and to receive security protection, major US corporations might require USGovt direction, cooperation, funding in order to thrive. This is a slap at free-market capitalism, a giant step backward.

THE TREND TOWARD STATE CORPORATIONS
Economic distress is certain to lead to more mergers of US corporations with the state. Economic distress in USEconomy renders more difficult continued freedoms on the political side, as national security forces the sacrifice of liberty. This is a deeply unfortunate trend. Formation of state dominated corporations in my view is a crystal clear harbinger of two developments. Outside the US borders, it signals an escalation for the global war for energy. Notice almost all such giant corporations have an energy nucleus. Inside the United States, they have a financial nucleus also, since financial weapons have been used as lethal economic weapons for decades. Given the Petro-Dollar superstructure, an umbilical cord ties the USDollar to oil. US tactical financial weapons are indeed deployed in order to protect energy supply, and at low cost. Inside the US borders, it signals a deterioration of personal freedom, civil liberties, and the private sector ability to migrate and transport money.

The next couple years will be explosive in the energy world, financial world, and political world. The collateral damage will be to economies, efficiency, and innocent people. The greatest casualty will be to TRUTH. Official national statements have often sunk to efforts to control public opinion, to shape conditions for legislation, to summon national emotions. The degradation of press & media quality and reliability in the United States is not only noticeable but should send the people into PUBLIC DEFCON. It has already degraded on a grand scale. Media networks are each owned by a corporation, each subject to party alliance, political motives, and agendas. The disparity between US news story slant & bias is astounding. The disparity between US story reports, versus European or Asian reports on the same story, is even more alarming, but not as frightening as the absence of stories being reported at all in the US press & media. A free press has always been held at the pinnacle of institutions in a land of freedom, a great light to shine. That light is going dim.

The tribes of the world have aligned. Their economic armies are comprised of state corporations. Securing energy, minerals, food, and water are of primary importance for tribal survival, as is keeping the flow of money ample and reliable. Gold and crude oil will be set on perpetual upward courses in price, with such a belligerent corporate climate in force. State corporations exist to fight wars on the economic fronts. They exist today to fight the GLOBAL ENERGY WAR, and to fight the FINANCIAL WAR TO PRESERVE THE PETRO-DOLLAR. Corrections in the gold price and oil price will be shorter in duration but no less volatile. Anyone who purchased gold under $580 is deeply satisfied. Anyone who purchased silver under $10 is deep satisfied. Selling rallies will be to lure in suckers who fail to comprehend the global war and its corporate weapons. No price decline in either gold or oil can be sustained in such a climate of war and prevalent warlike corporate devices.

RISK TO USDOLLAR
The true safe haven is not a government bond of any type, certainly not one which is responsible for 65% of all global debt in 2005 on a global basis. Especially not a govt bond from the nation which is so deeply committed to war in the Middle East in pursuit of oil, complete with its instability. Especially not from a nation which has authorized pre-emptive strikes while at the same time relying upon questionable usage of intelligence information. Especially not from a nation which has a growing deficit and trade imbalance beyond structural remedy, complete with poor repayment potential. Especially not from a nation which has corrupted and rigged markets against Constitutionally mandated metals (gold & silver) which stand in opposition to its USDollar. The USTreasury Bond, long the safe haven, is like a giant metallic pillbox sitting in on open field during a massive lightning storm. All those who hunker down in the USTBond pillbox run the risk of financial electrocution. As long as the funding for military operations and state dominated corporations comes from the same large pool in which USDollars float, gold and crude oil will outperform all other investments. The USGovt is bound to flood the system in order to finance its operations, where like the first-borns, the first to feed at the table is the war machine. The second to feed is the fleet of state corporations. The back draft of preferential financial feeding creates a colossal wind current for gold and crude oil. Essential commercial and financial commodities rise in price in times of war, strife, and chaos. The unspoken truth is that the gold and crude oil price have risen markedly since the Iraqi War, which kicked off the Global Energy War. As it rages, yellow gold and black gold will continue to rise.

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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at[email protected]