Special Analysis Report: Able Danger and the Secretary of State

In the year 2000, a private firm tasked to identifying potential security threats to the United States of America developed a chart of complex business and government relationships that, in its scope and detail, implicated China as a source of concern. As reported by the New York Post, the chart was "controversial" at the time it was unveiled; and according to the Post article, it triggered grave concerns because the investigation of which the chart was a component came "...dangerously close to violating laws banning the military from spying on Americans," according to sources involved in the operation.

One of the targets of the investigation was an individual with long-term ties to Right-wing and conservative interests, a person who was soon to become a Washington insider: her name was Condoleeza Rice, who was to become, subsequent to the Republican victory in the 2000 Presidential Election, the National Security Adviser to the new President, George W. Bush. Eventually, Dr. Rice would become the Secretary of State, a portfolio that she still holds. The Post article noted above concludes, "There was no suggestion that Rice or any of the others had done anything wrong."

The investigators who were targeting Dr. Rice and other Americans were fired, and the contract the private firm had with the Pentagon was canceled. James Smith, who was responsible for creating the "controversial" chart using a sophisticated data mining procedure to find correlations and connections among millions of pieces of disparate information, confirmed to the Post that he was, indeed, fired because of his work. He indicated that it was because of concerns by Pentagon lawyers about the "focus" on American citizens. It is possible that the termination of the Able Danger work was because of concerns within the Clinton Administration that, were the group's activities to become public, accusations would be made that Clinton was spying on his political enemies because a number of American names being generated by the model were Republican political personalities and their business supporters.

In other aspects of the work by Able Danger, it had been able to identify, months in advance of the attacks on the United States of September 11, 2001, several of the foreign nationals, including purported ringleader Mohammed Atta. That this intelligence existed but was never used or apparently communicated to the Bush Administration before the attacks has only recently come to light, and the facts surrounding Able Danger's accurate targeting was not made available to the independent commission (informally known as the "9/11 Commission") that was charged with preparing a definitive report on the attacks and the failures of intelligence that allowed them to happen.

According to Reuters, as reported by Intel Dump, a military official, Captain Phillott, affiliated with Able Danger has now stated that he did, indeed, tell the 9/11 Commission's controversial and allegedly partisan staff director, Phillip Zelikow, about intelligence generated by Able Danger regarding Mohammed Atta, but the actual Commission members assert that they were not told about the substantial importance of the successful, pre-attack investigative work that had been accomplished. This, however, must be viewed in the context of the Commission's final report, which described the captain's information as "not sufficiently reliable," indicating either that the Commission members dismissed a stunningly accurate assessment of men who were soon to be terrorists or that Dr. Zelikow provided the Commission the assessment that would entirely inform what would come to be its summary dismissal of the information.

In what might be taken as a mere side note, Dr. Zelikow and Commission member Jamie Gorelick, who worked for the Clinton Administration Justice Department, were the only individuals associated with the Commission that were ever permitted to fully review National Security Council documents pursuant to the Commission's investigations. More fundamentally, in a Statement of the Family Steering Committee for the 9/11 Independent Commission, organized family members of victims of the September 11, 2001, attacks called for the resignation of Dr. Zelikow from the 9/11 Commission because he, along with Condoleeza Rice, had attended a meeting in late 2000 in which outgoing Clinton Administration officials attempted to brief transition team members for the in-coming Bush Administration about on-going investigations of potential terrorist threats against the United States.

Dr. Zelikow is described by insiders as a long-time close friend of Condoleeza Rice, having co-authored with him a 1995 book on German reunification. She has recently appointed him as one of her senior advisers. According to her official online résumé provided by the United States government, before serving the current Bush Administration, Dr. Rice was the Provost of Stanford University, long reputed as a bastion of conservative and Right-wing intellectuals, and she had at various times served on the boards of directors of such multinational entitities as Transamerica Corporation, Hewlett Packard, the Carnegie Corporation, Carnegie Endowment for International Peace, The Rand Corporation, and the National Council for Soviet and East European Studies. Dr. Rice and Dr. Zelikow had worked together for the Administration of President George H.W. Bush.

No copies of the original Able Danger chart have surfaced. To the extent that the mainstream media has covered this odd little story, assurances have been made consistently that Dr. Rice and other Americans were not legitimate targets of investigation. Although such concerns are well justified, the existence of the now-vanished chart indicates that, in the present case, an extensive forensic process proceeded from the leads offered by the results of the brute algorithm. Whether or not the construction was entirely fantastic will never be known unless the chart is rediscovered and its pathways fully and impartially pursued by law enforcement authorities.

So far, Able Danger is the only known project at the national level that, more than a year before the attacks of September 11, 2001, correctly identified not only terrorists who would be involved in those attacks, but accurately identified the one who was the ringleader of the outrage.

So far, no one has explained why, if the Pentagon was concerned about military spying on American citizens, the information was not passed to domestic federal law enforcement officials who could have legally continued what proved in retrospect to be the most fruitful of all known avenues of investigation that were on-going in the year leading up to the attacks.

And so far, no one has explained how information about what Able Danger had found and surmised managed to get to Condoleeza Rice's close friend and associate, Phillip Zelikow, yet the 9/11 Commission members still disclaim any detailed knowledge of the extent of Able Danger's findings, despite the Commission's final report dismissing the source of the information passed to Dr. Zelikow.



The Dark Wraith leaves it to the discretion of the readers, as they may choose, to assess this odd little side story and all of the seemingly disparate issues that arise from it.

Special Analysis: The Unraveling and Unfolding of Iraq

The Balkanization of Iraq is already well underway. All the Americans and the British want at this point is documentary veneer that gives the legal appearance that a sovereign state called "Iraq" still exists, despite the concept having been a dog from the very start, requiring as it did a brutish and repressive central government to keep it together. It is the desire of the Americans, not the Iraqis, to have the mythical Western construct of a nation called "Iraq" remain; and as long as that myth persists, the prospects of all-out civil war will increase.

The Kurds want their own state. This is causing the Turks to the North great concern, especially since it appears that Israel—not long ago becoming quite the friend of Turkey—now sees productive political and military groundwork to be laid in a nascent Kurdistan.

The Shi'ites want perhaps not one, but two quasi-states for themselves, constructing as that scenario would the platform from which could eventually be constructed a political/religious span all the way from Iran to Syria.

And obviously, the Sunnis want their own turf, but they're none too thrilled because the only sand remaining for them has little oil under it, which means they would prefer to keep a tighter federation together to enhance their claim on some of the revenues from "Iraqi" oil, which is really Shi'ite Iraqi oil and Kurdish Iraqi oil. That having been said, the Sunnis are in no mood to acquiesce to the currently emerging constitution. In a bizarre coalition, militant Shia cleric Moqtada al Sadr has joined some Sunni leaders in saying that Shias and Sunnis alike will reject the constitution at its referendum in October, setting the stage for a major setback to hopes of political stability imposed by a statutory framework outside of religious law, rule of strongmen, and force of foreign arms.

Here's the upshot: if the coalition abandons Iraq, then the Shi'ites and the Kurds can get what they want, and the Sunnis will end up losing some of the primary sources for their on-going machinery of mayhem. Although the insurgency is internally complex and not monolithic by any means, a major cluster of provisionalism and murder arises from men who are Sunni Muslim by religion and Baathist by political affiliation. They still have plenty of weapons to keep causing trouble for years to come, but the primary pumps of weapons coming from Jordan, Syria, Iran, and other points all around the compass would dry up. Specifically, Syria and Iran—neither or which are "state sponsors" of the insurgency in Iraq, but both of which have borders like sieves—would move swiftly to bind strong alliance to the Shi'ites. In a recent visit to Iraq, the Vice President of Iran said, "We consider Iraq as our brother." A statement referencing kinship carries all kinds of subtext in the Middle East, and the reference to ties likened to blood means the contemplation of lasting, binding effect to a degree and depth perhaps not fully understood among American planners with their own ideas of what alliances are to come of Iraq's new nationhood. The point was not missed by the Sunnis, however: as the Los Angeles Times reports, "Sunnis fear that the federalism... is a trick to give Iran de facto control over the south."

But nationhood in the sense of an enduring Iraq like the one propped up by the West for so many decades might not be in the cards. If the nation-state that was once Iraq comes apart, there may be much wringing of hands not just in Washington, but also in Europe. This Euro-American gnashing of teeth notwithstanding, a disassembled Iraq would be more stable, and the payoff to the West would be less likelihood of and reason for repeated and protracted military forays into a land that has been the graveyard for many a soldier of Caucasian empires over the centuries. But the old idea of threshold size and composition for a viable state still lives in the minds of Western geo-strategists, even though that model has no empirical underpinnings when it comes to the Middle East: quite stable nations of all sizes and populations exist literally right next to one another, many of them Western creations, but many of them based upon older borders merely certified by colonialists. The nation known to current generations as Iraq was laid over a tapestry of disparate tribes, religious affiliations, and even resource distributions; and to keep it together, the West had to go from propping up one brutish puppet to another, ruling the land as each did with an iron fist.

Allowing Iraq to devolve would benefit many in that land: a major bloc in the return of a Shi'ite Caliphate would lay out from Iran to Syria; the Kurds would get a nation that could serve as the northern shard of a sorry excuse for a buffer on the Caliphate spreading to the North; and the Sunnis would be most unhappy, having rejected a nation-building constitution only to be left with the scraps of the broken state: they'd have to settle for getting what weaponry they could from resources like al-Qa'ida, the hard-core terrorist matrix that took advantage of the anarchy of the Coalition occupation to turn parts of Iraq into training grounds for their regional missions of murder. The good news, though, is that the terrorists, themselves, would be boxed in to an extent far greater than they are now, given the way they're currently shuttling fighters from Iraq into Jordan and the Gaza Strip like there's not even a border. The map at left depicts the demographic structure of Iraq right now and, at least to some extent, hints at the way Iraq could be disassembled in a controlled shatter. The part where moderate Middle Eastern concerns come into play is in how the Sunnis, occupying the western deserts (the dark yellow area of the map) would be contained, given that they would much prefer not to have this scenario at all, and given that they would not have great incentive to assist in stabilizing the region. A close look at the map points to a perhaps grim but nontheless possible way the borders among the new Shi'ite (light purple), Sunni, and Kurdish (blue) states would go together.

The sparse population of the western Iraqi desert manifestly shows the weakness of the Sunni position. All the Shi'ites would need is a defensible corridor, possibly arcing up along the ethnically mixed region (the red area of the map) that separates the Kurdish area of the North from the Sunni region in the center. The Kurds and the Turkmen might or might not be opposed to this; certainly, anything that would give them a buffer from the Sunni Arabs could be sold as a security measure, and the Shi'ites as well as the Kurds would be quite diligent in keeping them from setting foot in the corridor.

The real showstopper would be Baghdad, itself. The place is a mess, and whoever gets it would have the worst of mixed blessings: a very modern city, wrecked in large parts though it is; ethnically diverse; politically, religiously, and culturally divided along all kinds of lines. The Shi'ites would be hard-pressed to yield it to the Sunnis, and the Sunnis would have a hard time thinking of anything as desirable in exchange. As such, Baghdad becomes in this scenario the 21^st Century Jerusalem.

No one would argue that the break-up would come without blood. In fact, it might even require a full-scale civil war to establish what would otherwise be the inevitable cleaving of Iraq into smaller, far more stable constituent nation-states.

Right now, there is not a "civil war" in the sense of the American version nearly a century-and-a-half ago: the War Between the States involved a breakaway republic and a long-standing, legitimate federal authority. In Iraq, the federal authority is neither long-standing nor legitimate; neither is it in any way capable of projecting armed conflict onto a battlefield against its opponents to reel them back into a nation ruled by law underpinned by a powerful and broadly recogized federal constitution. Furthermore, there is no break-away republic in Iraq: nothing exists but factional interests and a putative "federal" power dominated by one of those factional interests.

In fact, the term "civil war" in Iraq is better cast as "regional war": the Sunni Arabs are deploying forces in a guerilla conflict; the Kurds have their own loose confederation of provisional paramilitary groups, some of which operate in conjunction with the American-backed, "federal" government; and the Shi'ites are internally factionalized, with some aligning to their majority position in the federal government, with others like Moqtada al-Sadr mustering their own provisional troops as in the case of al-Sadr's Mahdi Army.

There is, then, no civil war unless one wants to hold that there is a legitimate and viable entity called "Iraq," which arguably there is not; and there never has been because the republic was artificially constructed by Western interests, and its rulers imposed binding control through unspeakable force against the people under that illegitimate rule. To fall back to the position that the United Nations and the constituent nations of the world recognized the nation of Iraq is entirely specious: the same recognition of an entirely different Iraq of four years ago belies a tendency on the part of nations the world over to accept into their ranks nominal entities, regardless of the origins and legitimacy thereof, so long as they are certified by one or more members of the league of large and powerful countries.

That the U.S. finally decided to rid itself of the last dictatorial proxy when he no longer accepted his role as a bully puppet of the West, and specifically of the United States, means the United States now must face the long-term devolution of Iraq to a more sustainable, viable configuration of republics, none of which are going to be much to mainstream American liking, given that those new republics will pursue their own interests without regard to what the Americans want or need.

This means that, one way or the other, with or without years of lost American lives, Iraq will unfold into something other than what the United States, Great Britain, and certain other European and Asian nations desire. And the longer the Coalition stays, the more that unfolding will look like an unraveling, and the more the violence of nation-building will have the appearance of the madness of civil war.

But one thing is certain: all of this would happen without the Americans there. More tragically, something like this will probably happen to a greater or lesser extent with the Americans there.

If this be the case, then the United States is serving now as the unneeded sideshow, important though it might believe it is as it fills up Arlington National Cemetery with its citizens' contribution to the Save Iraq from Itself Foundation. In the end, though, its irrelevance will come shining through as events outpace ill-conceived neo-conservative strategies. The time frame in which this irrelevance dawns upon Washington will determine how many more of those soldiers' graves will be filled.


The Dark Wraith has spoken.

---

This article is based upon "One of Many: Iraq Unraveling, Iraq Unfolding," written by the author and published at The UnCapitalist Journal.

Special Analysis: The Whispers of Bombs

On Wednesday, August 3, a roadside bomb killed American Marines in the Iraqi town of Haditha. That in itself is nothing new in Iraq: it happens with an appalling frequency, even though Coalition forces have been seeing such devices since the very earliest days of the occupation. But the bomb used in this attack was somewhat different from the ones of even a couple of months ago. It was something of a monster, transitional device between older models and a new, far more lethal kind. The difference in the bombs starting to show up now in Iraq and those of the past tells not merely of the evolution of the Iraqi insurgency, but of the history of U.S. military operations in Iraq. It speaks as well to how the mainstream news media presents the occupation and the context of it.

The older style, "improvised" roadside bombs were often nothing more elaborate than one or several artillery shells strung together with some kind of triggering mechanism, perhaps a cell phone, or maybe just a pressure switch that would set the chain of shells off when a heavy object rolled over it. The graphic above is a one-shell, primitive affair, but nonetheless a machine waiting to butcher. Such bombs were bad enough: the shrapnel, the concussion, and the explosive heat catching things on fire could kill pretty efficiently. Even a well-armored Humvee could be flipped and/or cleaved open if the shells went off at just the right second. According to the Voice of America, the one that killed the Marines was a giant of the old style, so powerful that it threw a 27-metric-ton amphibious armored personnel carrier like the one at left into the air, tore it open, and thereby killed fourteen soldiers inside. The scale of force necessary to do such damage is beyond what most people have ever seen in their lives, even those who have been around or operated heavy equipment. The effect of that bomb on the doomed amphibious assault vehicle in Haditha can be seen at left, below.

The traditional, improvised explosive devices of the Iraqi insurgents are a bit tricky to set up. A pair of insurgents usually puts the device together along the side of the road, lays the trigger on the road bed, and sometimes even puts a can in place to warn locals of the danger. Done at night, the operation is somewhat perilous for several reasons: the ordnance being used can go off; and there's always the possibility that a Coalition sniper is watching from an elevated position at some distance, patiently and methodically setting up a kill shot.

A lot of those bombs were laid, though—so many, in fact, that it wasn't their kill rate that was as important as the perception that they were all over the place on the roads between the cities of Iraq: some of the bombs were in the ditches; some were mounted on the undersides of overpasses; some were just right there, waiting for an inexperienced or scared driver flying down the road to see the killer too late to swerve. It wasn't just the death: it was the fear.

Something new is coming, though. Plenty of old ordnance is lying around Iraq just waiting to be turned into crude roadside killers and murderous weapons hidden in the backs of parked trucks and carts, but those weapons of opportunity are now being supplemented by bombs made from shape charges, which are essentially an explosive chemical—powder, plastique, perhaps even liquid—with a metallic component—shrapnel, if you will—all inside a container that focuses the explosion. A well-designed shape charge like the commercially available one at left can cause the shrapnel to fly at speeds of as much as 10 kilometers per second, thereby turning it into a hail of slugs capable of fully penetrating practically any armored vehicle's plating. Once compromised, the armor then becomes the tomb of personnel inside the armored vehicle as the slugs, having been slowed down in the initial penetration, rattle around hundreds of times inside, shredding flesh, while the killing heat, gasses, and other metal from the device take advantage of the initial breaches to pour in more death and destruction.

Iraqi patrols at the Iranian border have caught smugglers shuttling shape charges into Iraq from Iran. In a find on July 20 of this year, not only were pre-fabricated shape charges seized, but so were the tools necessary for Iraqi insurgents to build them inside Iraq, thereby removing the time and risk involved in importing the devices. This means that the insurgency in Iraq has been gearing up not only to use more sophisticated weaponry, but it has also been laying the plans to create a self-contained, domestic weapons manufacturing industry right in Iraq, itself. This is important: although used, scavenged, and imported weapons will always be an important part of the insurgency's inventory, a localized weapons building matrix points to a far deeper, much more difficult occupation for the Coalition forces. Stopping inbound traffic at the Iraq/Iran border is difficult enough, given the enormous length of the border and the often treacherous, forbidding terrain of the frontier; but halting bomb building at the factory level inside a giant city like Baghdad is far more difficult.

On April 4, 2004, the United States led a full-scale assault on a huge slum called Sadr City in Baghdad. The seige was the culmination of a series of confrontations between the Iraqi occupation authorities and firebrand Shia cleric Moqtada al Sadr, who stood accused of instigating the assassination of a rival cleric. Mr. al Sadr was protected by a provisional paramilitary group called the Mahdi Army, whose ranks comprised primarily impoverished young men armed with little more than assault rifles and some rocket propelled grenades. After a bloody battle in which Mahdi Army commandos and al Sadr himself holed up inside a mosque, an agreement was reached that allowed al Sadr to escape prosecution in exchange for him and his men quitting the mosque and entering the mainstream political process then being contemplated for Iraq. In an article dated August 15, 2005, the Chicago Sun-Times describes Sadr City as it is now as "one of the brightest successes for the U.S. security effort [in Iraq]." However, in an article dated August 18, 2005, the highly reliable, if unabashedly pro-Israel, news source DEBKAfile has this to say: "[T]he shape charges smuggled into Iraq from Iran are now locally manufactured in the Sadr City slum of Baghdad."

And so, as the war against Coalition forces enters yet another phase of more lethal weaponry being deployed by the insurgency, the mainstream media touts to Americans as one of the 'brightest successes' in all of our trials of the Iraqi War the very pit from which more young Americans will be wounded, maimed, and killed.

And the American people will perhaps enter yet another phase of confusion about how so much success paraded before them, not just by their government, but also by their trusted news sources, can lead to so many wounded, maimed, and killed young Americans. Eventually, perhaps they'll figure it out.


The Dark Wraith has spoken.

Special Blog Post: Securities Scams and the Weather Forecast for Hell

At 10:25 a.m. EDT this morning, a spammer posted a promotion of a penny stock on a comment thread here at The Dark Wraith Forums. One of the long-time commenters here, a gentleman I consider a friend, followed by referencing the trading symbol that had been included in the spam comment. As soon as I saw what was going on, I deleted the spam comment and posted my own comment. It occurred to me that the comment that followed, which referenced the trading symbol, left the intent of the spam comment intact. I have chosen not to delete that comment, however, hoping as I do that everyone understands the context in which his comment then mine were made. It is anathema to me to censor speech except under extenuating circumstances.

That having been said, commercial speech does not enjoy the same rights and priviledges as private speech, so I make no apology for deleting the spam. It was posted here in the furtherance of a promotion of a security with which I have no affiliation whatsoever. The unauthorized use of The Dark Wraith Forums to promote any security constitutes, in my judgment, cyber trespass, among other torts.

The IP address of the commenter indicates that the post was made by a promoter who has most likely received compensation to make representations on behalf of the company that was the subject of the offending comment. In my last years as a business consultant, I spent quite a bit of effort trying to keep the officers and directors of client companies from doing exactly this kind of thing, either on their own or through promoters. I had learned that this was unacceptable, inappropriate, and in some circumstances illegal. It was also in at least some cases part of an "overall plan or scheme" pursuant to what we called a "pump and dump": the promotion of the security was intended to bring in buy orders, which would induce the market makers to push the bid price up. The higher the price, the more the insiders and promoters could get as they sold their stock off pursuant to Rule 144 or some kind of registration statement.

Pump and dump schemes don't work all that often. The buy volume has to get pretty serious, even on a penny stock, before the market makers will start to react. Usually, the entire effort gets a few suckers to buy into a penny stock, and they end up with bupkis.

Once in a while, though, some version of a pump and dump actually does work. The buy volume soars, driving the price of the security up into the treetops. The suckers get just all giddy about how smart they are, and they tell other suckers-in-the-making, who tell other wannabe suckers. Once the demand pressure pushes the stock price high enough, all kinds of sell orders start popping out of the woodwork: consultants dumping their S-8 stock, spouses and kids of insiders uncorking their stock, odd-sounding corporations pounding their stock out, and the insiders getting rid of as much of their insider stock as they can pursuant to restrictions under Rule 144.

In the end, the stock price comes back to Earth, and the suckers who held on, thinking the sky's the limit, learn instead that, in fact, the bottom of a small crater is the limit, and their investment money makes a nice carpet of losses to line the hole in the ground.

The Dark Wraith Forums will never sponsor, support, nor sanction a statement encouraging the purchase of a specific security. In fact, it is my intention to help people understand stocks, bonds, options, futures, and other financial instruments enough to have a healthy fear of the risks involved in foolhardy investments. Securities markets are a world of massively large investors, highly educated and seasoned professionals, powerful computers, high-speed connections, incomprehensibly complex streams of information, and money beyond your wildest dreams. It's also a world of con artists, companies that are already dead whose officers and directors have not yet gotten the clue, brilliant ideas that will never see the break for daylight, honest-to-god geniuses that just don't know how to run a business, and a whole lot of promoters who will pump out e-mails, "newsletters," faxes, press releases, and other hype just to get a pile of stock or a paycheck.

As an investor, at best you're going to make money by investing cautiously and in broad-based portfolios managed by people who know more than you do about that world. For every person about whom you might have heard who made a fortune in some penny stock, there are a couple zillion others who got their clocks roundly cleaned trying to get rich on the cheap in securities markets. I watched it happen.

If you want to get rich quickly, marry into wealth.

If you're too ugly to attract a well-to-do partner, buy some lottery tickets. With probabilities of winning in the tens or hundreds of millions to one against, you're still more likely to hit the big score than you would in the world of securities scams. And as an added bonus, unlike a rich spouse, a winning lottery ticket won't expect you to act properly in public.

The bottom line is simple: if you're looking for advice on what securities to buy, you won't find it at The Dark Wraith Forums.

Not, at least, until the day I change the name of this blog to the Sunny Investment Dweebs Forums. And that's going to happen the day that Hell freezes over.


The Dark Wraith has spoken.

Special Analysis: Pumpkins and Futures

It seems like just about every day recently, news services have been barking about oil prices going up. "Record breaking" keeps showing up in the news copy. In a CNN Money article for August 9 was the following somewhat cryptic line: "Light, sweet crude for September delivery fell 87 cents to $63.07 a barrel..." At least the word "fell" was in there, so that might be good news; but what's with the light and sweet stuff, and what's with September when it's still August? Well, the "light, sweet" just refers to a grade of oil, and that's how trading is done with most contracts: each identifiable grade of a product gets its own consideration based upon its characteristics. When Treasury bonds trade, they trade based upon their maturities; when currencies trade, each trades based upon the nation issuing the currency; et cetera. But that doesn't explain the September part, which has to do with the fact that these news reports are discussing futures contracts, and it is these animals that will be explained in a simplified manner below.

Before we get started, keep in mind that this is a very basic introduction to what futures contracts are all about. A little bit of terminology is introduced, and the underlying purposes for futures markets are shown. Those intimately familiar with futures will find all kinds of oversimplifications in here and will have reason to sharply criticize the example used as being unrealistic. To those critics, I acknowledge the complaints, and in the spirit of fraternal comraderie I say, "Bite me."

Let's take that simplified tour of a few basics about futures contracts.

You are Henry Hineyswilt, and you are planning your traditional Halloween festival. You'll be needing a thousand pounds of pumpkins in about the third week of October. Now, it so happens that you know a guy named Lester Longsteam who will have more than enough pumpkins to fill your order. Right now, pumpkins are selling for 25¢ a pound. This is what we call the spot price of the pumpkins. You obviously don't need the pumpkins right away, so you would like to buy a forward contract: an agreement that specifies a price, quantity, and terms of delivery for some date in the future. Well, as it turns out, pumpkins are such a popular commodity that there is a standardized contract for them: there's an agreement for each month of the year; it states the number of pounds in a delivery and where the delivery is to take place. When a market is such that completely standardized forward contracts are available, we say there's a futures market, and the contracts are called futures. Everybody knows the terms of these agreements, and there's no need for buyers and sellers to meet face to face to hash out how much, where, and when. It's all there, laid out in these perfectly standardized, off-the-shelf agreements.

Okay, then, you've never dealt in futures for pumpkins before, so you look into it. You discover, much to your satisfaction, that a pumpkin futures contract for October is open, and each contract specifies delivery of a thousand pounds of pumpkins on the 15^th of the month at the Farmers' Market just outside of Peoria. You figure this is going to work out perfectly. You tell Lester to go ahead and sign you up for a thousand pounds of pumpkins, and you get ready to give him a check for 25¢ per pound times 1000 pounds, or $250.00. Lester says to you, "No, Henry, I don't want to do a plain forward contract with you; I want you to go long one futures contract. I'll write (that is, 'I'll go short') a futures contract. We'll do this through the pumpkin futures clearinghouse because they deal in millions and millions of futures every day, and they guarantee payments and deliveries." You think this is a little strange, but you agree. Much to your surprise, when you buy the contract from your local pumpkin futures broker, Karl Korkburt, he tells you that you'll need to give him a check for $25, not $250! You ask him why you're not supposed to give him the whole amount, and he says, "Sir, all you pay on a futures contract is the margin, which in this case is 10%. You're not taking delivery now, so why would you pay the whole amount now?"

This makes sense to you, and you're about to tell him to go ahead, when he says, "Oh, wait a minute! My bad. I just quoted you the spot on pumpkins: that's going off at $250. Let me see what the futures prices are." You hear him clicking his keyboard, and then he says, "Okay, the September contract is going off at $230, and the October is going off at $190."

You find this odd, so you ask him to explain why these futures prices are less than the spot price. He says, "Well, first of all, money in the future isn't worth as much as money now. That's true for all instuments where money changes hands down the road instead of right away. But more importantly, traders by the millions are dealing in these pumpkin futures, and it is their judgment through their collective trading that there will be more pumpkins available in September, and lots more available in October. That means spot prices then should be lower than they are right now, when pumpkins are in pretty short supply."

Suddenly, it hits you: instead of paying the spot price to some producer for delivery in October, the futures contract allows you to pay what the market is currently assessing the price of those pumpkins will be in October, when you want delivery!

This is great, you figure. You authorize Karl to go long one pumpkin futures contract, and you give him the $19.00 (plus his commission, of course).

Well, the next day, Karl calls you and says you need to send him a check for some more money. You say, "I just sent you the $19 plus your commission, fool"; and he responds by saying, "Yes, but the October pumpkin futures contract is now trading at $180 (in other words, 18¢ per pound on the pumpkins). You say, "Yeah... so?" He gives an exasperated sigh and says, "You need to cover, Henry. Yesterday, you were holding a contract that obligated you to accept delivery of pumpkins at 19¢ per pound. Today, those October pumpkins are worth only 18¢ per pound. You've lost money: you had $19 margin with us; you lost $10 on the contract, so that puts you at $9; your margin on the new, $180 price is $18, so we need another $9."

This annoys you a little, and it doesn't exactly make sense; but then you say to him, "So, what would have happened if the price of the October futures contract had risen to $220?"

He answers, "Then your contract would have been worth more than you paid for it, so the gain would have gone into your cash account with us: you had the original $19 margin money, and you gained $30 on the contract; with a $220 price, your new margin would be $22; but with $49 in the account, you'd have $27 clear."

Ah, so this is how it works. You're making or losing money every day on the contract. Unlike stocks, bonds and other such financial investments where you don't actually realize gains and losses until you liquidate a security, futures trading means rising and falling real cash balances in your trading account every last day that your position is open. It strikes you that this means, if you're some kind of big-time trader in pumpkin futures, your net position could be whipsawing back and forth pretty seriously, so you'd have to have serious cash at the brokerage to cover in case the price went severely against your position.

You think you've got it all straight in your heart, and it's now the early part of October. The September contract has already expired, so October is the front-end contract. Everything is cool until you hear some awful news. The state in which you reside has just passed a law banning Halloween celebrations because they honor pagan religious beliefs contrary to the Judeo-Christian principles upon which this great nation was founded. If you were to go through with having that Halloween party, the maximum penalty would be $750 and death by burning at the stake. You call all your friends and tell them to forget about Halloween; you'll have some kind of Thanksgiving Day affair complete with proper and earnest prayers that the religious nuts all get zapped up to Heaven by Christmas so you won't have to buy them any presents. You also call the costume rental store and cancel your order for that Casablanca/Rocky Horror Picture Show combo outfit, and you kill the order at Sam-the-Spam-Man Catering. Problems solved.

Suddenly, something occurs to you: you have agreed to accept delivery of one thousand pounds of pumpkin pursuant to an open futures contract! You panic. You run around trying to figure out what to do.

Finally, you call that pumpkin broker, Karl Korkburt, from whom you bought the futures contract. He just starts laughing: "Sir, there's no reason for you to be acting like this. All you do is close the position." You ask him how to do this, and he says, "You simply take exactly the same position on the opposite side." After he checks his open positions screen, he says, "I remember: you're long one contract. That means, to close your position, you need to write one contract."

You respond, "Now wait a minute, Karl. You're telling me that I am now going to agree to accept delivery of a thousand pounds of pumpkins, and at the same time I'm going to agree to deliver a thousand pounds of pumpkins. What a fiasco!"

Karl has about had it with you by this point. "No, you ignoramus. The clearinghouse will see that you're long one October contract and short one October contract, so your net position is flat. You're out of the game. You're done. It's over."

A little sheepish at knowing so little, you grunt, "I'm done if I just write a contract, now?"

"Yes sir. As long as it's the same one you're long," Karl answers, getting his cheesy good humor back.

"Oh, well, let's do that, then," you tell him. "And let me know what this is going to cost me."

The broker says, "Well, I see that, as of yesterday, the price was $220 on the front-end contract. You had $30 in your account. Today, it looks like the price is up to $225, so we're going to have you write an October at that price."

You get all kinds of curious. You say, "I went long at $190, and yesterday it closed at $220, and that means I've got $30 in cash right now. So what happens here?"

The broker says, "Well, you're holding a contract that was marked at $220 as of last night; and you're going to write one that will sell at $225. That means you're five bucks ahead for the day and for the termination of the position, so that five dollars will add to your $30, so you finished the game ahead with a net gain of $35."

You grumble, "God, this is complicated."

Karl chuckles and responds, "No, it's complicated only because you were thinking about it the wrong way all along. You see, Henry, you kept thinking that you owned a contract you bought back in August; but you really shouldn't have been thinking that way. What was really happening was that, at the end of every day, your position was being closed out, and your gain or loss was being calculated, and the real wins or losses were going into or coming out of your account. Unless you did something about it—which you never did until this very minute—your position was being re-opened at the new price the next morning exactly as that position had been configured when the market closed the day before!"

"Ah!" you roar. "That's why I'm making only five dollars today: my position opened this morning by me automatically, without my doing anything, purchasing an October contract at $220! And now, because the price has gone up to $225, I'm ahead five bucks for the day!"

"BINGO!" Karl crows. "Whatever happened to the price of the October contract in previous days was already settled in your account. That money's already been there."

And you chime in, "But what really happened was that hundreds of dollars was going in at night, and then hundreds of dollars was heading back out in the morning."

"Well, I wouldn't say 'hundreds of dollars,' Henry," your broker corrects. "You're a small-time player, and you were working with margins that weren't even a drop in the bucket."

Now, you get curious. "Tell me this, Karl: if I hadn't thought to call you to kill this open position, would I really have had a thousand pounds of pumpkins show up at the shipping yard in Peoria?"

"No," your broker answers, "the clearinghouse keeps that from happening. Even though you were using futures to hedge—meaning that you were one of those types who actually had pumpkins or wanted pumpkins and were using contracts to guarantee a future delivery price—your position would have automatically and permanently closed on the closing date of the October contract, and you would have to have purchased the actual pumpkins, themselves, in the spot market with the proceeds from the liquidation of your futures portfolio for October. If you think about it, once the October contract has reached its end on the last day of trading before deliveries specified in the contract, the position couldn't be opened again the next morning because the October contract would no longer exist."

"I see," you ponder. "But I just got the impression from something you just said that there are people who do this who aren't really trying to buy and sell pumpkins."

"That's right, Henry," the broker agrees. "We call them speculators; they play these markets for pumpkins, for oil, for hog bellies, for currencies, for interest rates, and for all kinds of other things just to try to make money from day to day."

You kind of laugh and mumble, "Those speculators aren't trying to control risk; they're actually taking risk!"

"You're exactly right!" Karl hollers. "Hedgers are simply establishing a known price they'll end up paying out in the future. They're not interested in winning or losing on price swings. If you'd actually had to buy those pumpkins you were planning to, you would have ended up paying the $225 spot for them at a farmers' market. The futures contract made you some extra money that would have then gotten eaten up when you went and bought the commodity. Speculators aren't playing the game to hedge risk of real products they're buying or selling; they're just trying to make a buck off the price swings."

"So they're like parasites," you declare.

"Absolutely not, Henry," your broker protests. "They are critical to the price discovery function of the market for a commodity. They're doing research, analyzing trends, studying patterns, and pounding out real leg work on the underlying commodities; so their buying and selling pressures on the prices are just adding more critically important information that helps the prices of those futures contracts reflect the best possible overall market assessments of future pricing conditions."

"Yeah, whatever," you grunt. "They've got more guts than I have. The way those futures contracts can make your net account position swing back and forth from positive to negative every day is enough to give a person a stroke. I can't imagine doing that with hundreds of open contracts every day."

"Well, some people can handle that, Henry, but I'll tell you this: futures are no place for beginners to start their careers; but they've sure been the place where a lot of folks have gotten their careers ended."

And with that, you bid farewell to Karl, hang up the phone, and thank your lucky stars that your days as a futures trader are over. Now all you have to worry about in this world is having the state authorities find out that you had been actively planning a pagan ritual. Just be glad that you didn't actually go through with the Halloween party. Being burned at the stake is almost as bad as being burned by futures trading.



The Dark Wraith has spoken.

The Written Peace: Open Forum of August 7, 2005

The blog presents an Open Forum thread for topical discussions this evening. First on the topical discussion list is the announcement that the second graphic is now available at The Dark Wraith Forums e-Store. You might have noticed that, in addition to the bumper sticker version of the last graphic, "Draft Republicans," you were offered round magnet and pin-on button versions, as well. Those turned out to be somewhat popular, so the magnet and pin-on button versions will be offered for this graphic, too. At left, you can see—at least, more or less—what the graphic will look like for the 10"×3" bumper stickers and for the 2¼"×2¼" round magnets and buttons. As a side note, I received two e-mails asking if these could be purchased for re-sale; and the answer is, "Well, of course... provided, that is, you're not really planning to buy a bunch of bumper stickers and then go around slapping them on cars that have Bush/Cheney '04 bumper stickers already there." That would be so wrong. Remember: as long as all sides in the American political debate maintain the highest standards of conduct in their interactions, and as long as we all fully and deeply respect one another's political opinions, the United States will be a strong country and the beacon of democracy and pluralism in the world.

And how am I supposed to hear myself think in this place when folks are snickering, snorting, and throwing tomatoes?

Moving along, if you have a chance to do so, stop by some of the new sites over in the Dark Wraith BlogRing. Andi Allen's site, confessions of a first-time mother is worth reading. She's one of those bright, bright lights that seem to collect here at The Dark Wraith Forums and on the Message Board, illuminating them with intelligent commentary and insight. The same can be said for a whole lot of people here and over there, and it's always a good idea for me to mention some of them every once in a while. As noted in the thread from the article just prior to this Open Forum, Missouri Mule from Blondesense never ceases to amaze me with her sparkling talent for written humor, as close to professional quality as I've seen in the Blogosphere. Her writing gives me yet more evidence that there really is cream in this cyberspace of raw milk, and it's just a matter of getting that cream to rise to top so it can be used to make a good whipped topping for a hot cappucino with just a hint of cinnamon.

I have no idea what that meant or how that analogy went awry; but moving along, more humor and good political commentary are on tap over at The Adventures of the Smart Patrol, where Paul the Spud has some things to say on matters both great and small. Paul also contributes to the ever-worthy Shakespeare's Sister, which has also recently secured as one of its contributing writers a fellow who calls himself "D": he's a richly sarcastic, smart gentleman, and his contributions will be worth tracking down over there. Finally, if I have not yet welcomed Auntie Roo, I ask that she forgive the oversight. The same goes for the pleasantly crabby Crabletta of The Curmudgeonly Crab.

Oh, and don't forget to go to The Dark Wraith Forums Message Board, too. That has to be one of the most interesting places—aside, of course, from this blog—in the entirety of cyberspace. If you haven't been there yet, go. You'll find posts and threads on everything imaginable: life on Mars, conspiracy theories, SCOTUS nominees, Red State political corruption, nuclear war scenarios, Neolithic dildos, and even economics.

Say something if you have something to say. There's lots of junk food in the pantry; and the coffee pot's always on, which is probably why what's in it has the consistency of black tar. Try to avoid playing the rowdy music on the jukebox: the '40s-style cabaret stuff gets the cats wound up too much. Later, we might be able to get Peter of Lone Tree to do that Elvis impersonation that won him the award at the Best of the 1960s Nostalgia Festival last month. We'll see.


The Dark Wraith sweeps off the WELCOME mat.

Special Analysis: Practical Math for the New American Century

As a college teacher of mathematics, as well as economics, finance and other business subjects, I have always believed that it is important to provide students with real world, practical applications of the skills they are learning in the abstract. Just about every math teacher has heard the refrain, "Where would I use that in the real world?" That's usually a subtle declaration by the student that he or she has a life that is in some way more "real" than that of the teacher. Patience is always demanded in such a situation. So, too, is a ready application that uses the skill under current investigation in some setting that will resonate with the learner. The more clearly the example portrays a situation the student might encounter, the more likely the student is to drop his or her defenses and be willing to proceed with the admittedly often difficult task of mastering the subject matter and the mechanics of the quantitative analysis.

Sometimes, a teacher must be a bit disingenuous. The real "real world" application might require mathematics far too robust for the student at his or her current level. That's where some professors are likely to fall down: their mastery is at such a high and sophisticated level that simplified but clear examples of a technique will elude them. The professor who honestly aspires to be a great teacher will, on the other hand, seize an opportunity, reduce or eliminate the complexities that obscure underlying principles, and proceed with a realistic, if somewhat not-quite-real-world, presentation. In the process, the professor might garner a side benefit: cutting through the layers of far more sophisticated analysis can sometimes—not always, but sometimes—offer a personal clarity of understanding that has been lost to the years of advanced studies, gruelingly boring seminars, and mind-numbingly dry field literature.

This article offers a simplified—but still vividly realistic—portrayal of one of those real-world problems that life in the 21^st Century has thrown in the path of people not just here in the United States, but all over the world. Admittedly, it does have some particular currency with the peoples of America and Europe, but it truly is a problem in which math students everywhere can find value and a reason to care about mastering a few basic mathematical skills.

Without further motivation, then, we'll use the mathematics of empirical formulæ to compute the killing power of a nuclear bomb, with more extensive and exhaustive information available from the Federation of American Scientists.

First, we need to break down the killing power of a nuclear explosion into the three classical categories:

• pressure (the blast wave, which is like a wind);
• heat (which is more technically referred to as thermal radiation);
• nuclear radiation (the "nuke" stuff, as in ionized and sub-atomic particles).

All three of these effects become bigger as the yield of the device increases. In mathematics, we say each of these three factors varies directly with yield.

Also, and somewhat less obviously, each of these three effects varies against the others as the yield of the bomb is varied. In other words, these three effects don't increase at the same rate as the yield of the bomb is increased. In fact, these three effects also vary against each other based on several other factors besides plain old bomb yield. For example, a device detonated up in the sky, as opposed to being detonated at ground level, might spread a crushing blast wave downward over a larger area, but some of the fireball of thermal energy is wasted in so doing. For the purposes of what we're doing here, though, we'll assume that the bomb is detonated at the distance above ground level that maximizes the effectiveness of all three killing effects. We call this the bomb's optimal height.

Moving along, the standard basis for a first-round, rather rough analysis—at least within a wide range of yields—is a two-and-a-half kiloton device. The reason this is a good basis is that the three kill effects are about "equal" at that yield in terms of having about the same kill radius: right around one kilometer, assuming the following thresholds for mortal injury:

• blast: 4.6 pounds per square inch of overpressure;
• thermal radiation: 8 Calories per cm² (creating 3rd degree burns);
• nuclear radiation: 500 rem.

Now, if we do bomb yields as multiples of the 2.5 kiloton bad boy, the equation governing the kill radius for each of the three effects comes out as follows:

• kill radius of blast = (yield)^0.41
• kill radius of thermal radiation = (yield)^0.33
• kill radius of nuclear radiation = (yield)^0.19

Let's take as our first example a nuclear bomb with a two kiloton yield. First things first: we need to convert that yield into a multiple of the base, 2½ kiloton device, and then we'll be ready to crank.

2.0÷2.5=0.80

So, in other words, we're looking for the kill radii of the three effects for a bomb that has 80% of the yield of the base device. Now, we can do the calculations.

• kill radius of the blast: (0.80)^0.41 = 0.91 kilometers = 2986 feet
• kill radius of the heat: (0.80)^0.33 = 0.93 kilometers = 3051 feet
• kill radius of the radiation: (0.80)^0.19 = 0.96 kilometers = 3150 feet

In this example, the nuclear radiation sets the overall kill radius of the weapon: 3150 feet.

Now, let's look at a four kiloton bomb.

Again, we need to convert the yield of the device under analysis into a multiple of the base, 2½ kiloton device.

4.0÷2.5=1.60

So, in this example, we're looking for the kill radii of the three effects for a bomb that has 160% of the yield of the base device. Here come the calculations.

• kill radius of the blast: (1.60)^0.41 = 1.22 kilometers = 3978 feet
• kill radius of the heat: (1.60)^0.33 = 1.17 kilometers = 3831 feet
• kill radius of the radiation: (1.60)^0.19 = 1.09 kilometers = 3587 feet

Well, isn't that interesting: now, it's the overpressure that sets the overall kill radius. As a matter of fact, you've probably just figured out that, as the yield of the device increases, the overall kill radius becomes more and more defined by the blast contour, not by the fireball cooking people or by the radiation microwaving them.

And finally, we can do one last algebra trick to get some more information from the equations. We'll do the calculations backward to see what yield would be required to achieve a given kill radius for each of the effects. For example, suppose we wanted to know what yield would be required to create a kill radius of a half-mile. That would be a diameter of one full mile, of course.

The first thing we'll need to do is to convert 0.5 miles into kilometers, since the equations require metric units. Using the standard conversion tables, we get

0.5 mile × 1.6093 km/mile = 0.8047 km

Next, we write the three equations, with yield, of course, being the unknown for which we must solve.

• blast: (yield)^0.41 = 0.8047 km
• thermal radiation: (yield)^0.33 = 0.8047 km
• nuclear radiation: (yield)^0.19 = 0.8047 km

Solving any one of the three equations above is just a matter of using the algebra rule of taking the inverse power of the exponent on the variable. Here's how it works in the abstract: if we have the problem

• x⁴ = 81; we'll power up both sides by the reciprocal of the 4 (recalling that, as long as you do exactly the same thing to both sides of an equation, it's okay).
• (x⁴)^¼ = (81)^¼
• x^4×¼ = 81^0.25
• x = 3, where we usually use a calculator to take a number to a decimal power, unless it's a pretty obvious one we've memorized.

Okay, now that we've made it through that little detour, we can do the same trick to solve for the yields in the preceding set of equations. We'll just need to take the reciprocal power from the yield side and apply it to the number on the right side for each of the equations. If we run the reciprocals of the powers through the calculator we find that, for 0.41, the reciprocal is about 2.4390; for 0.33, the reciprocal is about 3.0303; and for 0.19, the reciprocal is around 5.2632.

Now, we can do the calculations, but we have to remember that these equations are doing yields based upon multiples of a 2.5 kiloton device; that means at the very end, we'll have to take each number we get for a yield and multiply it by 2.5 to get an actual kiloton value.

• blast: required yield = (0.8047)^2.4390 = 0.59 = 1.47 kiloton
• thermal radiation: required yield = (0.8047)^3.0303 = 0.52 = 1.29 kiloton
• nuclear radiation: required yield = (0.8047)^5.2632 = 0.32 = 0.80 kiloton

Well, there you go: all it takes is a device that isn't even yielding a full kiloton, because with the low yield devices, it's the radiation that does the maximum damage, not the blast or the firestorm.

And there you have it: math really is useful for everyday kinds of problems.



The Dark Wraith has spoken.

Oil Prices Break All-Time Record, Construction Slides for 4th Straight Month

Oil futures prices hit all-time intra-day highs on Thursday, with light sweet crude on the front-end, September contract briefly marking $62.30 per barrel on the New York Mercantile Exchange before backing down somewhat to settle for the day at $61.57 per barrel, a closing price one full dollar higher than the closing price on Friday. The intra-day high broke the old record set on July 6 by twenty cents, and the closing price beat the old record closing price by twenty-nine cents. The price surge had many causes, some perhaps more fundamental than others. The death of Saudi King Fahd put the markets on edge about the long-term survivability of the pro-Western House of Saud under the leadership of the Fahd's successor, Abdullah. Of more immediate concern on the international scene was Iran's announcement today that it has carried out its threat to resume part of its nuclear energy program. This revives fears of an imminent attack by the United States or Israel on the Persian nation. Putting more pressure on oil prices was the news of an announcement by BP that it will shut down a big Texas refinery for "maintenance," an announcement that comes in the wake of fires that crippled output at two other refineries.

Meanwhile, the Commerce Department reported on Monday that construction spending in June slid to $1.093 trillion, a three-tenths of a percent drop from the May level of $1.096 trillion and the fourth consecutive monthly pull-back from the record high construction reached just last February. The concensus forecast had predicted that construction spending would actually rise by half a percent in June.

Dark Wraith CyberGloss

Construction spending comprises private residential, private non-residential, public residential, and public non-residential spending. Private non-residential construction is business-related building, and public non-residential is government buildings, as well as such things as school buildings, highways and bridges, and other public goods.

  The total four-month loss has been just over three percent, meaning that construction spending through the Spring and into the early Summer, when construction should be picking up steam, has been losing ground at an annualized rate of about 9.6 percent, even though construction spending as of June still stands 9.6 percent higher than it did at this same time last year. The private residential component of total construction spending fell by four-tenths of a percent, while the private non-residential construction rose by two-tenths of a percent, indicating that, while home construction was backing off, business construction was moving ahead, although somewhat anemically. Public residential construction surged a full percentage point, but public non-residential construction lost a half percent. Among the detail components in the report, education construction spending fell a seasonally adjusted 1.2 percent, and highway construction slipped four-tenths of a percent.

Even with many economists hailing the strongly growing American economy, few would argue that the current growth rate can continue in the face of constantly rising energy prices. Despite the insistence by the Bureau of Labor Statistics that there has been virtually no inflation at either the wholesale or retail levels since April, most consumers are seeing substantial increases in prices they are paying.

Dark Wraith CyberGloss

Unless additional money is created and distributed into the economy by the central bank, consumers have a fixed amount of income to spend: more spent in one sector categorically means less is available to spend in another sector.

  Although such perceptions are anecdotal, eventually, expenditures on rising food and energy costs must translate into pullbacks in spending on other goods and services. The only way this could be avoided is if the Federal Reserve has quietly and contrary to its public statements revisited the expansionary monetary policies it prosecuted throughout the first four years of the Bush Administration to fund Republican-inspired tax cuts and war. Should it turn out that Fed has, indeed, again started printing money at a rate greater than that of the economy's ability to absorb it through real growth, the consequence will be further and escalating inflationary pressure that the government will have an increasingly difficult task of claiming doesn't exist.