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Government Agency: If 9 Substations Are Destroyed, The Power Grid Could Be Down For 18 Months

Government Agency: If 9 Substations Are Destroyed, The Power Grid Could Be Down For 18 Months.

 By Michael Snyder, on March 18th, 2014

North American Power Grid

What would you do if the Internet or the power grid went down for over a year?  Our key infrastructure, including the Internet and the power grid, is far more vulnerable than most people would dare to imagine.  These days, most people simply take for granted that the lights will always be on and that the Internet will always function properly.  But what if all that changed someday in the blink of an eye?  According to the Federal Energy Regulatory Commission’s latest report, all it would take to plunge the entire nation into darkness for more than a year would be to knock out a transformer manufacturer and just 9 of our 55,000 electrical substations on a really hot summer day.  The reality of the matter is that our power grid is in desperate need of updating, and there is very little or no physical security at most of these substations.  If terrorists, or saboteurs, or special operations forces wanted to take down our power grid, it would not be very difficult.  And as you will read about later in this article, the Internet is extremely vulnerable as well.

When I read the following statement from the Federal Energy Regulatory Commission’s latest report, I was absolutely floored…

“Destroy nine interconnection substations and a transformer manufacturer and the entire United States grid would be down for at least 18 months, probably longer.”

Wow.

What would you do without power for 18 months?

FERC studied what it would take to collapse the entire electrical grid from coast to coast.  What they found was quite unsettling

In its modeling, FERC studied what would happen if various combinations of substations were crippled in the three electrical systems that serve the contiguous U.S. The agency concluded the systems could go darkif as few as nine locations were knocked out: four in the East, three in the West and two in Texas, people with knowledge of the analysis said.

The actual number of locations that would have to be knocked out to spawn a massive blackout would vary depending on available generation resources, energy demand, which is highest on hot days, and other factors, experts said. Because it is difficult to build new transmission routes, existing big substations are becoming more crucial to handling electricity.

So what would life look like without any power for a long period of time?  The following list comes from one of my previous articles

-There would be no heat for your home.

-Water would no longer be pumped into most homes.

-Your computer would not work.

-There would be no Internet.

-Your phones would not work.

-There would be no television.

-There would be no radio.

-ATM machines would be shut down.

-There would be no banking.

-Your debit cards and credit cards would not work.

-Without electricity, gas stations would not be functioning.

-Most people would be unable to do their jobs without electricity and employment would collapse.

-Commerce would be brought to a standstill.

-Hospitals would not be able to function.

-You would quickly start running out of medicine.

-All refrigeration would shut down and frozen foods in our homes and supermarkets would start to go bad.

If you want to get an idea of how quickly society would descend into chaos, just watch the documentary “American Blackout” some time.  It will chill you to your bones.

The truth is that we live in an unprecedented time.  We have become extremely dependent on technology, and that technology could be stripped away from us in an instant.

Right now, our power grid is exceedingly vulnerable, and all the experts know this, but very little is being done to actually protect it

“The power grid, built over many decades in a benign environment, now faces a range of threats it was never designed to survive,” said Paul Stockton, a former assistant secretary of defense and president of risk-assessment firm Cloud Peak Analytics. “That’s got to be the focus going forward.”

If a group of agents working for a foreign government or a terrorist organization wanted to bring us to our knees, they could do it.

In fact, there have actually been recent attacks on some of our power stations.  Here is just one example

The Wall Street Journal’s Rebecca Smith reports that a former Federal Energy Regulatory Commission chairman is acknowledging for the first time that a group of snipers shot up a Silicon Valley substation for 19 minutes last year, knocking out 17 transformers before slipping away into the night.

The attack was “the most significant incident of domestic terrorism involving the grid that has ever occurred” in the U.S., Jon Wellinghoff, who was chairman of the Federal Energy Regulatory Commission at the time, told Smith.

Have you heard about that attack before now?

Most Americans have not.

But it should have been big news.

At the scene, authorities found “more than 100 fingerprint-free shell casings“, and little piles of rocks “that appeared to have been left by an advance scout to tell the attackers where to get the best shots.”

So what happens someday when the bad guys decide to conduct a coordinated attack against our power grid with heavy weapons?

It could happen.

In addition, as I mentioned at the top of this article, the Internet is extremely vulnerable as well.

For example, did you know that authorities are so freaked out about the security of the Internet that they have given “the keys to the Internet” to a very small group of individuals that meet four times per year?

It’s true.  The following is from a recent story posted by the Guardian

The keyholders have been meeting four times a year, twice on the east coast of the US and twice here on the west, since 2010. Gaining access to their inner sanctum isn’t easy, but last month I was invited along to watch the ceremony and meet some of the keyholders – a select group of security experts from around the world. All have long backgrounds in internet security and work for various international institutions. They were chosen for their geographical spread as well as their experience – no one country is allowed to have too many keyholders. They travel to the ceremony at their own, or their employer’s, expense.

What these men and women control is the system at the heart of the web: the domain name system, or DNS. This is the internet’s version of a telephone directory – a series of registers linking web addresses to a series of numbers, called IP addresses. Without these addresses, you would need to know a long sequence of numbers for every site you wanted to visit. To get to the Guardian, for instance, you’d have to enter “77.91.251.10” instead of theguardian.com.

If the system that controls those IP addresses gets hijacked or damaged, we would definitely need someone to press the “reset button” on the Internet.

Sadly, the hackers always seem to be several steps ahead of the authorities.  In fact, according to one recent report, breaches of U.S. government computer networks go undetected 40 percent of the time

A new report by Sen. Tom Coburn (R., Okla.) detailswidespread cybersecurity breaches in the federal government, despite billions in spending to secure the nation’s most sensitive information.

The report, released on Tuesday, found thatapproximately 40 percent of breaches go undetected, and highlighted “serious vulnerabilities in the government’s efforts to protect its own civilian computers and networks.”

“In the past few years, we have seen significant breaches in cybersecurity which could affect critical U.S. infrastructure,” the report said. “Data on the nation’s weakest dams, including those which could kill Americans if they failed, were stolen by a malicious intruder. Nuclear plants’ confidential cybersecurity plans have been left unprotected. Blueprints for the technology undergirding the New York Stock Exchange were exposed to hackers.”

Yikes.

And things are not much better when it comes to cybersecurity in the private sector either.  According to Symantec, there was a 42 percentincrease in cyberattacks against businesses in the United States last year.  And according to a recent report in the Telegraph, our major banks are being hit with cyberattacks “every minute of every day”…

Every minute, of every hour, of every day, a major financial institution is under attack.

Threats range from teenagers in their bedrooms engaging in adolescent “hacktivism”, to sophisticated criminal gangs and state-sponsored terrorists attempting everything from extortion to industrial espionage. Though the details of these crimes remain scant, cyber security experts are clear that behind-the-scenes online attacks have already had far reaching consequences for banks and the financial markets.

For much more on all of this, please see my previous article entitled “Big Banks Are Being Hit With Cyberattacks ‘Every Minute Of Every Day’“.

Up until now, attacks on our infrastructure have not caused any significant interruptions in our lifestyles.

But at some point that will change.

Are you prepared for that to happen?

We live at a time when our world is becoming increasingly unstable.  In the years ahead it is quite likely that we will see massive economic problems, major natural disasters, serious terror attacks and war.  Any one of those could cause substantial disruptions in the way that we live.

At this point, even NASA is warning that “civilization could collapse”…

A new study sponsored by Nasa’s Goddard Space Flight Center has highlighted the prospect that global industrial civilisation could collapse in coming decades due to unsustainable resource exploitation and increasingly unequal wealth distribution.

Noting that warnings of ‘collapse’ are often seen to be fringe or controversial, the study attempts to make sense of compelling historical data showing that “the process of rise-and-collapse is actually a recurrent cycle found throughout history.” Cases of severe civilisational disruption due to “precipitous collapse – often lasting centuries – have been quite common.”

So let us hope for the best.

But let us also prepare for the worst.

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Dmitry Orlov: Ukraine Crisis, Russia and Crimea Update | Greg Hunter’s USAWatchdog

Dmitry Orlov: Ukraine Crisis, Russia and Crimea Update | Greg Hunter’s USAWatchdog.

By Greg Hunter On March 19, 2014

4Dmitry Orlov:  Ukraine Crisis, Russia and Crimea UpdateBy Greg Hunter’s USAWatchdog.com

Dmitry Orlov is a Russian blogger who writes about the parallel between the U.S and the USSR.  Orlov lived through the financial collapse of the Soviet Union in the early 1990’s, and he thinks the U.S. is on the same trajectory.  Orlov contends, “The trajectory is defined by this sort of incompetent militarism where more and more money results in bigger and bigger military fiascos around the world and less and less of actual foreign policy that can be pursued or articulated.  There are massive levels of corruption.  The amount of money that is being stolen by the U.S. Government and its various appropriations processes is now in the trillions of dollars a year.  Runaway debt, the United States now has a level of debt that is un-repayable.  All we’re waiting for is interest rates to go across the magic threshold of 3% and the entire budget of the country explodes.  There are also all types of other tendencies that point in the direction of collapse and systemic failure at all levels.”

So, how close are we to collapse or system failure?  Orlov contends, “I am pretty sure that anyone who makes a prediction when the collapse will happen is wrong.  Nobody can say when it will happen.  It’s the same as saying a bridge that is structurally deficient; you don’t know when a truck is going to fall through into the river below. . . . You can be chronically sick for a long time, and then one day, you go into a coma or your heart stops.  You cannot predict what day that will happen.  Orlov does say, “The United States right now, from my point of view and the point of view from observers from around the world, is on suicide watch.  It’s a country that is going to self-destruct at some point in the near future.”

On the Ukraine crisis, Orlov thinks, “The Crimea referendum was the first legal way to find out what the people wanted to do.  The turnout was remarkable, and they voted overwhelmingly to rejoin Russia, to become part of Russia once again.  The interesting thing here is it was not just the Russians that voted to join Russia but the Ukrainians in Crimea, which makes a sizable part of the population voted to join Russia. . . Ukraine is composed of sort of a no man’s land in the West and then Russian territories in the East. . . .  If that trend holds, you are basically left with this insolvent nugget of nothingness, and it will be up to the international community to decide what to do with these people.  They are right now marching around Kiev with baseball bats and going into government offices and beating up members of local government and installing their own members.  They are basically running amok.  They don’t even have the support of the Ukrainian military at this point.  So, it will be a mop-up operation against these neo-fascists that are running amok.”  Orlov goes on to say, “In Washington, in the Obama Administration and in the Kerry State Department, we have absolutely breathtaking levels of incompetence.  These people really don’t know what they’re doing and are dangerous at any speed; and everywhere else, we have this follow the incompetent leader thing taking place, and it’s really, really frightening because the incompetents are leading the world to a really dangerous place.”

Orlov goes on to say, “What are these people doing trash talking the Russians?  What would these people do without Russia?  How would they get out of earth’s orbit and visit the international space station?  Who would negotiate international deals with Syria and Iran because all they can do is blunder and lose face.”  Russia doesn’t need the United States for anything.  The United States is the most dispensable country on earth.”

On possible war between Ukraine and Russia, Orlov contends, “They are not going to fight because the Ukraine military is part of the Russian military.  There really isn’t any opposition.  The Ukrainian military will decide what to do in a few days, and then they will inform the Russians, and after that, maybe they will inform their own government.  Maybe they will just go into the government offices and just round them up.  Last I heard, 60% of Ukrainian military accepted Russian passports already.  The remaining parts are being shipped out to the mainland.  That is happening peacefully.  So, there isn’t going to be any fight.  The really important point is the Ukrainian military all over Ukraine does not support the government in Kiev.  They are withholding support, and what they really want is to join the Russian military. . . . The best thing Russia can do is sit back and relax and let this work out.  I don’t think the government in Kiev has any legs.”

Join Greg Hunter as he goes One-on-One with Dmitry Orlov of ClubOrlov.com coming from Central America.

(There is much more in the video interview.)

 


After the Interview:
Dmitry Orlov is currently working on a new book that will be out later this year.  Orlov says, “The new book is about communities and what makes them resistant to adverse events such as financial collapse.”  Orlov adds, “The U.S., as a whole, is not resistant to shocks, but some parts of America are.”  You can find Dmitry Orlov at ClubOrlov.com.  

Dmitry Orlov: Ukraine Crisis, Russia and Crimea Update | Greg Hunter’s USAWatchdog

Dmitry Orlov: Ukraine Crisis, Russia and Crimea Update | Greg Hunter’s USAWatchdog.

By Greg Hunter On March 19, 2014

4Dmitry Orlov:  Ukraine Crisis, Russia and Crimea UpdateBy Greg Hunter’s USAWatchdog.com

Dmitry Orlov is a Russian blogger who writes about the parallel between the U.S and the USSR.  Orlov lived through the financial collapse of the Soviet Union in the early 1990’s, and he thinks the U.S. is on the same trajectory.  Orlov contends, “The trajectory is defined by this sort of incompetent militarism where more and more money results in bigger and bigger military fiascos around the world and less and less of actual foreign policy that can be pursued or articulated.  There are massive levels of corruption.  The amount of money that is being stolen by the U.S. Government and its various appropriations processes is now in the trillions of dollars a year.  Runaway debt, the United States now has a level of debt that is un-repayable.  All we’re waiting for is interest rates to go across the magic threshold of 3% and the entire budget of the country explodes.  There are also all types of other tendencies that point in the direction of collapse and systemic failure at all levels.”

So, how close are we to collapse or system failure?  Orlov contends, “I am pretty sure that anyone who makes a prediction when the collapse will happen is wrong.  Nobody can say when it will happen.  It’s the same as saying a bridge that is structurally deficient; you don’t know when a truck is going to fall through into the river below. . . . You can be chronically sick for a long time, and then one day, you go into a coma or your heart stops.  You cannot predict what day that will happen.  Orlov does say, “The United States right now, from my point of view and the point of view from observers from around the world, is on suicide watch.  It’s a country that is going to self-destruct at some point in the near future.”

On the Ukraine crisis, Orlov thinks, “The Crimea referendum was the first legal way to find out what the people wanted to do.  The turnout was remarkable, and they voted overwhelmingly to rejoin Russia, to become part of Russia once again.  The interesting thing here is it was not just the Russians that voted to join Russia but the Ukrainians in Crimea, which makes a sizable part of the population voted to join Russia. . . Ukraine is composed of sort of a no man’s land in the West and then Russian territories in the East. . . .  If that trend holds, you are basically left with this insolvent nugget of nothingness, and it will be up to the international community to decide what to do with these people.  They are right now marching around Kiev with baseball bats and going into government offices and beating up members of local government and installing their own members.  They are basically running amok.  They don’t even have the support of the Ukrainian military at this point.  So, it will be a mop-up operation against these neo-fascists that are running amok.”  Orlov goes on to say, “In Washington, in the Obama Administration and in the Kerry State Department, we have absolutely breathtaking levels of incompetence.  These people really don’t know what they’re doing and are dangerous at any speed; and everywhere else, we have this follow the incompetent leader thing taking place, and it’s really, really frightening because the incompetents are leading the world to a really dangerous place.”

Orlov goes on to say, “What are these people doing trash talking the Russians?  What would these people do without Russia?  How would they get out of earth’s orbit and visit the international space station?  Who would negotiate international deals with Syria and Iran because all they can do is blunder and lose face.”  Russia doesn’t need the United States for anything.  The United States is the most dispensable country on earth.”

On possible war between Ukraine and Russia, Orlov contends, “They are not going to fight because the Ukraine military is part of the Russian military.  There really isn’t any opposition.  The Ukrainian military will decide what to do in a few days, and then they will inform the Russians, and after that, maybe they will inform their own government.  Maybe they will just go into the government offices and just round them up.  Last I heard, 60% of Ukrainian military accepted Russian passports already.  The remaining parts are being shipped out to the mainland.  That is happening peacefully.  So, there isn’t going to be any fight.  The really important point is the Ukrainian military all over Ukraine does not support the government in Kiev.  They are withholding support, and what they really want is to join the Russian military. . . . The best thing Russia can do is sit back and relax and let this work out.  I don’t think the government in Kiev has any legs.”

Join Greg Hunter as he goes One-on-One with Dmitry Orlov of ClubOrlov.com coming from Central America.

(There is much more in the video interview.)

 


After the Interview:
Dmitry Orlov is currently working on a new book that will be out later this year.  Orlov says, “The new book is about communities and what makes them resistant to adverse events such as financial collapse.”  Orlov adds, “The U.S., as a whole, is not resistant to shocks, but some parts of America are.”  You can find Dmitry Orlov at ClubOrlov.com.  

S&P Brings Out The Big Policy Guns – Downgrades Russia To Outlook Negative | Zero Hedge

S&P Brings Out The Big Policy Guns – Downgrades Russia To Outlook Negative | Zero Hedge.

S&P, still deep in the mire of a legal battle with the US government, has decided now is an opportune time to cut the ratings outlook on Russia:

  • *RUSSIAN FEDERATION OUTLOOK TO NEGATIVE FROM STABLE BY S&P
  • *S&P SEES EU-U.S. IMPOSING FURTHER SANCTIONS

Russia remains a BBB credit (but with the outlook shift remains open to a downgrade with 24 months). S&P has cut 2014 GDP forecast to 1.2% and 2015 to 2.2%. Of course, we are sure, this would have nothing to do with currying favors with the US government (who threatened them when they downgraded the USA). Full report below.

 

S&P Reduces Russian Federation outlook to Negative from Stable.

Below is the full report:

OVERVIEW
• In our view, heightened geopolitical risk and the prospect of U.S. and EU economic sanctions following Russia’s incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia’s already deteriorating economic performance.

• We are therefore revising the outlook on our long-term sovereign credit ratings on Russia to negative from stable.

• We are affirming our ‘BBB/A-2’ foreign currency and ‘BBB+/A-2’ local currency ratings on the Russian Federation.

As a “sovereign rating” (as defined in EU CRA Regulation 1060/2009 “EU CRA Regulation”), the ratings on the Russian Federation are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see “Calendar Of 2014 Publication Dates For EMEA Sovereign, Regional, And Local Government Ratings,” published Dec. 30, 2013, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the material and unanticipated intensification of geopolitical risks since our most recent release on Dec. 13, 2013, the introduction of sanctions, and the increased financial and economic downside risks to Russia related to these events. The next scheduled rating publication on the sovereign rating of the Russian Federation will be on April 25, 2014.

RATING ACTION

On March 20, 2014, Standard & Poor’s Ratings Services revised its outlook on the Russian Federation (Russia) to negative from stable. At the same time, we affirmed our ‘BBB/A-2’ foreign currency and ‘BBB+/A-2’ local currency long- and short-term sovereign credit ratings on Russia.

We also affirmed our ‘ruAAA’ long-term national scale rating on Russia.

RATIONALE

The outlook revision reflects our view of the material and unanticipated economic and financial consequences that EU and U.S. sanctions could have on Russia’s creditworthiness following Russia’s incorporation of Crimea, which the international community currently considers legally to be a part of Ukraine.

In February 2014, pro-Russian forces took control of Crimea. As a consequence, on March 6, the European Union (EU) and the U.S. agreed on an initial round of sanctions, as part of a staged approach to imposing sanctions on Russia. On March 16, a referendum was held in Crimea in which approximately 97% of voters reportedly were in favor of Crimea joining Russia. The following day, the EU and U.S. announced that they viewed the referendum as illegitimate and sanctioned certain Russian and Ukrainian nationals through travel bans and asset freezes. On March 18, Russia’s president, Vladimir Putin, signed a decree incorporating Crimea into the Russian Federation which was ratified by parliament today.

We expect that the EU and U.S. will impose further sanctions.

In our view, the deteriorating geopolitical situation has already had a negative impact on Russia’s economy. The Central Bank of the Russian Federation appears to have abandoned its policy of increased currency flexibility and limited intervention in the foreign-exchange market. The Central Bank is now focused on stabilizing financial markets in light of the inflationary impact of the around 10% depreciation of the currency so far this year and the significant capital outflow, which we estimate at about $60 billion in the first quarter of 2014, similar to the level for the whole of 2013. The Central Bank also called an extraordinary meeting in March, raising its benchmark interest rate by 150 basis points to 7%.

Economic growth in Russia slowed to 1.3% in 2013, the lowest rate since 1999–excluding the economic contraction in 2009. We expect a further modest deceleration in growth this year and have lowered our GDP growth forecasts for 2014 and 2015 to 1.2% and 2.2%, respectively, from 2.2% and 3.0% in December 2013. In our view, there is a significant downside risk that growth will fall well below 1% if the uncertainties caused by the geopolitical tensions do not subside in the near term.

In our view, there is a material risk that the conflict between Russia and Ukraine could extend beyond Crimea and that violence between pro- and anti-Russian protesters could spread to other cities in Eastern Ukraine. Should the situation deteriorate, we believe further and wider sanctions could be imposed against Russian institutions and individuals, potentially including trade restrictions. In our view, these sanctions could further undermine Russia’s economic growth prospects. We note, however, that sanctions, particularly those that might be imposed by EU countries, could be tempered by European economic trade and energy interests.

Our ratings on Russia continue to be supported by its relatively strong external and government balance sheets. The ratings remain constrained by structural weaknesses in Russia’s economy, in particular the strong dependence on hydrocarbons and other commodities. Further constraints are what we view as comparatively weak governance and economic institutions that impede the economy’s competitiveness, investment climate, and business environment.

The Russian government’s finances continue to be buoyed by strong commodity revenues, particularly from oil. These account for almost one-half of the government’s budget revenues, but also leave it exposed to swings in commodity prices. To mitigate this vulnerability, the government has instituted a fiscal rule from 2013, which caps government expenditure based on long-term historical oil prices. This fiscal rule is designed to lead to the accumulation of assets in times of high oil prices, and to the drawing on fiscal assets in times of low oil prices, reducing the procyclicality of fiscal policy. In our view, the government’s commitment to this fiscal rule will likely be significantly tested by the recent further deterioration in growth prospects, while off-budget measures to support additional spending could also increase. We estimate Russia’s 2013 general government budget to have recorded a deficit of 0.6% of GDP. Based on our expectation that commodity revenues will decline slightly on the back of a slightly weaker oil price (falling to $95 by 2015), we think the general government deficit will gradually worsen, reaching 1.5% of GDP by 2016, just outside the level targeted by the fiscal rule, and implying an average annual change in general government debt of 1.5% of GDP over 2013-2016.

Russia’s aging population will be a source of considerable medium- to long-term fiscal pressure. In a no-policy-change scenario, we expect the aging of the population to add more than 10% of GDP to government spending by 2050 compared with 2010 levels. While the government has been adjusting pension system parameters, it has so far shied away from more decisively tackling the issue. We now estimate the Russian government to be in a marginal net debtor position due to revised data on the outstanding stock of gross general government debt. Nevertheless, low levels of gross debt imply low general government interest payments at about 2% of revenues during 2014-2016.

Commodity exports are also behind Russia’s persistent current account surpluses, resulting in a net external asset position of about 4% of GDP in 2014. Measured in terms of narrow net external debt, that is, external debt minus liquid external assets held by the public and banking sector, we expect Russia to be in a small net external creditor position. This strong external asset position has been declining since reaching a peak of 34% in 2009. We note, however, that due to consistently negative errors and omissions in Russia’s balance of payments (averaging almost $8 billion annually, or 1.5% of CAR in 2007 to 2013) the reported net asset position is considerably lower than implied by the large current account surpluses.

We expect the current account surpluses to disappear by 2015, owing to imports rising faster than exports. Further ruble weakness could weigh on imports and keep current account deficits from occurring a little later, but we believe the longer-term trend of a weakening current account will remain in place even so. Gross external financing needs (current account payments plus short-term external debt by remaining maturity) will amount to 70% of CARs and usable reserves in 2014, in our view. Dependence on commodity exports results in terms-of-trade volatility, although past experience has shown that imports tend to adjust strongly, offsetting part of a commodity price-induced drop in export revenue.

Russia’s political institutions remain comparatively weak and political power is highly centralized. Protesters, opposition members, nongovernmental organizations, and liberal members of the political establishment have come under increasing pressure. We do not expect the government to decisively and effectively tackle the long-standing structural obstacles to stronger economic growth over our forecast horizon (2014-2017). These obstacles include high perceived corruption, comparatively weak rule of law, the state’s pervasive role in the economy, and a challenging business and investment climate.

OUTLOOK

The negative outlook reflects our view that there is at least a one-in-three chance that we could reassess the risks to Russia’s creditworthiness based on its deteriorating external profile and reduced monetary policy flexibility. As a result, we could lower our ratings on Russia within the next 24 months. Geopolitical reaction to Russia’s incorporation of Crimea could further reduce the flow of potential investment and negatively affect already weak economic growth, which would provide a further basis for lowering the ratings. Similarly, we could equalize the local and foreign currency ratings on Russia if we were to view Russia’s transition toward a more flexible exchange rate regime as having stalled.

We could revise the outlook to stable if Russia’s economy were to prove resilient to the current challenges, resulting in a return to a policy of a more flexible exchange rate, and if its external and fiscal buffers were to remain in line with our current expectations.

S&P Brings Out The Big Policy Guns – Downgrades Russia To Outlook Negative | Zero Hedge

S&P Brings Out The Big Policy Guns – Downgrades Russia To Outlook Negative | Zero Hedge.

S&P, still deep in the mire of a legal battle with the US government, has decided now is an opportune time to cut the ratings outlook on Russia:

  • *RUSSIAN FEDERATION OUTLOOK TO NEGATIVE FROM STABLE BY S&P
  • *S&P SEES EU-U.S. IMPOSING FURTHER SANCTIONS

Russia remains a BBB credit (but with the outlook shift remains open to a downgrade with 24 months). S&P has cut 2014 GDP forecast to 1.2% and 2015 to 2.2%. Of course, we are sure, this would have nothing to do with currying favors with the US government (who threatened them when they downgraded the USA). Full report below.

 

S&P Reduces Russian Federation outlook to Negative from Stable.

Below is the full report:

OVERVIEW
• In our view, heightened geopolitical risk and the prospect of U.S. and EU economic sanctions following Russia’s incorporation of Crimea could reduce the flow of potential investment, trigger rising capital outflows, and further weaken Russia’s already deteriorating economic performance.

• We are therefore revising the outlook on our long-term sovereign credit ratings on Russia to negative from stable.

• We are affirming our ‘BBB/A-2’ foreign currency and ‘BBB+/A-2’ local currency ratings on the Russian Federation.

As a “sovereign rating” (as defined in EU CRA Regulation 1060/2009 “EU CRA Regulation”), the ratings on the Russian Federation are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see “Calendar Of 2014 Publication Dates For EMEA Sovereign, Regional, And Local Government Ratings,” published Dec. 30, 2013, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is the material and unanticipated intensification of geopolitical risks since our most recent release on Dec. 13, 2013, the introduction of sanctions, and the increased financial and economic downside risks to Russia related to these events. The next scheduled rating publication on the sovereign rating of the Russian Federation will be on April 25, 2014.

RATING ACTION

On March 20, 2014, Standard & Poor’s Ratings Services revised its outlook on the Russian Federation (Russia) to negative from stable. At the same time, we affirmed our ‘BBB/A-2’ foreign currency and ‘BBB+/A-2’ local currency long- and short-term sovereign credit ratings on Russia.

We also affirmed our ‘ruAAA’ long-term national scale rating on Russia.

RATIONALE

The outlook revision reflects our view of the material and unanticipated economic and financial consequences that EU and U.S. sanctions could have on Russia’s creditworthiness following Russia’s incorporation of Crimea, which the international community currently considers legally to be a part of Ukraine.

In February 2014, pro-Russian forces took control of Crimea. As a consequence, on March 6, the European Union (EU) and the U.S. agreed on an initial round of sanctions, as part of a staged approach to imposing sanctions on Russia. On March 16, a referendum was held in Crimea in which approximately 97% of voters reportedly were in favor of Crimea joining Russia. The following day, the EU and U.S. announced that they viewed the referendum as illegitimate and sanctioned certain Russian and Ukrainian nationals through travel bans and asset freezes. On March 18, Russia’s president, Vladimir Putin, signed a decree incorporating Crimea into the Russian Federation which was ratified by parliament today.

We expect that the EU and U.S. will impose further sanctions.

In our view, the deteriorating geopolitical situation has already had a negative impact on Russia’s economy. The Central Bank of the Russian Federation appears to have abandoned its policy of increased currency flexibility and limited intervention in the foreign-exchange market. The Central Bank is now focused on stabilizing financial markets in light of the inflationary impact of the around 10% depreciation of the currency so far this year and the significant capital outflow, which we estimate at about $60 billion in the first quarter of 2014, similar to the level for the whole of 2013. The Central Bank also called an extraordinary meeting in March, raising its benchmark interest rate by 150 basis points to 7%.

Economic growth in Russia slowed to 1.3% in 2013, the lowest rate since 1999–excluding the economic contraction in 2009. We expect a further modest deceleration in growth this year and have lowered our GDP growth forecasts for 2014 and 2015 to 1.2% and 2.2%, respectively, from 2.2% and 3.0% in December 2013. In our view, there is a significant downside risk that growth will fall well below 1% if the uncertainties caused by the geopolitical tensions do not subside in the near term.

In our view, there is a material risk that the conflict between Russia and Ukraine could extend beyond Crimea and that violence between pro- and anti-Russian protesters could spread to other cities in Eastern Ukraine. Should the situation deteriorate, we believe further and wider sanctions could be imposed against Russian institutions and individuals, potentially including trade restrictions. In our view, these sanctions could further undermine Russia’s economic growth prospects. We note, however, that sanctions, particularly those that might be imposed by EU countries, could be tempered by European economic trade and energy interests.

Our ratings on Russia continue to be supported by its relatively strong external and government balance sheets. The ratings remain constrained by structural weaknesses in Russia’s economy, in particular the strong dependence on hydrocarbons and other commodities. Further constraints are what we view as comparatively weak governance and economic institutions that impede the economy’s competitiveness, investment climate, and business environment.

The Russian government’s finances continue to be buoyed by strong commodity revenues, particularly from oil. These account for almost one-half of the government’s budget revenues, but also leave it exposed to swings in commodity prices. To mitigate this vulnerability, the government has instituted a fiscal rule from 2013, which caps government expenditure based on long-term historical oil prices. This fiscal rule is designed to lead to the accumulation of assets in times of high oil prices, and to the drawing on fiscal assets in times of low oil prices, reducing the procyclicality of fiscal policy. In our view, the government’s commitment to this fiscal rule will likely be significantly tested by the recent further deterioration in growth prospects, while off-budget measures to support additional spending could also increase. We estimate Russia’s 2013 general government budget to have recorded a deficit of 0.6% of GDP. Based on our expectation that commodity revenues will decline slightly on the back of a slightly weaker oil price (falling to $95 by 2015), we think the general government deficit will gradually worsen, reaching 1.5% of GDP by 2016, just outside the level targeted by the fiscal rule, and implying an average annual change in general government debt of 1.5% of GDP over 2013-2016.

Russia’s aging population will be a source of considerable medium- to long-term fiscal pressure. In a no-policy-change scenario, we expect the aging of the population to add more than 10% of GDP to government spending by 2050 compared with 2010 levels. While the government has been adjusting pension system parameters, it has so far shied away from more decisively tackling the issue. We now estimate the Russian government to be in a marginal net debtor position due to revised data on the outstanding stock of gross general government debt. Nevertheless, low levels of gross debt imply low general government interest payments at about 2% of revenues during 2014-2016.

Commodity exports are also behind Russia’s persistent current account surpluses, resulting in a net external asset position of about 4% of GDP in 2014. Measured in terms of narrow net external debt, that is, external debt minus liquid external assets held by the public and banking sector, we expect Russia to be in a small net external creditor position. This strong external asset position has been declining since reaching a peak of 34% in 2009. We note, however, that due to consistently negative errors and omissions in Russia’s balance of payments (averaging almost $8 billion annually, or 1.5% of CAR in 2007 to 2013) the reported net asset position is considerably lower than implied by the large current account surpluses.

We expect the current account surpluses to disappear by 2015, owing to imports rising faster than exports. Further ruble weakness could weigh on imports and keep current account deficits from occurring a little later, but we believe the longer-term trend of a weakening current account will remain in place even so. Gross external financing needs (current account payments plus short-term external debt by remaining maturity) will amount to 70% of CARs and usable reserves in 2014, in our view. Dependence on commodity exports results in terms-of-trade volatility, although past experience has shown that imports tend to adjust strongly, offsetting part of a commodity price-induced drop in export revenue.

Russia’s political institutions remain comparatively weak and political power is highly centralized. Protesters, opposition members, nongovernmental organizations, and liberal members of the political establishment have come under increasing pressure. We do not expect the government to decisively and effectively tackle the long-standing structural obstacles to stronger economic growth over our forecast horizon (2014-2017). These obstacles include high perceived corruption, comparatively weak rule of law, the state’s pervasive role in the economy, and a challenging business and investment climate.

OUTLOOK

The negative outlook reflects our view that there is at least a one-in-three chance that we could reassess the risks to Russia’s creditworthiness based on its deteriorating external profile and reduced monetary policy flexibility. As a result, we could lower our ratings on Russia within the next 24 months. Geopolitical reaction to Russia’s incorporation of Crimea could further reduce the flow of potential investment and negatively affect already weak economic growth, which would provide a further basis for lowering the ratings. Similarly, we could equalize the local and foreign currency ratings on Russia if we were to view Russia’s transition toward a more flexible exchange rate regime as having stalled.

We could revise the outlook to stable if Russia’s economy were to prove resilient to the current challenges, resulting in a return to a policy of a more flexible exchange rate, and if its external and fiscal buffers were to remain in line with our current expectations.

Overpopulation: An Overlooked Factor in Global Health

Overpopulation: An Overlooked Factor in Global Health.

Written by Brian Krans | Published on March 19, 2014
|
TEXT SIZE: A A A

New research suggests that population growth is driving numerous global health crises, yet it’s rarely factored into the equation.

Overpopulation Overlooked Factor Global Health

The world’s population currently stands at 7.15 billion people and has the potential to double in the next 50 years. In the U.S., there’s one birth every eight seconds and one death every 12 seconds.

With an ever-growing population on a finite earth, the issue of overpopulation should be a major concern when evaluating how we’ll be able to feed and care for the masses.

But it’s not.

Camilo Mora, an assistant professor of geography in the College of Social Sciences at the University of Hawaii at Manoa, reviewed nearly 200 research articles and found that population is being “downplayed and trivialized,” despite its biological impact and its fundamental role in human welfare.

In the U.S. alone, unintended pregnancies are responsible for $11 billion in public spendingeach year.

Pregnant? You’ll Want to Watch These Videos »

‘The Picture Isn’t Pretty’

Mora’s research, published in the journal Ecology and Society, suggests that major health crises won’t be fixed if researchers continue to ignore burgeoning birth rates and declining death rates.

“In a planet with limited resources and a sensitive climate, with most of its natural resources being overexploited and its economic systems overstressed, meeting the additional demands of a growing human population without destroying the Earth and our social systems will be one of the greatest tests to humanity in the years to come,” Mora concluded.

Doomsday scenarios aside, Mora said diseases like HIV/AIDS and malaria will continue to spread, mainly through unsafe behaviors linked to overpopulation: high-risk sexual practices, a lack of access to contraception, and an increase in the number of sex workers.

In Africa, extreme poverty has forced many women into the “sex for fish” trade, in which they have sex with local fishermen in exchange for a portion of the daily catch. Because these woman have inadequate access to contraceptives and safer-sex tools, this practice increases the spread of HIV and makes unwanted pregnancies more likely.

“People are forced to do these things. There’s no way to dig people out of this kind of poverty,” Mora told Healthline. “When you get a perspective, the picture isn’t pretty.”

Learn About the Life Expectancy of an HIV Patient »

Is One Child Enough?

In his paper, Mora pointed to the case of former presidential candidate Mitt Romney, who has 22 grandchildren. If each of Romney’s children were to follow in his footsteps, he and his wife, Ann, would be responsible for creating 124 people in just four generations.

While the Romneys have the financial capacity to provide food, education, and healthcare for a flock as large as theirs, they are in the minority.

The average ideal family used to be 2.1 children: one to replace each parent and 0.1 to account for child mortality rates. Now that child mortality rates have dropped and medical advances have helped more people living longer, Mora suggests that the average family have only one child.

“Everything has to go down to women and how many children they have,” he says. “In some countries, that isn’t an option.”

With scientific literacy in the U.S. and other developed countries falling below 17 percent, few people consider the ramifications of their family size and the impact it has on earth’s future.

While one-child mandates may be perceived as fodder for science fiction—or as the practice of oppressive governments—Mora says changing social norms are the better way to go.

“People need to look at the total impact,” he says. “The more people you have, the fewer services you have to go around.”

Learn About the 10 Worst Disease Outbreaks in U.S. History»

The DJIA Is A Hoax Washington's Blog

The DJIA Is A Hoax Washington’s Blog.

The Dow Jones Industrial Average Is a Farce

Guest post by Wim Grommen. Mr. Grommen was a teacher in mathematics and physics for eight years at secondary schools. The last twenty years he trained programmers in Oracle-software. He worked almost five years as trainer for Oracle and the last 18 years as trainer for Transfer Solutions in the Netherlands.

The last 15 years he studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines / sites in The Netherlands and Belgium.

The paper “The present crisis, a pattern: current problems associated with the end of the third industrial revolution” was accepted for an International Symposium in Valencia: The Economic Crisis: Time for a paradigm shift, Towards a systems approach. 

On January 25 2013, during the symposium in Valencia he presented his paper to scientists.

The Dow Jones Industrial Average (DJIA) Index is the only stock market index that covers both the second and the third industrial revolution. Calculating share indexes such as the Dow Jones Industrial Average and showing this index in a historical graph is a useful way to show which phase the industrial revolution is in. Changes in the DJIA shares basket, changes in the formula and stock splits during the take-off phase and acceleration phase of industrial revolutions are perfect transition-indicators. The similarities of these indicators during the last two revolutions are fascinating, but also a reason for concern. In fact the graph of the DJIA is a classic example of fictional truth, a hoax.

Transitions

Every production phase, civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.

A transition has the following characteristics:

–          it involves a structural change of civilization or a complex subsystem of our civilization

–          it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other

–          it is the result of slow changes (changes in supplies) and fast dynamics (flows)

A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.

Four transition phases

In general transitions can be seen to go through the S curve and we can distinguish four phases (see fig. 1):

  1. a pre development phase of a dynamic balance in which the present status does not visibly change
  2. a take off phase in which the process of change starts because of changes in the system
  3. an acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  4. a stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

A product life cycle also goes through an S curve. In that case there is a fifth phase:

  1. the degeneration phase in which cost rises because of over capacity and the producer will finally withdraw from the market.

 

 

Figure 1. The S curve of a transition
Four phases in a transition best visualized by means of an S curve:
Pre-development, Take-off, Acceleration, Stabilization.

When we look back into the past we see three transitions, also called industrial revolutions, taking place with far-reaching effect :

1. The first industrial revolution (1780 until circa 1850); the steam engine

2. The second industrial revolution (1870 until circa 1930); electricity, oil and the car

3. The third industrial revolution (1950 until ….); computer and microprocessor

Dow Jones Industrial Average (DJIA)

The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor.

While the inclusion of the Dow Divisor may have seemed totally straightforward it was – and still is – anything but! Why so? Because every time the number of, or specific constituent, companies change in the index any comparison of the new index value with the old index value is impossible to make with any validity whatsoever. It is like comparing the taste of a cocktail of fruits when the number of different fruits and their distinctive flavours – keep changing. Let me explain the aforementioned as it relates to the Dow.

The False Appreciation of the Dow Explained

On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase.

On October 1st, 1928, when the Dow was enlarged to 30 constituents, the calculation formula for the index was changed to take into account the fact that the shares of companies in the Index split on occasion. It was determined that, to allow the value of the Index to remain constant, the sum total of the share values of the 30 constituent companies would be divided by 16.67 ( called the Dow Divisor) as opposed to the previous 30.

On October 1st, 1928 the sum value of the shares of the 30 constituents of the Dow 30 was $3,984 which was then divided by 16.67 rather than 30 thereby generating an index value of 239 (3984 divided by 16.67) instead of 132.8 (3984 divided by 30) representing an increase of 80% overnight!! This action had the affect of putting dramatically more importance on the absolute dollar changes of those shares with the greatest price changes. But it didn’t stop there!

On September, 1929 the Dow divisor was adjusted yet again. This time it was reduced even further down to 10.47 as a way of better accounting for the change in the deletion and addition of constituents back in October, 1928 which, in effect, increased the October 1st, 1928 index value to 380.5 from the original 132.8 for a paper increase of 186.5%!!! From September, 1929 onwards (at least for a while) this “adjustment” had the affect – and I repeat myself – of putting even that much more importance on the absolute dollar changes of those shares with the greatest changes.

How the Dow Divisor Contributed to the Crash of ‘29

From the above analyses/explanation it is evident that the dramatic “adjustments” to the Dow Divisor (coupled with the addition/deletion of constituent companies according to which transition phase they were in) were major contributors to the dramatic increase in the Dow from 1920 until October 1929 and the following dramatic decrease in the Dow 30 from then until 1932 notwithstanding the economic conditions of the time as well.

Dow Jones Industrial Index is a Hoax

In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance. An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit. In less than ten years twelve of the thirty companies (i.e. 40%) in the Dow Jones were replaced. Over a period of sixteen years, twenty companies were replaced, a figure of 67%. This meant that over a very short period we were left comparing a basket of today’s apples with a basket of yesterday’s pears.

Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index, which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15571590501117 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:

Dow1985 = (x1 + x2 +..+x30) / 1

Dow2014 = (x1 + x2 +.. + x30) / 0.15571590501117

In the 1990s many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed. An increase in share value of 1 dollar of the set of shares in 2014 results is 6.4 times more points than in 1985. The fact that in the 1990s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 16,437 points. If we used the 1985 formula it would be at 2,559 points.

The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition. From 1980 onward 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft), the engines of the latest revolution and 5 financial institutions, which always play an important role in every transition, were added to the Dow Jones.

Period

Basket changes

Stock splits

Dow Divisor end period

1930-1940

18

0

15,100

1940-1950

0

12

9,060

1950-1960

5

27

3,824

1960-1970

0

26

1,894

1970-1980

3

12

1,465

1980-1990

5

32

0,586

1990-2000

11

40

0,201

2000-2010

7

13

0,132

Table 1. Changes in the Dow, stock splits and the value of the Dow Divisor after the market crash of 1929

 Dow Jones Industrial Average

Figure 2 Exchange rates of Dow Jones during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously.

Overview from 1997 : 20 winners in – 20 losers out, a figure of 67%

September 23, 2013: Hewlett – Packard Co., Bank of America Inc. and Alcoa Inc. will replaced by Goldman Sachs Group Inc., Nike Inc. and Visa Inc.
Alcoa has dropped from $40 in 2007 to $8.08. Hewlett- Packard Co. has dropped from $50 in 2010 to $22.36.
Bank of America has dropped from $50 in 2007 to $14.48.
But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. have risen 25%, 27% and 18% respectively in 2013.

September 20, 2012: UnitedHealth Group Inc. (UNH) replaces Kraft Foods Inc.
Kraft Foods Inc. was split into two companies and was therefore deemed less representative so no longer suitable for the Dow. The share value of UnitedHealth Group Inc. had risen for two years before inclusion in the Dow by 53%.

June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors.
 Citigroup and General Motors have received billions of dollars of U.S. government money to survive and were not representative of the Do.

September 22, 2008: Kraft Foods Inc. replaced American International Group. 
American International Group was replaced after the decision of the government to take a 79.9% stake in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed.

February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International.
Altria was split into two companies and was deemed no longer suitable for the Dow.
 Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow.

April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc. replace AT & T Corp., Eastman Kodak Co. and International Paper.
AIG shares had increased over 387% in the previous decade and Pfizer had an increase of more than 675& behind it. Shares of AT & T and Kodak, on the other hand, had decreases of more than 40% in the past decade and were therefore removed from the Dow.

November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck.

March 17, 1997:  Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation.

Real truth and fictional truth

Is the number of points that the Dow Jones now gives us a truth or a fictional truth? 
If a fictional truth then the number of points now says absolutely nothing about the state that the economy or society is in when compared to the past. In that case a better guide would be to look at the number of people in society that use food stamps today – That is the real truth

The DJIA Is A Hoax Washington’s Blog

The DJIA Is A Hoax Washington’s Blog.

The Dow Jones Industrial Average Is a Farce

Guest post by Wim Grommen. Mr. Grommen was a teacher in mathematics and physics for eight years at secondary schools. The last twenty years he trained programmers in Oracle-software. He worked almost five years as trainer for Oracle and the last 18 years as trainer for Transfer Solutions in the Netherlands.

The last 15 years he studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines / sites in The Netherlands and Belgium.

The paper “The present crisis, a pattern: current problems associated with the end of the third industrial revolution” was accepted for an International Symposium in Valencia: The Economic Crisis: Time for a paradigm shift, Towards a systems approach. 

On January 25 2013, during the symposium in Valencia he presented his paper to scientists.

The Dow Jones Industrial Average (DJIA) Index is the only stock market index that covers both the second and the third industrial revolution. Calculating share indexes such as the Dow Jones Industrial Average and showing this index in a historical graph is a useful way to show which phase the industrial revolution is in. Changes in the DJIA shares basket, changes in the formula and stock splits during the take-off phase and acceleration phase of industrial revolutions are perfect transition-indicators. The similarities of these indicators during the last two revolutions are fascinating, but also a reason for concern. In fact the graph of the DJIA is a classic example of fictional truth, a hoax.

Transitions

Every production phase, civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.

A transition has the following characteristics:

–          it involves a structural change of civilization or a complex subsystem of our civilization

–          it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other

–          it is the result of slow changes (changes in supplies) and fast dynamics (flows)

A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not dogmatic.

Four transition phases

In general transitions can be seen to go through the S curve and we can distinguish four phases (see fig. 1):

  1. a pre development phase of a dynamic balance in which the present status does not visibly change
  2. a take off phase in which the process of change starts because of changes in the system
  3. an acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  4. a stabilization phase in which the speed of sociological change slows down and a new dynamic balance is achieved through learning

A product life cycle also goes through an S curve. In that case there is a fifth phase:

  1. the degeneration phase in which cost rises because of over capacity and the producer will finally withdraw from the market.

 

 

Figure 1. The S curve of a transition
Four phases in a transition best visualized by means of an S curve:
Pre-development, Take-off, Acceleration, Stabilization.

When we look back into the past we see three transitions, also called industrial revolutions, taking place with far-reaching effect :

1. The first industrial revolution (1780 until circa 1850); the steam engine

2. The second industrial revolution (1870 until circa 1930); electricity, oil and the car

3. The third industrial revolution (1950 until ….); computer and microprocessor

Dow Jones Industrial Average (DJIA)

The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor.

While the inclusion of the Dow Divisor may have seemed totally straightforward it was – and still is – anything but! Why so? Because every time the number of, or specific constituent, companies change in the index any comparison of the new index value with the old index value is impossible to make with any validity whatsoever. It is like comparing the taste of a cocktail of fruits when the number of different fruits and their distinctive flavours – keep changing. Let me explain the aforementioned as it relates to the Dow.

The False Appreciation of the Dow Explained

On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase.

On October 1st, 1928, when the Dow was enlarged to 30 constituents, the calculation formula for the index was changed to take into account the fact that the shares of companies in the Index split on occasion. It was determined that, to allow the value of the Index to remain constant, the sum total of the share values of the 30 constituent companies would be divided by 16.67 ( called the Dow Divisor) as opposed to the previous 30.

On October 1st, 1928 the sum value of the shares of the 30 constituents of the Dow 30 was $3,984 which was then divided by 16.67 rather than 30 thereby generating an index value of 239 (3984 divided by 16.67) instead of 132.8 (3984 divided by 30) representing an increase of 80% overnight!! This action had the affect of putting dramatically more importance on the absolute dollar changes of those shares with the greatest price changes. But it didn’t stop there!

On September, 1929 the Dow divisor was adjusted yet again. This time it was reduced even further down to 10.47 as a way of better accounting for the change in the deletion and addition of constituents back in October, 1928 which, in effect, increased the October 1st, 1928 index value to 380.5 from the original 132.8 for a paper increase of 186.5%!!! From September, 1929 onwards (at least for a while) this “adjustment” had the affect – and I repeat myself – of putting even that much more importance on the absolute dollar changes of those shares with the greatest changes.

How the Dow Divisor Contributed to the Crash of ‘29

From the above analyses/explanation it is evident that the dramatic “adjustments” to the Dow Divisor (coupled with the addition/deletion of constituent companies according to which transition phase they were in) were major contributors to the dramatic increase in the Dow from 1920 until October 1929 and the following dramatic decrease in the Dow 30 from then until 1932 notwithstanding the economic conditions of the time as well.

Dow Jones Industrial Index is a Hoax

In many graphs the y-axis is a fixed unit, such as kg, meter, liter or euro. In the graphs showing the stock exchange values, this also seems to be the case because the unit shows a number of points. However, this is far from true! An index point is not a fixed unit in time and does not have any historical significance. An index is calculated on the basis of a set of shares. Every index has its own formula and the formula gives the number of points of the index. Unfortunately many people attach a lot of value to these graphs which are, however, very deceptive.

An index is calculated on the basis of a set of shares. Every index has its own formula and the formula results in the number of points of the index. However, this set of shares changes regularly. For a new period the value is based on a different set of shares. It is very strange that these different sets of shares are represented as the same unit. In less than ten years twelve of the thirty companies (i.e. 40%) in the Dow Jones were replaced. Over a period of sixteen years, twenty companies were replaced, a figure of 67%. This meant that over a very short period we were left comparing a basket of today’s apples with a basket of yesterday’s pears.

Even more disturbing is the fact that with every change in the set of shares used to calculate the number of points, the formula also changes. This is done because the index, which is the result of two different sets of shares at the moment the set is changed, must be the same for both sets at that point in time. The index graphs must be continuous lines. For example, the Dow Jones is calculated by adding the shares and dividing the result by a number. Because of changes in the set of shares and the splitting of shares the divider changes continuously. At the moment the divider is 0.15571590501117 but in 1985 this number was higher than 1. An index point in two periods of time is therefore calculated in different ways:

Dow1985 = (x1 + x2 +..+x30) / 1

Dow2014 = (x1 + x2 +.. + x30) / 0.15571590501117

In the 1990s many shares were split. To make sure the result of the calculation remained the same both the number of shares and the divider changed. An increase in share value of 1 dollar of the set of shares in 2014 results is 6.4 times more points than in 1985. The fact that in the 1990s many shares were split is probably the cause of the exponential growth of the Dow Jones index. At the moment the Dow is at 16,437 points. If we used the 1985 formula it would be at 2,559 points.

The most remarkable characteristic is of course the constantly changing set of shares. Generally speaking, the companies that are removed from the set are in a stabilization or degeneration phase. Companies in a take off phase or acceleration phase are added to the set. This greatly increases the chance that the index will rise rather than go down. This is obvious, especially when this is done during the acceleration phase of a transition. From 1980 onward 7 ICT companies (3M, AT&T, Cisco, HP, IBM, Intel, Microsoft), the engines of the latest revolution and 5 financial institutions, which always play an important role in every transition, were added to the Dow Jones.

Period

Basket changes

Stock splits

Dow Divisor end period

1930-1940

18

0

15,100

1940-1950

0

12

9,060

1950-1960

5

27

3,824

1960-1970

0

26

1,894

1970-1980

3

12

1,465

1980-1990

5

32

0,586

1990-2000

11

40

0,201

2000-2010

7

13

0,132

Table 1. Changes in the Dow, stock splits and the value of the Dow Divisor after the market crash of 1929

 Dow Jones Industrial Average

Figure 2 Exchange rates of Dow Jones during the latest two industrial revolutions. During the last few years the rate increases have accelerated enormously.

Overview from 1997 : 20 winners in – 20 losers out, a figure of 67%

September 23, 2013: Hewlett – Packard Co., Bank of America Inc. and Alcoa Inc. will replaced by Goldman Sachs Group Inc., Nike Inc. and Visa Inc.
Alcoa has dropped from $40 in 2007 to $8.08. Hewlett- Packard Co. has dropped from $50 in 2010 to $22.36.
Bank of America has dropped from $50 in 2007 to $14.48.
But Goldman Sachs Group Inc., Nike Inc. and Visa Inc. have risen 25%, 27% and 18% respectively in 2013.

September 20, 2012: UnitedHealth Group Inc. (UNH) replaces Kraft Foods Inc.
Kraft Foods Inc. was split into two companies and was therefore deemed less representative so no longer suitable for the Dow. The share value of UnitedHealth Group Inc. had risen for two years before inclusion in the Dow by 53%.

June 8, 2009: Cisco and Travelers replaced Citigroup and General Motors.
 Citigroup and General Motors have received billions of dollars of U.S. government money to survive and were not representative of the Do.

September 22, 2008: Kraft Foods Inc. replaced American International Group. 
American International Group was replaced after the decision of the government to take a 79.9% stake in the insurance giant. AIG was narrowly saved from destruction by an emergency loan from the Fed.

February 19, 2008: Bank of America Corp. and Chevron Corp. replaced Altria Group Inc. and Honeywell International.
Altria was split into two companies and was deemed no longer suitable for the Dow.
 Honeywell was removed from the Dow because the role of industrial companies in the U.S. stock market in the recent years had declined and Honeywell had the smallest sales and profits among the participants in the Dow.

April 8, 2004: Verizon Communications Inc., American International Group Inc. and Pfizer Inc. replace AT & T Corp., Eastman Kodak Co. and International Paper.
AIG shares had increased over 387% in the previous decade and Pfizer had an increase of more than 675& behind it. Shares of AT & T and Kodak, on the other hand, had decreases of more than 40% in the past decade and were therefore removed from the Dow.

November 1, 1999: Microsoft Corporation, Intel Corporation, SBC Communications and Home Depot Incorporated replaced Chevron Corporation, Goodyear Tire & Rubber Company, Union Carbide Corporation and Sears Roebuck.

March 17, 1997:  Travelers Group, Hewlett-Packard Company, Johnson & Johnson and Wal-Mart Stores Incorporated replaced Westinghouse Electric Corporation, Texaco Incorporated, Bethlehem Steel Corporation and Woolworth Corporation.

Real truth and fictional truth

Is the number of points that the Dow Jones now gives us a truth or a fictional truth? 
If a fictional truth then the number of points now says absolutely nothing about the state that the economy or society is in when compared to the past. In that case a better guide would be to look at the number of people in society that use food stamps today – That is the real truth

"We'll Destroy Twitter" Blasts Turkish PM | Zero Hedge

“We’ll Destroy Twitter” Blasts Turkish PM | Zero Hedge.

It appears the madness is contagious. Turkish Prime Minister Recep Tayyip Erdogan, embroiled in an ongoing and huge corruption probe, lashed out at “international conspiracies” in a speech at a rally in Bursa. “We’ll dig up Twitter – all of them – from the roots,” he raged, “they’ll see the power of the Republic of Turkey.” With the looming elections – sure to fair and equitable to all – he warned he would “settle scores” after winning. Indeed…

Via Bloomberg,

“We’ll dig up Twitter and so on — all of them — from the roots.”

“When people say, ‘Sir, the international community would say this or that,’ it doesn’t interest me at all,” Turkish Prime Minister Recep Tayyip Erdogan says today, according to state-run Anatolia news agency.

Erdogan, quoted at a rally in Bursa, also says:

Court decision has been made regarding Twitter, without elaborating on the decision

“International conspiracies are a part of this”

“They’ll see the power of the Republic of Turkey”

“We’ll Destroy Twitter” Blasts Turkish PM | Zero Hedge

“We’ll Destroy Twitter” Blasts Turkish PM | Zero Hedge.

It appears the madness is contagious. Turkish Prime Minister Recep Tayyip Erdogan, embroiled in an ongoing and huge corruption probe, lashed out at “international conspiracies” in a speech at a rally in Bursa. “We’ll dig up Twitter – all of them – from the roots,” he raged, “they’ll see the power of the Republic of Turkey.” With the looming elections – sure to fair and equitable to all – he warned he would “settle scores” after winning. Indeed…

Via Bloomberg,

“We’ll dig up Twitter and so on — all of them — from the roots.”

“When people say, ‘Sir, the international community would say this or that,’ it doesn’t interest me at all,” Turkish Prime Minister Recep Tayyip Erdogan says today, according to state-run Anatolia news agency.

Erdogan, quoted at a rally in Bursa, also says:

Court decision has been made regarding Twitter, without elaborating on the decision

“International conspiracies are a part of this”

“They’ll see the power of the Republic of Turkey”

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