My Briefing from the Joint Chiefs of Staff

From the desk of John Thomas

The Mad Hedge Fund Trader

Tuesday, June 28, 2011

I have always considered the US military to have one of the world’s greatest research organizations. The frustrating thing is that their “clients” only consist of the President and a handful of three and four star generals. So I thought that I would review my notes from a dinner I had with General James E. Cartwright, Vice Chairman of the Joint Chiefs of Staff, and known as “Hoss” to his close subordinates.

Meeting the tip of the spear in person was fascinating. The four star Marine pilot is the second highest ranking officer in the US armed forces, and showed up in his drab green alpha suit, his naval aviator wings matching my own, and spit and polished shoes. As he spoke, I was ticking off the stock, ETF, and futures plays that would best capitalize on the long term trends he was outlining.

The cycle of warfare is now driven by Moore’s Law more than anything else (XLK), (CSCO), (GOOG). Peer nation states, like Russia, are no longer the main concern. Budgeting for military expenditures is a challenge in the midst of the worst economic environment since the Great Depression.

Historically, inertia has limited changes in defense budgets to 5%-10% a year, but last year defense secretary Robert Gates pulled off 30% realignment, thanks to a major management shakeup. We can only afford to spend on winning current conflicts, not potential future wars. No more exercises in the Fulda Gap.

The war on terrorism will continue for at least 4-8 more years. US troops in Iraq will wind down to 35-50,000 by this year to support a large State Department presence. Afghanistan is a long haul that will depend more on cooperation from neighboring Iran and Pakistan. “We’re not going to be able to kill our way or buy our way to success in Afghanistan,” said the general. However, a 30,000 man surge there over the next 18 months will bring an improvement on the ground situation.

Iran is a big concern, and the strategy there is to interfere with outside suppliers of nuclear technology in order to stretch out their weapons development until a regime change cancels the whole program.

Water (PHO), (CGW) is going to become a big defense issue, as the countries running out the fastest, like Pakistan and the Sahel, happen to be the least politically stable.

Cyber warfare is another weak point, as excellent protection of .mil sites cannot legally be extended to .gov and .com sites. We may have to lose a few private institutions in an attack to get congress to change the law and accept the legal concept of “voluntarism.” General Cartwright said “Anyone in business will tell you that they’re losing intellectual capital on a daily basis.”

The START negotiations have become complicated by the fact that for demographic reasons, Russia (RSX) will never be able to field a million man army again, so they need more tactical nukes to defend against the Chinese (FXI). The Russians are trying to cut the cost of defending against the US, so they can spend more on defense against a far larger force from China.

I left the dinner with dozens of more ideas percolating through my mind, which I will write about in future letters.

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The Wall Street Journal published one of the funniest investment strategy pieces I have ever read. Dilbert cartoonist Scott Adams argues that you should invest in companies you hate because only the most unprincipled and rapacious firms make the greatest profits.

Moral bankruptcy is a great leading indicator of success, and the best ones can get you to balance your wallet on the end of your nose and bark like a seal, as you buy products that you utterly despise. Companies with the work ethic of a serial killer, like British Petroleum (BP) come to mind, but you can also add other firms to the list, like Goldman Sachs (GS), Citicorp (C), Pfizer (PFE), and Altria (MO).

Adams initially started investing in companies he loved, like Enron, WorldCom, and Webvan, and absolutely lost his shirt. Adams’ advice to BP is not to waste money on artificial sincere ad campaigns apologizing, but get us to hate them more. Bring on more dead bird pictures!

Who is Adams about to hate next? Apple (AAPL), because he irrationally craves their products, resents their emotional control over his entire family, can’t get ITunes to work, and is appalled by those aloof black turtlenecks that Steve Jobs wears. For my own recent piece on Apple, please click here. To read the entire, hilarious piece in full, please click here.

I was deeply saddened by the death of my old friend, CNN Asia correspondent, John Lewis, a legend in television journalism.

I first met John in Tokyo at the Foreign Correspondents’ Club of Japan back in 1974, when he was a decorated Vietnam vet from Ohio trying to claw his way into TV, bootstrap style. Personable and easy going, he was one of the few in the club who got along with most of the cantankerous, suicidal, or just plain drunk writers there, and was often the first to step in to stop a fight. In those days you didn’t get fired in this rough and tumble business for punching out competitors.

At my 1977 wedding at the club, John graciously shot the stills because I was too poor to hire a professional. In 1979, rumors spread that this wild man millionaire named the “Mouth of the South,” Ted Turner, was going to start up a 24 hour news cable channel called CNN, and was looking to hire a full time Asia correspondent. We both jumped at the job, and Lewis won out. Everyone was impressed, but kept their fingers crossed.

I was left part time stringing for NBC news, reporting to the late Bruce McDonald, who had worked his way up from writing for Johnny Carson’s Tonight show to the network producer for Asia, which is a big deal. And you wonder where I got my wicked sense of humor.

I often ran into John in the field, he covering the typhoons, floods, and wars, and me the business angle, which often blended into the same story. So we covered the corrupt Marcos regime in the Philippines, the assassination of Indira Ghandi in India, and the opening up of China. We never missed an opportunity to swap contacts and war stories at dingy, dubious bars from Seoul to New Delhi, and all points in between.

We parted ways in the eighties when my career made a sharp jag to the right with my joining Morgan Stanley in New York. John shot to international fame when he ignored Chinese orders to cease covering the Tiananmen Square massacre in 1989, and kept beaming reports abroad until the heavies cut the power off. Gutsy move, John.

I heard that John died of a heart attack at 63. Foreign correspondence did not exactly offer a healthy lifestyle, with all the smoking, drinking, and general carousing that went on. There were also the occupational hazards of the occasional stray bullet, bouts of amoebic dysentery, and stints in jail at the behest of some third world dictator. It was a larger than life existence, but not exactly conducive to a family life, so I moved on. John stuck with it, but what a price! I was appalled when I saw his recent picture. The years had not been kind.

John was one of a dying breed of journalist whose sole interest was to get the story right and get it fast. There was no pandering to a particular political viewpoint, stealth marketing, or surreptitious product placement that has regrettably become endemic in the trade today. His was really an old fashioned kind of reporting, almost quaint in its principles.

He will be missed.

“Free choice is not relevant in financial markets because there are too many players. A stock with a million holders is much more predictable than one with five,” said Charles Nenner, of Charles Nenner Research in Amsterdam.