Sep 03

Today’s News 3rd September 2017

  • De-Dollarization Accelerates: China Readies Yuan-Priced Crude Oil Benchmark Backed By Gold

    Authored by Tsvetana Paraskova via OilPrice.com,

    The world’s top oil importer, China, is preparing to launch a crude oil futures contract denominated in Chinese yuan and convertible into gold, potentially creating the most important Asian oil benchmark and allowing oil exporters to bypass U.S.-dollar denominated benchmarks by trading in yuan, Nikkei Asian Review reports.

    The crude oil futures will be the first commodity contract in China open to foreign investment funds, trading houses, and oil firms. The circumvention of U.S. dollar trade could allow oil exporters such as Russia and Iran, for example, to bypass U.S. sanctions by trading in yuan, according to Nikkei Asian Review.

    To make the yuan-denominated contract more attractive, China plans the yuan to be fully convertible in gold on the Shanghai and Hong Kong exchanges.

    Last month, the Shanghai Futures Exchange and its subsidiary Shanghai International Energy Exchange, INE, successfully completed four tests in production environment for the crude oil futures, and the exchange continues with preparatory works for the listing of crude oil futures, aiming for the launch by the end of this year.

    “The rules of the global oil game may begin to change enormously,” Luke Gromen, founder of U.S.-based macroeconomic research company FFTT, told Nikkei Asia Review.

    The yuan-denominated futures contract has been in the works for years, and after several delays, it looks like it may be launched this year.

    Some potential foreign traders have been worried that the contract would be priced in yuan.

    But according to analysts who spoke to Nikkei Asian Review, backing the yuan-priced futures with gold would be appealing to oil exporters, especially to those that would rather avoid U.S. dollars in trade.  

    “It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either,” Alasdair Macleod, head of research at Goldmoney, told Nikkei.

  • "Don't Mess With Yellowstone Supervolcano" Geologists Warn NASA

    Two weeks ago, we reported that Brian Wilcox, a former member of the NASA Advisory Council on Planetary Defense, had shared a report on what the Space Agency considered one of the greatest natural threats to human civilization: the Yellowstone “supervolcano.”

    Following an article published by BBC about super volcanoes last month, a group of NASA researchers got in touch with the media to share a report previously unseen outside the space agency about the threat Yellowstone poses, and what they hypothesize could possibly be done about it. 

    “I was a member of the NASA Advisory Council on Planetary Defense which studied ways for NASA to defend the planet from asteroids and comets,” explains Brian Wilcox of Nasa’s Jet Propulsion Laboratory (JPL) at the California Institute of Technology. 

    “I came to the conclusion during that study that the supervolcano threat is substantially greater than the asteroid or comet threat.”

    Yellowstone currently leaks about 60 to 70% of its heat into the atmosphere through stream water which seeps into the magma chamber through cracks, while the rest of the heat builds up as magma and dissolves into volatile gasses. The heat and pressure will reach the threshold, meaning an explosion is inevitable. When NASA scientists considered the fact that a super volcano’s eruption would plunge the earth into a volcanic winter, destroying most sources of food, starvation would then become a real possibility.  Food reserves would only last about 74 days, according to the UN, after an eruption of a super volcano, like that under Yellowstone.  And they have devised a risky plan that could end up blowing up in their faces.  Literally.

    Wilcox hypothesized that if enough heat was removed, and the temperature of the super volcano dropped, it would never erupt. But he wants to see a 35% decrease in temperature, and how to achieve that, is incredibly risky. One possibility is to simply increase the amount of water in the supervolcano. As it turns to steam. the water would release the heat into the atmosphere, making global warming alarmists tremble.

    “Building a big aqueduct uphill into a mountainous region would be both costly and difficult, and people don’t want their water spent that way,” Wilcox says. “People are desperate for water all over the world and so a major infrastructure project, where the only way the water is used is to cool down a supervolcano, would be very controversial.”

    So, NASA came up with an alternative plan: the smartest people on earth believe the most viable solution could be to drill up to 10km down into the super volcano and pump down water at high pressure. The circulating water would return at a temperature of around 350C (662F), thus slowly day by day extracting heat from the volcano. And while such a project would come at an estimated cost of around $3.46 billion, it comes with an enticing catch which could convince politicians (taxpayers) to make the investment.

    “Yellowstone currently leaks around 6GW in heat,” Wilcox says. “Through drilling in this way, it could be used to create a geothermal plant, which generates electric power at extremely competitive prices of around $0.10/kWh. You would have to give the geothermal companies incentives to drill somewhat deeper and use hotter water than they usually would, but you would pay back your initial investment, and get electricity which can power the surrounding area for a period of potentially tens of thousands of years. And the long-term benefit is that you prevent a future supervolcano eruption which would devastate humanity.”

    To be sure, NASA itself admitted that drilling into a super volcano comes with its own risks, like the eruption that scientists are desperate to prevent. Triggering an eruption by drilling would be disastrous.

    “The most important thing with this is to do no harm,” Wilcox says. “If you drill into the top of the magma chamber and try and cool it from there, this would be very risky. This could make the cap over the magma chamber more brittle and prone to fracture. And you might trigger the release of harmful volatile gases in the magma at the top of the chamber which would otherwise not be released.”

    Now, it is others’ turn to slam the NASA plan: according to a geologist at Yellowstone national park, the proposal could have dire consequences, including killing countless animals.

    According to the Star, Dr Jefferson Hungerford, who works at Yellowstone, has warned NASA scientists to stay away from the volcano. He said that: “messing with a mass that sits underneath our dynamic Yellowstone would potentially be harmful to life around us.

    “It would potentially be a dangerous thing to play around with.” And he questioned whether the drilling could even work, saying “we’re not there scientifically”.

    More importantly, Dr Hungerford said there is no need for anything to be done proactively at Yellowstone, adding: “We won’t see [an eruption]. Very likely we will never see it.”

    Perhaps he is correct: the Earth has 20 known supervolcanoes, which if they erupt, would trigger planet-changing effects. Major eruptions are incredibly rare, with the last one approximately 26,500 years ago in New Zealand. But if a similar event occurred today, it would cause a nuclear winter with humans wiped out in just a few months from starvation.

    For now, what some of the smartest people in the world disagreeing on what to do next, the increasingly more precarious status quo is the most likely outcome.

  • Three Dangerous Delusions About Korea

    Authored by James George Jatras via The Strategic Culture Foundation,

    They say that most of the world’s real dangers arise not because of what people don’t know but because of what they do 'know' that just ain’t so.

    As a case in point, consider three things about Korea that the bipartisan Washington establishment seems quite sure of but are far removed from reality:

    Delusion 1: All options, including U.S. military force, are «on the table.»

    – Everyone knows there are no military «options» the U.S. could use against North Korea that don’t result in disaster. The prospect that a «surgical strike» could «take out» (a muscular-sounding term much loved by laptop bombardiers) Pyongyang’s nuclear and missile capabilities is a fiction. Already impractical when considered against a country like Iran, no one believes a limited attack could eliminate North Korea’s ability to strike back, hard. At risk would be not only almost 30,000 U.S. troops in Korea but 25 million people in the Seoul metropolitan area, not to mention many more lives at risk in the rest of South Korea and perhaps Japan.

     

    – Hence, any contemplated U.S. preemptive strike would have to be massive from the start, imposing a ghastly cost on North Koreans (do their lives count?) but still running the risk that anything less than total success would mean a devastating retaliation. That’s not even taking into account possible actions of other countries, notably China’s response to an American attack on their detestable buffer state.

    Delusion 2: North Korea must be denuclearized.

    – Whether anyone likes it or not, North Korea is a nuclear weapons state outside the Nuclear Non-Proliferation Treaty and will remain so. Kim Jong-un learned the lessons of Saddam Hussein and Muammar Gaddafi. Because Kim has weapons of mass destruction, especially nukes, he gets to stay alive and in power. If he gives them up, he can look forward to dancing the Tyburn jig or getting sodomized with a bayonet, then shot. That’s not a difficult choice.

    Delusion 3: If the U.S. presses China hard enough, Beijing will solve the problem for us.

    – There is no combination of U.S. sanctions, threats, or pressures that will make Beijing take steps that are fundamentally contrary to China’s vital national security interests. (Here, the «vital national security» of China means just that, not the way U.S. policymakers routinely abuse the term to mean anything they don’t like even if it has nothing to do with American security, much less with America’s survival.) Aside from speculation (which is all it is) that China could seek to engineer an internal coup to overthrow Kim in favor of a puppet administration, maintaining the current odious regime is Beijing’s only option if they don’t want to face the prospect of having on their border a reunited Korean peninsula under a government allied with Washington.

     

    – After Moscow’s experience with the expansion of NATO following the 1990 reunification of Germany, why would Beijing take credibly any assurances from Washington (of which there is no indication anyway) not to expand into a vacuum created by a collapse of North Korea? Quite to the contrary, it has been suggested that if China refuses to deal with the North Korea problem on Washington’s behalf, then the U.S. would do it on its terms, presenting Beijing (in the description of former U.S. ambassador to the United Nations John Bolton) with «regime collapse, huge refugee flows and U.S. flags flying along the Yalu River.» Adds Bolton, «China can do it the easier way or the harder way: It’s their choice. Time is growing short.» If under such a scenario U.S. forces end up on China’s border, suggests Bolton, they wouldn’t be leaving anytime soon. Don’t be so sure. In 1950, the last time American forces were on the Yalu River, they weren’t there very long when hundreds of thousands of Chinese soldiers crossed into Korea. Keep in mind that happened when China didn’t have nuclear weapons but the U.S. did.

    The seemingly weekly rise and fall of the decibel level of bellicose rhetoric coming out of Washington and Pyongyang obscures the realities behind these three delusions. Little change can be expected from Pyongyang, whose policy at least has the virtue of simplicity: «if you do anything bad to us, we’ll do something really, really bad to you.»

    So then, what are the prospects Washington could jump off the hamster wheel and come up with something besides threats and sanctions? The omens are not auspicious. Just before he left the White House, Steve Bannon violated the taboo surrounding Delusion 1: «Until somebody solves the part of the equation that shows me that ten million people in Seoul don't die in the first 30 minutes from conventional weapons, I don't know what you're talking about, there's no military solution here, they got us.» Then he was gone.

    But let’s be optimistic. There have been reports of direct «back channel» contacts between North Korea and the U.S. at the United Nations in New York. Even Bolton suggests that some kind of accommodation could be made to China in the form of a pullback of U.S. forces down to the south, near Pusan, so as to be still «available for rapid deployment across Asia.» (Certainly, that’s one idea. Here’s a better one: how about getting us out of Korea entirely and not having Americans available for deployment across Asia?)

    The definitive clarification should have been the Beijing-based Global Times editorial of August 10, 2017 («Reckless game over the Korean Peninsula runs risk of real war»), universally seen as reflecting the position of the Chinese government:

    «China should also make clear that if North Korea launches missiles that threaten U.S. soil first and the U.S. retaliates, China will stay neutral. If the U.S. and South Korea carry out strikes and try to overthrow the North Korean regime and change the political pattern of the Korean Peninsula, China will prevent them from doing so».

    That means that if Kim attacks the U.S., he’s on his own. If we attack Kim, we’re at war with China. In the latter case, while Russia would not likely directly join the fray we can be sure Moscow would provide China total support short of belligerency. Put mildly, this would not be in the American interest.

    There is one, and only one overriding priority that should now guide U.S. policy on Korea. It’s not regime change in North Korea – despite that regime’s loathsomeness – or even the wellbeing of South Korea or Japan. It’s avoiding Kim’s developing a missile system capable of delivering a nuclear weapon to the United States. How close North Korea might be to such a capability is the subject of wildly conflicting estimations. (Regarding the American lives hung out on the DMZ, there’s a simple solution to ensuring their safety – get them the hell out of there.)

    But what about South Korea and Japan? Our «alliances» with them are a fiction. The U.S. guarantees their security but other than cooperating on the defense of their own territory they do nothing to safeguard ours, nor can they. The U.S. derives no benefit in continuing to make ourselves a target on account of a place that’s more than five thousand miles from the American mainland.

    It’s time that «America First!» meant something. As a start, Washington could take seriously Beijing’s proposal for a double-freeze. On the one hand, Pyongyang would suspend its nuclear and missile programs, in particular halting tests of weapons with potential intercontinental range. Washington and Seoul would suspend joint military exercises, including practicing so-called «decapitation strikes« aimed at North Korea’s leadership.

    If protecting our own territory and people is American officials’ top priority, and not, as they implausibly claim, «regime change» in North Korea, it’s hard to see why a double-freeze would not be a sensible first step. It would be largely up to China to see that the North Koreans complied with their part of the deal. If they did, perhaps it could lead towards a long-overdue settlement of this Cold War-era standoff and, in time, a reunited, neutral Korea. If not, all bets are off – but we’d be hardly worse off than we are now.

  • Modi's Demonetization Called "Colossal Failure That Ruined Economy" As India GDP Growth Slumps To 2-Year Lows

    India's embattled Prime Minister Narendra Modi faced a double whammy of abuse this week as his nation's economic growth collapsed to its weakest since Q1 2014 and India's Central Bank released a report on Modi's extraordinary "demonitization" plan last year showing that 99 per cent of the high denomination banknotes cancelled last year were deposited or exchanged for new currency, crushing Modi's lie that his contentious 'war on cash' would wipe out huge amounts of so-called 'black money'.

    When Modi announced in November that Rs1,000 ($16) and Rs500 notes would no longer be legal tender, he suggested that corrupt officials, businessmen and criminals — popularly believed to hoard large amounts of illicit cash — would be stuck with “worthless pieces of paper”. At the time, government officials had suggested that as much as one-third of India’s outstanding currency would be purged from the economy – as the wealthy abandoned or destroyed it, rather than admit to their hoardings – reducing central bank liabilities and creating a government windfall.

    Since he unleashed his cunning plan, India's GDP growth has slowed dramatically.

    After India's Composite PMI collapsed, India's Q2 GDP growth slowed to 5.7% – its weakest since Q2 2014…

     

    And now, as The FT reports, the Reserve Bank of India’s annual report on Wednesday suggested that most holders of the old currency managed to dispose of it, estimating that banned notes worth Rs15.28tn ($239bn) were returned to the bank. That amounts to 99 per cent of the Rs15.44tn of the old high-value notes that were in circulation when Mr Modi made his announcement, according to the finance ministry.

    The government’s critics were quick to seize on the RBI’s announcement as evidence of the policy’s failure.

    “99 per cent notes legally exchanged! Was demonetisation a scheme designed to convert black money into white?” former finance minister P Chidambaram tweeted.

     

    Rahul Gandhi, de facto leader of the opposition Congress party, tweeted: “A colossal failure which cost innocent lives and ruined the economy. Will the PM own up?”

    The bank’s figures are a political embarrassment to Mr Modi, who had appealed to the nation to endure the disruption and hardship to punish the rich and corrupt, and deprive them of their ill-gotten gains.

    Many lower income Indians hard hit hard by cash shortages supported the demonetisation policy because they believed the rich were suffering more.

    It appears they were suckered!

  • Van Halen, M&Ms, And The Next Market Downturn

    Authored by Adam Taggart via PeakProsperity.com,

    The planet-sized egos of rock & roll performers are legendary.

    Few things symbolize this better than the outrageous requests they often make when on tour.

    These requests are referred to as "riders", and appear in the contract a tour venue receives in advance of the artist's arrival. These contract riders specify the physical conditions that the singer/band requires to be in place before arriving to perform. Stage lighting settings, sound equipment, furnishings, etc — that kind of stuff.

    And these rider requests can get pretty funky – often extremely so — when it comes to backstage perks the performers want.

    For example: A wooden pond filled with koi carp (Eminem). A driver who will not speak or make eye contact (Katy Perry). 20 white kittens and 100 doves (Mariah Carey). Seven dwarves (Iggy Pop). 50,000 bees (Slayer). A sub-machine gun (Mötley Crüe). And, yes, even a great white shark (Hank III).

    The practice of making these kind of outrageous demands stems from a rider Van Halen inserted into the contract for its 1982 world tour, which insisted on a bowl of M&Ms to be provided backstage, but with all of the brown M&Ms removed.

    As this image below of the actual rider shows, the band was very explicit in its seriousness about this:

    Once the media got whiff of this, it had a field day roasting the band's narcissistic chutzpah. A new high-water mark of diva capriciousness had been established, which quickly became legend. A feat of prima donna pampering that subsequent performers have been trying to top ever since.

    But as crazy as it sounds, Van Halen's "no brown M&Ms" rider had nothing to do with caprice. There was a solid rationale behind it.

    In fact, it was quite brilliant.

    The Importance Of Effective Indicators

    Van Halen's 1982 world tour was a massive production, involving a tremendous amount of gear and technical complexity. The contract the band sent in advance to venues was so thick due to all the details within, it was referred to as the "Chinese Yellow Pages".

    Non-compliance with the requirements in the contract could have serious consequences that could ruin the show, or even jeopardize lives.

    So when the band rolled up to its next venue, it needed a quick way to determine if the stage crew there had complied with all of the specifications within its contract.

    And that's why the "no brown M&Ms" rider was inserted. The band could simply hop off the bus and check the candy bowl. If they found brown M&Ms, they knew the contract hadn't been carefully read. And then they'd immediately call for a full-line check of the entire set.

    As lead singer David Lee Roth detailed in his autobiography:

    Van Halen was the first band to take huge productions into tertiary, third-level markets. We’d pull up with nine eighteen-wheeler trucks, full of gear, where the standard was three trucks, max. And there were many, many technical errors — whether it was the girders couldn’t support the weight, or the flooring would sink in, or the doors weren’t big enough to move the gear through.

     

    The contract rider read like a version of the Chinese Yellow Pages because there was so much equipment, and so many human beings to make it function. So just as a little test, in the technical aspect of the rider, it would say “Article 148: There will be fifteen amperage voltage sockets at twenty-foot spaces, evenly, providing nineteen amperes …” This kind of thing. And article number 126, in the middle of nowhere, was: “There will be no brown M&M’s in the backstage area, upon pain of forfeiture of the show, with full compensation.”

     

    So, when I would walk backstage, if I saw a brown M&M in that bowl … well, line-check the entire production. Guaranteed you’re going to arrive at a technical error. They didn’t read the contract. Guaranteed you’d run into a problem. Sometimes it would threaten to just destroy the whole show. Something like, literally, life-threatening.

    Genius.

    Through its rider, the band had created a easy-to-monitor and trustworthy indicator. No brown M&Ms, and the show was likely set up to go smoothly. But if otherwise, don't perform until the entire venue is scrutinized for other missed requirements.

    The lesson to take from Van Halen's wisdom is that having good indicators is key to achieving success.

    This is also extremely true for the world of investing, where you are deploying capital based upon an expected future return. How do you determine when it's a good time to enter into an investment? Once in it, how do you monitor the conditions supporting your rationale for holding it — are those changing? And if so, are they getting better or worse? When should you exit the position?

    For all of these questions, the better the indicators you use, the more accurate and informed your decision-making will be. And the better your returns as an investor will be.

    When The Indicators Are Giving A Signal, Pay Attention

    Over the years, we've compiled a large number of indicators that we monitor closely on an ongoing basis here at PeakProsperity.com. They most definitely inform our economic outlook and forecasting.

    We'll dedicate an upcoming report to laying out the sources and metrics we place the greatest weighting on. But several that we're watching closely right now come from two market analysts that we highly respect.

    The first set comes from Lance Roberts, chief strategist/economist for Clarity Financial. Lance is renowned for his excellent charts and ability to highlight key changes in data trends. Below are several indicators he's recently featured, suggesting weariness in the US financial markets and growing likelihood of economic recession.

    First, the S&P 500 is showing signs of topping out, having broken below the trading range of its latest 8-month bullish trend, and its MACD momentum indicator displaying two recent sell signals:

    Lance warns that such signals suggest that further price gains will be "volatile and limited" unless the S&P returns into its bullish channel. If it indeed does not and drops below the key resistance level of 2390, he sees a swift price correction of 12% as a real possibility.

    But he then combines this near-term technical analysis with more far-sighted data to make the point that the financial markets are not just overbought, but dangerously overvalued at this point. Similar to John Hussman (another producer of market indicators we value highly), Lance shows that, because today's prices are the result of pulling so much of tomorrow's valuation into today (e.g., via the suppression of interest rates and overexuberant speculation), we are living at a rare time in history where the average market return for the next 20 years may well be negative:

    And he recently caught our attention by surfacing this chart of the change in annual Real Value Added to the US economy, a metric that hadn't been on our radar beforehand. This has been a reliable indicator of recession in the US for nearly 70 years, and is now signaling that we've likely already entered one:

    Couple Lance's indicators with those of our other expert, Grant Williams, portfolio advisor at Vulpes Investment Management and co-founder of Real Vision TV. Grant and the team at Real Vision recently issued their latest Killer Charts series, which adds validation and additional weight to Lance's warnings.

    First off, Grant and his team see similar technical signs of "exhaustion" in the S&P 500 and predict lower prices ahead:

    Note that they don't just expect the S&P to correct slightly and then continuing powering higher. Other indicators they track, like the equities-vs-commodities ratio, strongly suggests a bubble peak for the S&P. From here they predict a secular bear trend for stocks (possibly paired with a new bull trend in commodities):

    And like Lance, Grant sees signs that the US economy is poised to slow further…

    .. and is likely, as Lance also concludes, tipping into recession:

    When smart analysts independently find the same patterns in the data, it's time to take notice.

    The charts above are only a few of the indicators Lance and Grant monitor that are now sending strong cautionary warnings about the near-term prospects for the financial markets and the underlying economy. What other key metrics should we also be tracing closely right now?

    To dig much deeper into this, Lance and Grant will be presenting their latest indicators, analysis and forecasts at the Dangerous Markets webinar on September 13th — where they will take ample questions live from the audience. For more information on the webinar, click here.

     

  • North Korea Claims It Has Developed Advanced Hydrogen Bomb, EMP

    A day after Russian President Vladimir warned that the US and North Korea are “balancing on the verge of a large-scale conflict," North Korean leader Kim Jong Un is doing everything in his power to validate Putin’s words.

    To wit, in a segment broadcasted Saturday by the Korean Central Broadcasting Network, the North’s state-run television-news network, the regime claimed that it has “succeeded in making a more developed” hydrogen bomb. In the broadcast, Kim can be seen looking on as a purported thermonuclear warhead is loaded onto an intercontinental ballistic missile, which KCNA described as having “great destructive powers." KCNA added that all hydrogen bomb components are homemade, so the North can "produce as many as it wants." The report also claimed that the North have developed a powerful electromagnetic pulse weapon.

    According to the Wall Street Journal, experts fear an attack with this type of weapon could wipe out electrical networks in the U.S.

    Here are more details from Dow Jones Newswires:

    • North Korea Says It Has ‘Succeeded in Making a More Developed’ Nuclear Weapon
    • Kim Jong Un Witnesses Hydrogen Bomb Being Loaded onto a ‘New ICBM’ —North Korea State Media
    • New Hydrogen Bomb’s Explosive Power Goes Up to Hundreds of Kilotons —North Korea State Media
    • North Korea Threatens ‘Super-Powerful’ EMP, or Electromagnetic Pulse, Attack
    • North Korea Claims All Hydrogen Bomb Components Are ‘Homemade,’ Can Produce ‘As Many As It Wants’

    Reuters explains that the hydrogen bomb's power is adjustable to hundreds of kilotons and can be detonated at high altitudes. Kim Jong Un "set forth tasks to be fulfilled in the research into nukes," KCNA said, but it made no mention of plans for a sixth nuclear test.

    As a reminder, in July, the North launched two ICBMs capable of reaching the US mainland, and after a monthlong break, Kim resumed his provocative missile tests last Friday by launching three short-range missiles into the Sea of Japan – and then on Monday, in another unprecedented provocation, the North fired an intermediate-range missile over the northern Japanese island of Hokkaido.

    Of course, there is no way of knowing whether the warhead is authentic, though we’re sure the intelligence community’s army of analysts will promptly opine one way or the other. Here’s Reuters with a more detailed account of the broadcast…

    “Kim visited the country’s Nuclear Weapons Institute and “watched an H-bomb to be loaded into new ICBM,” KCNA said. “All components of the H-bomb were homemade and all the processes … were put on the Juche basis, thus enabling the country to produce powerful nuclear weapons as many as it wants, he said.”

     

    Juche is North Korea’s homegrown ruling go-it-alone ideology that is a mix of Marxism and extreme nationalism preached by state founder Kim Il Sung, the current leader’s grandfather.

     

    Kim Jong Un “set forth tasks to be fulfilled in the research into nukes,” KCNA said, but it made no mention of plans for a sixth nuclear test.”

    Whether or not the claim of having an H-bomb is a fabrication, professional observers of the Kim regime warn that the report is a signal that the North Korean leader is preparing to carry out what would be the country's sixth nuclear test. North Korea last year conducted its fourth and fifth nuclear tests, claiming that the fourth in January 2016 was a successful hydrogen bomb test, though outside observers raised doubts about this claim. The North conducted a fifth nuclear test in September 2016, which was measured to be possibly North Korea’s biggest detonation ever, but the earthquake it caused was still not believed to be big enough to demonstrate a thermonuclear test, according to Reuters.

    And at least one observer who weighed in on Twitter said that the bomb appears to be authentic, which would confirm that the North is preparing for its most provocative action yet: its sixth nuclear test, which would force Trump to respond, having vowed never to allow North Korea to become a nuclear power with offensive capabilities.

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    Meanwhile, China and Russia have repeatedly urged the US and North Korea to engage in talks – even going so far as to offer a “roadmap” to de-escalation that would ask the North to halt progress on its missile program while the US and South Korea end military exercises.  As always, we await a response from President Donald Trump, who spent Saturday visiting disaster victims of Hurricane Harvey in Texas. As WSJ noted, the State Department has yet to comment.

  • Red Cross Admits It Doesn't Know How Hurricane Harvey Donation Money Is Spent

    Authored by Carey Wedler via TheAntiMedia.org,

    Though the Red Cross has a historical reputation for providing relief to victims of natural disasters and other emergencies, the organization’s practices have tarnished its name over the last few years.

    Amid the catastrophic earthquake in Haiti in 2010, the Red Cross reportedly accepted nearly $500 million in relief money but built only six homes with the funds even though they claimed they had provided homes to 130,000 people. These failures prompted some Haitians to advise the world against donating funds to the Red Cross.

    The organization was accused of diverting resources and supplies to bolster its public image during Hurricane Sandy. As an investigation by NPR and ProPublica found:

    “The Red Cross national headquarters in Washington ‘diverted assets for public relations purposes.’  

     

    A former Red Cross official managing the Sandy effort says 40 percent of available trucks were assigned to serve as backdrops for news conferences.”

    The outlets reported that “[d]istribution of relief was ‘politically driven instead of [Red Cross] planned,’” noting many organizational failures.

    Further, a report released last year by Iowa Sen. Chuck Grassley found that 25% of funds donated to aid in relief for victims of the earthquake was actually spent on internal costs. That amounted to roughly $124 million.

    Now, amid the hurricane in Texas, the Red Cross is admitting it currently doesn’t know how the funds it’s receiving are being spent.

    NPR’s Morning Edition interviewed Red Cross executive Brad Kieserman to ask how the funds will be distributed.  Kieserman said that as of Wednesday morning, “had spent $50 million on Harvey relief, mainly on 232 shelters for 66,000 people.”

    “Through donations, how much of every dollar goes to relief?” NPR’s Ailsa Chang asked him.

    But he responded without actually providing an answer to her question:

    “Yeah, I don’t think I know the answer to that any better than the chief fundraiser knows how many, how much it costs to put a volunteer downrange for a week and how many emergency response vehicles I have on the road today. So I think if he was on this interview and you were asking how many relief vehicles in Texas, I don’t think he’d know the answer and I don’t know the answer to the financial question I’m afraid.”

    She pressed him about the Red Cross’ previous failures and misallocation of resources. According to NPR’s transcript:

    “Is that still happening? Such a substantial percentage of donations going to internal administrative costs, rather than to relief?

     

    “Kieserman: It’s not something I would have any visibility on. I can talk about what it costs to deliver certain relief services.

     

    “Chang: Yeah.

     

    “Kieserman: But the way the internal revenue stream works, uhh …

     

    “Chang: You don’t know what portion of that amount.

     

    “Kieserman: Not really.

     

    “Chang: You don’t know what portion of that total amount is for relief.

     

    “Kieserman: No, I really don’t. I wish I could answer your question, but it’s not something I have visibility on in the role that I play in this organization.

    The executive ultimately claimed that “The folks I work for are very, very attentive to cost effectiveness and cost efficiencies in making sure that as much as every dollar that we spend on an operation is client-facing.”

    Slate reporter Jonathan Katz also reported the organization declined to disclose how much money they had spent or raised so far. Katz ultimately urged readers not to contribute to the Red Cross.

    The Red Cross continues to face criticism and urgings for individuals who want to help to take their donations elsewhere. The Independent reports that over the weekend, Dan Gillmor, author and professor at Arizona State University’s Walter Cronkite School of Journalism, advised against donating to the Red Cross. Many other social media users have expressed similar sentiments.

    Despite the Red Cross’ failings, however, there are still many organizations doing important work.

    The group A Just Harvey Recovery lists a number of local efforts accepting contributions. The Cajun Navy, a volunteer effort that previously rescued victims of Hurricane Katrina and the Louisiana floods last year, has also been working round the clock in Texas and is accepting donations. There are many organizations and shelters working locally to provide relief and essential services. If you would like to contribute or volunteer, you can find some of them here, here and here.

  • Are Grocery Chains About To Join The Retail-Bankruptcy Bloodbath?

    Amazon officially assumed control of Whole Foods Market on Monday and by noon, channel checks at WFM stores revealed that its new tech overlords had already slashed prices by nearly 50%, sending bonds of its grocery-chain rivals reeling as grocers confronted a new dilemma: either slash prices to the point of unprofitability, or hold the line and risk seeing sales evaporate.

    And as bonds of even highly rated grocery chains have underperformed this week, Bloomberg is questioning whether the WFM acquisition has fundamentally changed market dynamics in what was previously an island of stability in a retail sector beset by bankruptcies.

    Even before the WFM acquisition, the industry experienced the first signs of strain as Amazon launched its Amazon Fresh grocery service and Wal-Mart started stocking up on reasonably priced organics – factors that contributed to the massive drop in WFM’s market cap, allowing Amazon to scoop it up for less than $14 billion.

    Prior to this, the conventional wisdom dictated that grocers were impervious to the onslaught of e-commerce that was decimating industries such as clothing and electronics. Investors reasoned that consumers would probably balk at buying perishable goods like food online.

    But Amazon, with its seemingly infinite capacity to slash prices and brook losses, has created new risks for Whole Foods' rivals.

    Apollo Global thought buying North Carolina-based Fresh Market for the “every day low price” of $1.4 billion would be a turnaround slam dunk after its success with Sprouts Farmers Markets. One year later, the future profitability of that deal is in doubt, and that uncertainty is being reflected in the price.

    “The bonds that financed Apollo Global Management’s purchase last year of upscale grocer Fresh Market plunged to new lows this week. The cost of buying contracts to protect against a default in Albertsons Cos.’s debt has jumped. Bonds of Bi-Lo Holdings have lost almost half their value this year.”

     

    When Apollo Global bought Greensboro, North Carolina-based Fresh Market for $1.4 billion last year, the grocery world seemed quite different. The chain, known for its fresh produce, had seen sales slow. To lure customers back to Fresh Market’s roughly 170 stores, the private-equity titan was betting it could rely on its experience with previous – and profitable – investments in companies such as organic grocer Sprouts Farmers Markets.

     

    But Fresh Market is struggling for some of the same reasons that sent Whole Foods into the arms of Amazon. Mainstream competitors including Kroger Co. and Wal-Mart Stores Inc. have pushed deeper into sales of fresh produce and organic products. Supermarkets have opened so many stores that many analysts expect a shakeout. Before the Amazon deal, Fresh Market bonds traded as high as 91 cents on the dollar. Now they fetch less than 76 cents.”

    The reason is simple: Amazon, which is insulated not only by its e-commerce hegemony but also by investors who don’t expect the company to turn a profit. One analyst aptly referred to this as the Amazon-Whole Foods "fear factor.”

    “It’s the fear factor of Amazon,” said Mickey Chadha, an analyst at Moody’s Investors Service. “No retailer can under-price as long as Amazon can, make no money and get away with it. That’s why people are scared.”

    * * *

    News of the Amazon deal obliterated billions of dollars of grocers’ valuations, slicing $2 billion off Kroger’s market cap in one day. The grocer’s stock is down 35% this year. Yet its bonds have held steady.

    Meanwhile, nearly $3 billion in Albertsons bonds due in 2021 have tumbled..

    “Kroger’s bonds, which are investment grade, haven’t been hit. But about $3 billion of Albertsons debt coming due in 2021 has felt a chill. The loans have been trading at 97.6 cents on the dollar. Large, liquid, secured loans of that size typically command par, or 100 cents. A public stock offering for the Cerberus Capital Management-backed grocer was again put on hold after Amazon announced its purchase of Whole Foods.”

    …causing the cost of insuring them to skyrocket.

    As one might expect, analysts now believe that large chains with relatively low debt burdens will somehow manage to survive.

    But smaller chains like Bi-Lo Holdings may soon find that their debt burdens are untenable:

    “For example, Bi-Lo Holdings has borrowed hundreds of millions to make cash payouts to private-equity owner Lone Star Global Acquisitions. One of the bonds the company sold to pay the dividends now trades at levels indicating investors expect to recoup only a third of what they loaned the company.”

    Tops Friendly Markets, another troubled grocer, is being choked by its $720 million debt pile.

    “Tops Friendly Markets, which is reporting millions in losses, is straining under $720 million in debt. Using a maneuver typical of distressed companies, it put off repayments due in 2018 while it grapples with price deflation and traditional rivals in its western New York home turf. If earnings and the balance sheet don’t improve, investors holding the rest of Tops’ bonds could find they’re stuck with spoiled goods.”

    However, there's at least one factor that may insulate the market's weaker hands, at least for a little while. There are 40,000 grocery stores in the US, only 400 of which are WFMs…

    So, should investors be bracing for a wave of grocery bankruptcies resembling this year’s record run of failures among department stores, apparel sellers and electronics retailers? Maybe not right away. But once Amazon's had a few years to expand its footprint, a massive shakeout seems inevitable.
     

  • Facebook Exposed – "You" Are The Product

    Authored by John Lanchester via The London Review of Books,

    At the end of June, Mark Zuckerberg announced that Facebook had hit a new level: two billion monthly active users. That number, the company’s preferred ‘metric’ when measuring its own size, means two billion different people used Facebook in the preceding month. It is hard to grasp just how extraordinary that is. Bear in mind that thefacebook – its original name – was launched exclusively for Harvard students in 2004. No human enterprise, no new technology or utility or service, has ever been adopted so widely so quickly. The speed of uptake far exceeds that of the internet itself, let alone ancient technologies such as television or cinema or radio.

    Also amazing: as Facebook has grown, its users’ reliance on it has also grown. The increase in numbers is not, as one might expect, accompanied by a lower level of engagement. More does not mean worse – or worse, at least, from Facebook’s point of view. On the contrary. In the far distant days of October 2012, when Facebook hit one billion users, 55 per cent of them were using it every day. At two billion, 66 per cent are. Its user base is growing at 18 per cent a year – which you’d have thought impossible for a business already so enormous. Facebook’s biggest rival for logged-in users is YouTube, owned by its deadly rival Alphabet (the company formerly known as Google), in second place with 1.5 billion monthly users. Three of the next four biggest apps, or services, or whatever one wants to call them, are WhatsApp, Messenger and Instagram, with 1.2 billion, 1.2 billion, and 700 million users respectively (the Chinese app WeChat is the other one, with 889 million). Those three entities have something in common: they are all owned by Facebook. No wonder the company is the fifth most valuable in the world, with a market capitalisation of $445 billion.

    Zuckerberg’s news about Facebook’s size came with an announcement which may or may not prove to be significant. He said that the company was changing its ‘mission statement’, its version of the canting pieties beloved of corporate America. Facebook’s mission used to be ‘making the world more open and connected’. A non-Facebooker reading that is likely to ask: why? Connection is presented as an end in itself, an inherently and automatically good thing. Is it, though? Flaubert was sceptical about trains because he thought (in Julian Barnes’s paraphrase) that ‘the railway would merely permit more people to move about, meet and be stupid.’ You don’t have to be as misanthropic as Flaubert to wonder if something similar isn’t true about connecting people on Facebook. For instance, Facebook is generally agreed to have played a big, perhaps even a crucial, role in the election of Donald Trump. The benefit to humanity is not clear. This thought, or something like it, seems to have occurred to Zuckerberg, because the new mission statement spells out a reason for all this connectedness. It says that the new mission is to ‘give people the power to build community and bring the world closer together’.

    Hmm. Alphabet’s mission statement, ‘to organise the world’s information and make it universally accessible and useful’, came accompanied by the maxim ‘Don’t be evil,’ which has been the source of a lot of ridicule: Steve Jobs called it ‘bullshit’. Which it is, but it isn’t only bullshit. Plenty of companies, indeed entire industries, base their business model on being evil. The insurance business, for instance, depends on the fact that insurers charge customers more than their insurance is worth; that’s fair enough, since if they didn’t do that they wouldn’t be viable as businesses. What isn’t fair is the panoply of cynical techniques that many insurers use to avoid, as far as possible, paying out when the insured-against event happens. Just ask anyone who has had a property suffer a major mishap. It’s worth saying ‘Don’t be evil,’ because lots of businesses are. This is especially an issue in the world of the internet. Internet companies are working in a field that is poorly understood (if understood at all) by customers and regulators. The stuff they’re doing, if they’re any good at all, is by definition new. In that overlapping area of novelty and ignorance and unregulation, it’s well worth reminding employees not to be evil, because if the company succeeds and grows, plenty of chances to be evil are going to come along.

    Google and Facebook have both been walking this line from the beginning. Their styles of doing so are different. An internet entrepreneur I know has had dealings with both companies. ‘YouTube knows they have lots of dirty things going on and are keen to try and do some good to alleviate it,’ he told me. I asked what he meant by ‘dirty’. ‘Terrorist and extremist content, stolen content, copyright violations. That kind of thing. But Google in my experience knows that there are ambiguities, moral doubts, around some of what they do, and at least they try to think about it. Facebook just doesn’t care. When you’re in a room with them you can tell. They’re’ – he took a moment to find the right word – ‘scuzzy’.

    That might sound harsh. There have, however, been ethical problems and ambiguities about Facebook since the moment of its creation, a fact we know because its creator was live-blogging at the time. The scene is as it was recounted in Aaron Sorkin’s movie about the birth of Facebook, The Social Network. While in his first year at Harvard, Zuckerberg suffered a romantic rebuff. Who wouldn’t respond to this by creating a website where undergraduates’ pictures are placed side by side so that users of the site can vote for the one they find more attractive? (The film makes it look as if it was only female undergraduates: in real life it was both.) The site was called Facemash. In the great man’s own words, at the time:

    I’m a little intoxicated, I’m not gonna lie. So what if it’s not even 10 p.m. and it’s a Tuesday night? What? The Kirkland dormitory facebook is open on my desktop and some of these people have pretty horrendous facebook pics. I almost want to put some of these faces next to pictures of some farm animals and have people vote on which is the more attractive … Let the hacking begin.

    As Tim Wu explains in his energetic and original new book The Attention Merchants, a ‘facebook’ in the sense Zuckerberg uses it here ‘traditionally referred to a physical booklet produced at American universities to promote socialisation in the way that “Hi, My Name Is” stickers do at events; the pages consisted of rows upon rows of head shots with the corresponding name’. Harvard was already working on an electronic version of its various dormitory facebooks. The leading social network, Friendster, already had three million users. The idea of putting these two things together was not entirely novel, but as Zuckerberg said at the time, ‘I think it’s kind of silly that it would take the University a couple of years to get around to it. I can do it better than they can, and I can do it in a week.’

    Wu argues that capturing and reselling attention has been the basic model for a large number of modern businesses, from posters in late 19th-century Paris, through the invention of mass-market newspapers that made their money not through circulation but through ad sales, to the modern industries of advertising and ad-funded TV. Facebook is in a long line of such enterprises, though it might be the purest ever example of a company whose business is the capture and sale of attention. Very little new thinking was involved in its creation. As Wu observes, Facebook is ‘a business with an exceedingly low ratio of invention to success’. What Zuckerberg had instead of originality was the ability to get things done and to see the big issues clearly. The crucial thing with internet start-ups is the ability to execute plans and to adapt to changing circumstances. It’s Zuck’s skill at doing that – at hiring talented engineers, and at navigating the big-picture trends in his industry – that has taken his company to where it is today. Those two huge sister companies under Facebook’s giant wing, Instagram and WhatsApp, were bought for $1 billion and $19 billion respectively, at a point when they had no revenue. No banker or analyst or sage could have told Zuckerberg what those acquisitions were worth; nobody knew better than he did. He could see where things were going and help make them go there. That talent turned out to be worth several hundred billion dollars.

    Jesse Eisenberg’s brilliant portrait of Zuckerberg in The Social Network is misleading, as Antonio García Martínez, a former Facebook manager, argues in Chaos Monkeys, his entertainingly caustic book about his time at the company. The movie Zuckerberg is a highly credible character, a computer genius located somewhere on the autistic spectrum with minimal to non-existent social skills. But that’s not what the man is really like. In real life, Zuckerberg was studying for a degree with a double concentration in computer science and – this is the part people tend to forget – psychology. People on the spectrum have a limited sense of how other people’s minds work; autists, it has been said, lack a ‘theory of mind’. Zuckerberg, not so much. He is very well aware of how people’s minds work and in particular of the social dynamics of popularity and status. The initial launch of Facebook was limited to people with a Harvard email address; the intention was to make access to the site seem exclusive and aspirational. (And also to control site traffic so that the servers never went down. Psychology and computer science, hand in hand.) Then it was extended to other elite campuses in the US. When it launched in the UK, it was limited to Oxbridge and the LSE. The idea was that people wanted to look at what other people like them were doing, to see their social networks, to compare, to boast and show off, to give full rein to every moment of longing and envy, to keep their noses pressed against the sweet-shop window of others’ lives.

    This focus attracted the attention of Facebook’s first external investor, the now notorious Silicon Valley billionaire Peter Thiel. Again, The Social Network gets it right: Thiel’s $500,000 investment in 2004 was crucial to the success of the company. But there was a particular reason Facebook caught Thiel’s eye, rooted in a byway of intellectual history. In the course of his studies at Stanford – he majored in philosophy – Thiel became interested in the ideas of the US-based French philosopher René Girard, as advocated in his most influential book, Things Hidden since the Foundation of the World. Girard’s big idea was something he called ‘mimetic desire’. Human beings are born with a need for food and shelter. Once these fundamental necessities of life have been acquired, we look around us at what other people are doing, and wanting, and we copy them. In Thiel’s summary, the idea is ‘that imitation is at the root of all behaviour’.

    Girard was a Christian, and his view of human nature is that it is fallen. We don’t know what we want or who we are; we don’t really have values and beliefs of our own; what we have instead is an instinct to copy and compare. We are homo mimeticus. ‘Man is the creature who does not know what to desire, and who turns to others in order to make up his mind. We desire what others desire because we imitate their desires.’ Look around, ye petty, and compare. The reason Thiel latched onto Facebook with such alacrity was that he saw in it for the first time a business that was Girardian to its core: built on people’s deep need to copy. ‘Facebook first spread by word of mouth, and it’s about word of mouth, so it’s doubly mimetic,’ Thiel said. ‘Social media proved to be more important than it looked, because it’s about our natures.’ We are keen to be seen as we want to be seen, and Facebook is the most popular tool humanity has ever had with which to do that.

    *  *  *

    The view of human nature implied by these ideas is pretty dark. If all people want to do is go and look at other people so that they can compare themselves to them and copy what they want – if that is the final, deepest truth about humanity and its motivations – then Facebook doesn’t really have to take too much trouble over humanity’s welfare, since all the bad things that happen to us are things we are doing to ourselves. For all the corporate uplift of its mission statement, Facebook is a company whose essential premise is misanthropic. It is perhaps for that reason that Facebook, more than any other company of its size, has a thread of malignity running through its story. The high-profile, tabloid version of this has come in the form of incidents such as the live-streaming of rapes, suicides, murders and cop-killings. But this is one of the areas where Facebook seems to me relatively blameless. People live-stream these terrible things over the site because it has the biggest audience; if Snapchat or Periscope were bigger, they’d be doing it there instead.

    In many other areas, however, the site is far from blameless. The highest-profile recent criticisms of the company stem from its role in Trump’s election. There are two components to this, one of them implicit in the nature of the site, which has an inherent tendency to fragment and atomise its users into like-minded groups. The mission to ‘connect’ turns out to mean, in practice, connect with people who agree with you. We can’t prove just how dangerous these ‘filter bubbles’ are to our societies, but it seems clear that they are having a severe impact on our increasingly fragmented polity. Our conception of ‘we’ is becoming narrower.

    This fragmentation created the conditions for the second strand of Facebook’s culpability in the Anglo-American political disasters of the last year. The portmanteau terms for these developments are ‘fake news’ and ‘post-truth’, and they were made possible by the retreat from a general agora of public debate into separate ideological bunkers. In the open air, fake news can be debated and exposed; on Facebook, if you aren’t a member of the community being served the lies, you’re quite likely never to know that they are in circulation. It’s crucial to this that Facebook has no financial interest in telling the truth. No company better exemplifies the internet-age dictum that if the product is free, you are the product. Facebook’s customers aren’t the people who are on the site: its customers are the advertisers who use its network and who relish its ability to direct ads to receptive audiences. Why would Facebook care if the news streaming over the site is fake? Its interest is in the targeting, not in the content. This is probably one reason for the change in the company’s mission statement. If your only interest is in connecting people, why would you care about falsehoods? They might even be better than the truth, since they are quicker to identify the like-minded. The newfound ambition to ‘build communities’ makes it seem as if the company is taking more of an interest in the consequence of the connections it fosters.

    Fake news is not, as Facebook has acknowledged, the only way it was used to influence the outcome of the 2016 presidential election. On 6 January 2017 the director of national intelligence published a report saying that the Russians had waged an internet disinformation campaign to damage Hillary Clinton and help Trump. ‘Moscow’s influence campaign followed a Russian messaging strategy that blends covert intelligence operations – such as cyber-activity – with overt efforts by Russian government agencies, state-funded media, third-party intermediaries, and paid social media users or “trolls”,’ the report said. At the end of April, Facebook got around to admitting this (by then) fairly obvious truth, in an interesting paper published by its internal security division. ‘Fake news’, they argue, is an unhelpful, catch-all term because misinformation is in fact spread in a variety of ways:

    Information (or Influence) Operations – Actions taken by governments or organised non-state actors to distort domestic or foreign political sentiment.

     

    False News – News articles that purport to be factual, but which contain intentional misstatements of fact with the intention to arouse passions, attract viewership, or deceive.

     

    False Amplifiers – Co-ordinated activity by inauthentic accounts with the intent of manipulating political discussion (e.g. by discouraging specific parties from participating in discussion, or amplifying sensationalistic voices over others).

     

    Disinformation – Inaccurate or manipulated information/content that is spread intentionally. This can include false news, or it can involve more subtle methods, such as false flag operations, feeding inaccurate quotes or stories to innocent intermediaries, or knowingly amplifying biased or misleading information.

    The company is promising to treat this problem or set of problems as seriously as it treats such other problems as malware, account hacking and spam. We’ll see. One man’s fake news is another’s truth-telling, and Facebook works hard at avoiding responsibility for the content on its site – except for sexual content, about which it is super-stringent. Nary a nipple on show. It’s a bizarre set of priorities, which only makes sense in an American context, where any whiff of explicit sexuality would immediately give the site a reputation for unwholesomeness. Photos of breastfeeding women are banned and rapidly get taken down. Lies and propaganda are fine.

    The key to understanding this is to think about what advertisers want: they don’t want to appear next to pictures of breasts because it might damage their brands, but they don’t mind appearing alongside lies because the lies might be helping them find the consumers they’re trying to target. In Move Fast and Break Things, his polemic against the ‘digital-age robber barons’, Jonathan Taplin points to an analysis on Buzzfeed: ‘In the final three months of the US presidential campaign, the top-performing fake election news stories on Facebook generated more engagement than the top stories from major news outlets such as the New York Times, Washington Post, Huffington Post, NBC News and others.’ This doesn’t sound like a problem Facebook will be in any hurry to fix.

    The fact is that fraudulent content, and stolen content, are rife on Facebook, and the company doesn’t really mind, because it isn’t in its interest to mind. Much of the video content on the site is stolen from the people who created it. An illuminating YouTube video from Kurzgesagt, a German outfit that makes high-quality short explanatory films, notes that in 2015, 725 of Facebook’s top one thousand most viewed videos were stolen. This is another area where Facebook’s interests contradict society’s. We may collectively have an interest in sustaining creative and imaginative work in many different forms and on many platforms. Facebook doesn’t. It has two priorities, as Martínez explains in Chaos Monkeys: growth and monetisation. It simply doesn’t care where the content comes from. It is only now starting to care about the perception that much of the content is fraudulent, because if that perception were to become general, it might affect the amount of trust and therefore the amount of time people give to the site.

    Zuckerberg himself has spoken up on this issue, in a Facebook post addressing the question of ‘Facebook and the election’. After a certain amount of boilerplate bullshit (‘Our goal is to give every person a voice. We believe deeply in people’), he gets to the nub of it. ‘Of all the content on Facebook, more than 99 per cent of what people see is authentic. Only a very small amount is fake news and hoaxes.’ More than one Facebook user pointed out that in their own news feed, Zuckerberg’s post about authenticity ran next to fake news. In one case, the fake story pretended to be from the TV sports channel ESPN. When it was clicked on, it took users to an ad selling a diet supplement. As the writer Doc Searls pointed out, it’s a double fraud, ‘outright lies from a forged source’, which is quite something to have right slap next to the head of Facebook boasting about the absence of fraud. Evan Williams, co-founder of Twitter and founder of the long-read specialist Medium, found the same post by Zuckerberg next to a different fake ESPN story and another piece of fake news purporting to be from CNN, announcing that Congress had disqualified Trump from office. When clicked-through, that turned out to be from a company offering a 12-week programme to strengthen toes. (That’s right: strengthen toes.) Still, we now know that Zuck believes in people. That’s the main thing.

    *  *  *

    A neutral observer might wonder if Facebook’s attitude to content creators is sustainable. Facebook needs content, obviously, because that’s what the site consists of: content that other people have created. It’s just that it isn’t too keen on anyone apart from Facebook making any money from that content. Over time, that attitude is profoundly destructive to the creative and media industries. Access to an audience – that unprecedented two billion people – is a wonderful thing, but Facebook isn’t in any hurry to help you make money from it. If the content providers all eventually go broke, well, that might not be too much of a problem. There are, for now, lots of willing providers: anyone on Facebook is in a sense working for Facebook, adding value to the company. In 2014, the New York Times did the arithmetic and found that humanity was spending 39,757 collective years on the site, every single day. Jonathan Taplin points out that this is ‘almost fifteen million years of free labour per year’. That was back when it had a mere 1.23 billion users.

    Taplin has worked in academia and in the film industry. The reason he feels so strongly about these questions is that he started out in the music business, as manager of The Band, and was on hand to watch the business being destroyed by the internet. What had been a $20 billion industry in 1999 was a $7 billion industry 15 years later. He saw musicians who had made a good living become destitute. That didn’t happen because people had stopped listening to their music – more people than ever were listening to it – but because music had become something people expected to be free. YouTube is the biggest source of music in the world, playing billions of tracks annually, but in 2015 musicians earned less from it and from its ad-supported rivals than they earned from sales of vinyl. Not CDs and recordings in general: vinyl.

    Something similar has happened in the world of journalism. Facebook is in essence an advertising company which is indifferent to the content on its site except insofar as it helps to target and sell advertisements. A version of Gresham’s law is at work, in which fake news, which gets more clicks and is free to produce, drives out real news, which often tells people things they don’t want to hear, and is expensive to produce. In addition, Facebook uses an extensive set of tricks to increase its traffic and the revenue it makes from targeting ads, at the expense of the news-making institutions whose content it hosts. Its news feed directs traffic at you based not on your interests, but on how to make the maximum amount of advertising revenue from you. In September 2016, Alan Rusbridger, the former editor of the Guardian, told a Financial Times conference that Facebook had ‘sucked up $27 million’ of the newspaper’s projected ad revenue that year. ‘They are taking all the money because they have algorithms we don’t understand, which are a filter between what we do and how people receive it.’

    This goes to the heart of the question of what Facebook is and what it does. For all the talk about connecting people, building community, and believing in people, Facebook is an advertising company. Martínez gives the clearest account both of how it ended up like that, and how Facebook advertising works. In the early years of Facebook, Zuckerberg was much more interested in the growth side of the company than in the monetisation. That changed when Facebook went in search of its big payday at the initial public offering, the shining day when shares in a business first go on sale to the general public. This is a huge turning-point for any start-up: in the case of many tech industry workers, the hope and expectation associated with ‘going public’ is what attracted them to their firm in the first place, and/or what has kept them glued to their workstations. It’s the point where the notional money of an early-days business turns into the real cash of a public company.

    Martínez was there at the very moment when Zuck got everyone together to tell them they were going public, the moment when all Facebook employees knew that they were about to become rich:

    I had chosen a seat behind a detached pair, who on further inspection turned out to be Chris Cox, head of FB product, and Naomi Gleit, a Harvard grad who joined as employee number 29, and was now reputed to be the current longest-serving employee other than Mark.

     

    Naomi, between chats with Cox, was clicking away on her laptop, paying little attention to the Zuckian harangue. I peered over her shoulder at her screen. She was scrolling down an email with a number of links, and progressively clicking each one into existence as another tab on her browser. Clickathon finished, she began lingering on each with an appraiser’s eye. They were real estate listings, each for a different San Francisco property.

    Martínez took note of one of the properties and looked it up later. Price: $2.4 million. He is fascinating, and fascinatingly bitter, on the subject of class and status differences in Silicon Valley, in particular the never publicly discussed issue of the huge gulf between early employees in a company, who have often been made unfathomably rich, and the wage slaves who join the firm later in its story. ‘The protocol is not to talk about it at all publicly.’ But, as Bonnie Brown, a masseuse at Google in the early days, wrote in her memoir, ‘a sharp contrast developed between Googlers working side by side. While one was looking at local movie times on their monitor, the other was booking a flight to Belize for the weekend. How was the conversation on Monday morning going to sound now?’

    When the time came for the IPO, Facebook needed to turn from a company with amazing growth to one that was making amazing money. It was already making some, thanks to its sheer size – as Martínez observes, ‘a billion times any number is still a big fucking number’ – but not enough to guarantee a truly spectacular valuation on launch. It was at this stage that the question of how to monetise Facebook got Zuckerberg’s full attention. It’s interesting, and to his credit, that he hadn’t put too much focus on it before – perhaps because he isn’t particularly interested in money per se. But he does like to win.

    The solution was to take the huge amount of information Facebook has about its ‘community’ and use it to let advertisers target ads with a specificity never known before, in any medium. Martínez: ‘It can be demographic in nature (e.g. 30-to-40-year-old females), geographic (people within five miles of Sarasota, Florida), or even based on Facebook profile data (do you have children; i.e. are you in the mommy segment?).’ Taplin makes the same point:

    If I want to reach women between the ages of 25 and 30 in zip code 37206 who like country music and drink bourbon, Facebook can do that. Moreover, Facebook can often get friends of these women to post a ‘sponsored story’ on a targeted consumer’s news feed, so it doesn’t feel like an ad. As Zuckerberg said when he introduced Facebook Ads, ‘Nothing influences people more than a recommendation from a trusted friend. A trusted referral is the Holy Grail of advertising.’

    That was the first part of the monetisation process for Facebook, when it turned its gigantic scale into a machine for making money. The company offered advertisers an unprecedentedly precise tool for targeting their ads at particular consumers. (Particular segments of voters too can be targeted with complete precision. One instance from 2016 was an anti-Clinton ad repeating a notorious speech she made in 1996 on the subject of ‘super-predators’. The ad was sent to African-American voters in areas where the Republicans were trying, successfully as it turned out, to suppress the Democrat vote. Nobody else saw the ads.)

    The second big shift around monetisation came in 2012 when internet traffic began to switch away from desktop computers towards mobile devices. If you do most of your online reading on a desktop, you are in a minority. The switch was a potential disaster for all businesses which relied on internet advertising, because people don’t much like mobile ads, and were far less likely to click on them than on desktop ads. In other words, although general internet traffic was increasing rapidly, because the growth was coming from mobile, the traffic was becoming proportionately less valuable. If the trend were to continue, every internet business that depended on people clicking links – i.e. pretty much all of them, but especially the giants like Google and Facebook – would be worth much less money.

    Facebook solved the problem by means of a technique called ‘onboarding’. As Martínez explains it, the best way to think about this is to consider our various kinds of name and address.

    For example, if Bed, Bath and Beyond wants to get my attention with one of its wonderful 20 per cent off coupons, it calls out:

     

    Antonio García Martínez
    1 Clarence Place #13
    San Francisco, CA 94107

     

    If it wants to reach me on my mobile device, my name there is:38400000-8cfo-11bd-b23e-10b96e40000d

     

    That’s my quasi-immutable device ID, broadcast hundreds of times a day on mobile ad exchanges.

     

    On my laptop, my name is this: 07J6yJPMB9juTowar.AWXGQnGPA1MCmThgb9wN4vLoUpg.BUUtWg.rg.FTN.0.AWUxZtUf

     

    This is the content of the Facebook re-targeting cookie, which is used to target ads-are-you based on your mobile browsing.

     

    Though it may not be obvious, each of these keys is associated with a wealth of our personal behaviour data: every website we’ve been to, many things we’ve bought in physical stores, and every app we’ve used and what we did there … The biggest thing going on in marketing right now, what is generating tens of billions of dollars in investment and endless scheming inside the bowels of Facebook, Google, Amazon and Apple, is how to tie these different sets of names together, and who controls the links. That’s it.

    Facebook already had a huge amount of information about people and their social networks and their professed likes and dislikes. After waking up to the importance of monetisation, they added to their own data a huge new store of data about offline, real-world behaviour, acquired through partnerships with big companies such as Experian, which have been monitoring consumer purchases for decades via their relationships with direct marketing firms, credit card companies, and retailers. There doesn’t seem to be a one-word description of these firms: ‘consumer credit agencies’ or something similar about sums it up. Their reach is much broader than that makes it sound, though Experian says its data is based on more than 850 million records and claims to have information on 49.7 million UK adults living in 25.2 million households in 1.73 million postcodes. These firms know all there is to know about your name and address, your income and level of education, your relationship status, plus everywhere you’ve ever paid for anything with a card. Facebook could now put your identity together with the unique device identifier on your phone.

    That was crucial to Facebook’s new profitability. On mobiles, people tend to prefer the internet to apps, which corral the information they gather and don’t share it with other companies. A game app on your phone is unlikely to know anything about you except the level you’ve got to on that particular game. But because everyone in the world is on Facebook, the company knows everyone’s phone identifier. It was now able to set up an ad server delivering far better targeted mobile ads than anyone else could manage, and it did so in a more elegant and well-integrated form than anyone else had managed.

    So Facebook knows your phone ID and can add it to your Facebook ID. It puts that together with the rest of your online activity: not just every site you’ve ever visited, but every click you’ve ever made – the Facebook button tracks every Facebook user, whether they click on it or not. Since the Facebook button is pretty much ubiquitous on the net, this means that Facebook sees you, everywhere. Now, thanks to its partnerships with the old-school credit firms, Facebook knew who everybody was, where they lived, and everything they’d ever bought with plastic in a real-world offline shop. All this information is used for a purpose which is, in the final analysis, profoundly bathetic. It is to sell you things via online ads.

    The ads work on two models. In one of them, advertisers ask Facebook to target consumers from a particular demographic – our thirty-something bourbon-drinking country music fan, or our African American in Philadelphia who was lukewarm about Hillary. But Facebook also delivers ads via a process of online auctions, which happen in real time whenever you click on a website. Because every website you’ve ever visited (more or less) has planted a cookie on your web browser, when you go to a new site, there is a real-time auction, in millionths of a second, to decide what your eyeballs are worth and what ads should be served to them, based on what your interests, and income level and whatnot, are known to be. This is the reason ads have that disconcerting tendency to follow you around, so that you look at a new telly or a pair of shoes or a holiday destination, and they’re still turning up on every site you visit weeks later. This was how, by chucking talent and resources at the problem, Facebook was able to turn mobile from a potential revenue disaster to a great hot steamy geyser of profit.

    What this means is that even more than it is in the advertising business, Facebook is in the surveillance business. Facebook, in fact, is the biggest surveillance-based enterprise in the history of mankind. It knows far, far more about you than the most intrusive government has ever known about its citizens. It’s amazing that people haven’t really understood this about the company. I’ve spent time thinking about Facebook, and the thing I keep coming back to is that its users don’t realise what it is the company does. What Facebook does is watch you, and then use what it knows about you and your behaviour to sell ads. I’m not sure there has ever been a more complete disconnect between what a company says it does – ‘connect’, ‘build communities’ – and the commercial reality. Note that the company’s knowledge about its users isn’t used merely to target ads but to shape the flow of news to them. Since there is so much content posted on the site, the algorithms used to filter and direct that content are the thing that determines what you see: people think their news feed is largely to do with their friends and interests, and it sort of is, with the crucial proviso that it is their friends and interests as mediated by the commercial interests of Facebook. Your eyes are directed towards the place where they are most valuable for Facebook.

    *  *  *

    I’m left wondering what will happen when and if this $450 billion penny drops. Wu’s history of attention merchants shows that there is a suggestive pattern here: that a boom is more often than not followed by a backlash, that a period of explosive growth triggers a public and sometimes legislative reaction. Wu’s first example is the draconian anti-poster laws introduced in early 20th-century Paris (and still in force – one reason the city is by contemporary standards undisfigured by ads). As Wu says, ‘when the commodity in question is access to people’s minds, the perpetual quest for growth ensures that forms of backlash, both major and minor, are all but inevitable.’ Wu calls a minor form of this phenomenon the ‘disenchantment effect’.

    Facebook seems vulnerable to these disenchantment effects. One place they are likely to begin is in the core area of its business model – ad-selling. The advertising it sells is ‘programmatic’, i.e. determined by computer algorithms that match the customer to the advertiser and deliver ads accordingly, via targeting and/or online auctions. The problem with this from the customer’s point of view – remember, the customer here is the advertiser, not the Facebook user – is that a lot of the clicks on these ads are fake. There is a mismatch of interests here. Facebook wants clicks, because that’s how it gets paid: when ads are clicked on. But what if the clicks aren’t real but are instead automated clicks from fake accounts run by computer bots? This is a well-known problem, which particularly affects Google, because it’s easy to set up a site, allow it to host programmatic ads, then set up a bot to click on those ads, and collect the money that comes rolling in. On Facebook the fraudulent clicks are more likely to be from competitors trying to drive each others’ costs up.

    The industry publication Ad Week estimates the annual cost of click fraud at $7 billion, about a sixth of the entire market. One single fraud site, Methbot, whose existence was exposed at the end of last year, uses a network of hacked computers to generate between three and five million dollars’ worth of fraudulent clicks every day. Estimates of fraudulent traffic’s market share are variable, with some guesses coming in at around 50 per cent; some website owners say their own data indicates a fraudulent-click rate of 90 per cent. This is by no means entirely Facebook’s problem, but it isn’t hard to imagine how it could lead to a big revolt against ‘ad tech’, as this technology is generally known, on the part of the companies who are paying for it. I’ve heard academics in the field say that there is a form of corporate groupthink in the world of the big buyers of advertising, who are currently responsible for directing large parts of their budgets towards Facebook. That mindset could change. Also, many of Facebook’s metrics are tilted to catch the light at the angle which makes them look shiniest. A video is counted as ‘viewed’ on Facebook if it runs for three seconds, even if the user is scrolling past it in her news feed and even if the sound is off. Many Facebook videos with hundreds of thousands of ‘views’, if counted by the techniques that are used to count television audiences, would have no viewers at all.

    A customers’ revolt could overlap with a backlash from regulators and governments. Google and Facebook have what amounts to a monopoly on digital advertising. That monopoly power is becoming more and more important as advertising spend migrates online. Between them, they have already destroyed large sections of the newspaper industry. Facebook has done a huge amount to lower the quality of public debate and to ensure that it is easier than ever before to tell what Hitler approvingly called ‘big lies’ and broadcast them to a big audience. The company has no business need to care about that, but it is the kind of issue that could attract the attention of regulators.

    That isn’t the only external threat to the Google/Facebook duopoly. The US attitude to anti-trust law was shaped by Robert Bork, the judge whom Reagan nominated for the Supreme Court but the Senate failed to confirm. Bork’s most influential legal stance came in the area of competition law. He promulgated the doctrine that the only form of anti-competitive action which matters concerns the prices paid by consumers. His idea was that if the price is falling that means the market is working, and no questions of monopoly need be addressed. This philosophy still shapes regulatory attitudes in the US and it’s the reason Amazon, for instance, has been left alone by regulators despite the manifestly monopolistic position it holds in the world of online retail, books especially.

    The big internet enterprises seem invulnerable on these narrow grounds. Or they do until you consider the question of individualised pricing. The huge data trail we all leave behind as we move around the internet is increasingly used to target us with prices which aren’t like the tags attached to goods in a shop. On the contrary, they are dynamic, moving with our perceived ability to pay. Four researchers based in Spain studied the phenomenon by creating automated personas to behave as if, in one case, ‘budget conscious’ and in another ‘affluent’, and then checking to see if their different behaviour led to different prices. It did: a search for headphones returned a set of results which were on average four times more expensive for the affluent persona. An airline-ticket discount site charged higher fares to the affluent consumer. In general, the location of the searcher caused prices to vary by as much as 166 per cent. So in short, yes, personalised prices are a thing, and the ability to create them depends on tracking us across the internet. That seems to me a prima facie violation of the American post-Bork monopoly laws, focused as they are entirely on price. It’s sort of funny, and also sort of grotesque, that an unprecedentedly huge apparatus of consumer surveillance is fine, apparently, but an unprecedentedly huge apparatus of consumer surveillance which results in some people paying higher prices may well be illegal.

    Perhaps the biggest potential threat to Facebook is that its users might go off it. Two billion monthly active users is a lot of people, and the ‘network effects’ – the scale of the connectivity – are, obviously, extraordinary. But there are other internet companies which connect people on the same scale – Snapchat has 166 million daily users, Twitter 328 million monthly users – and as we’ve seen in the disappearance of Myspace, the onetime leader in social media, when people change their minds about a service, they can go off it hard and fast.

    For that reason, were it to be generally understood that Facebook’s business model is based on surveillance, the company would be in danger. The one time Facebook did poll its users about the surveillance model was in 2011, when it proposed a change to its terms and conditions – the change that underpins the current template for its use of data. The result of the poll was clear: 90 per cent of the vote was against the changes. Facebook went ahead and made them anyway, on the grounds that so few people had voted. No surprise there, neither in the users’ distaste for surveillance nor in the company’s indifference to that distaste. But this is something which could change.

    The other thing that could happen at the level of individual users is that people stop using Facebook because it makes them unhappy. This isn’t the same issue as the scandal in 2014 when it turned out that social scientists at the company had deliberately manipulated some people’s news feeds to see what effect, if any, it had on their emotions. The resulting paper, published in the Proceedings of the National Academy of Sciences, was a study of ‘social contagion’, or the transfer of emotion among groups of people, as a result of a change in the nature of the stories seen by 689,003 users of Facebook. ‘When positive expressions were reduced, people produced fewer positive posts and more negative posts; when negative expressions were reduced, the opposite pattern occurred. These results indicate that emotions expressed by others on Facebook influence our own emotions, constituting experimental evidence for massive-scale contagion via social networks.’ The scientists seem not to have considered how this information would be received, and the story played quite big for a while.

    Perhaps the fact that people already knew this story accidentally deflected attention from what should have been a bigger scandal, exposed earlier this year in a paper from the American Journal of Epidemiology. The paper was titled ‘Association of Facebook Use with Compromised Well-Being: A Longitudinal Study’. The researchers found quite simply that the more people use Facebook, the more unhappy they are. A 1 per cent increase in ‘likes’ and clicks and status updates was correlated with a 5 to 8 per cent decrease in mental health. In addition, they found that the positive effect of real-world interactions, which enhance well-being, was accurately paralleled by the ‘negative associations of Facebook use’. In effect people were swapping real relationships which made them feel good for time on Facebook which made them feel bad. That’s my gloss rather than that of the scientists, who take the trouble to make it clear that this is a correlation rather than a definite causal relationship, but they did go so far – unusually far – as to say that the data ‘suggests a possible trade-off between offline and online relationships’. This isn’t the first time something like this effect has been found. To sum up: there is a lot of research showing that Facebook makes people feel like shit. So maybe, one day, people will stop using it.?

    *  *  *

    What, though, if none of the above happens? What if advertisers don’t rebel, governments don’t act, users don’t quit, and the good ship Zuckerberg and all who sail in her continues blithely on? We should look again at that figure of two billion monthly active users. The total number of people who have any access to the internet – as broadly defined as possible, to include the slowest dial-up speeds and creakiest developing-world mobile service, as well as people who have access but don’t use it – is three and a half billion. Of those, about 750 million are in China and Iran, which block Facebook. Russians, about a hundred million of whom are on the net, tend not to use Facebook because they prefer their native copycat site VKontakte. So put the potential audience for the site at 2.6 billion. In developed countries where Facebook has been present for years, use of the site peaks at about 75 per cent of the population (that’s in the US). That would imply a total potential audience for Facebook of 1.95 billion. At two billion monthly active users, Facebook has already gone past that number, and is running out of connected humans. Martínez compares Zuckerberg to Alexander the Great, weeping because he has no more worlds to conquer. Perhaps this is one reason for the early signals Zuck has sent about running for president – the fifty-state pretending-to-give-a-shit tour, the thoughtful-listening pose he’s photographed in while sharing milkshakes in (Presidential Ambitions klaxon!) an Iowa diner.

    Whatever comes next will take us back to those two pillars of the company, growth and monetisation. Growth can only come from connecting new areas of the planet. An early experiment came in the form of Free Basics, a program offering internet connectivity to remote villages in India, with the proviso that the range of sites on offer should be controlled by Facebook. ‘Who could possibly be against this?’ Zuckerberg wrote in the Times of India. The answer: lots and lots of angry Indians. The government ruled that Facebook shouldn’t be able to ‘shape users’ internet experience’ by restricting access to the broader internet. A Facebook board member tweeted that ‘anti-colonialism has been economically catastrophic for the Indian people for decades. Why stop now?’ As Taplin points out, that remark ‘unwittingly revealed a previously unspoken truth: Facebook and Google are the new colonial powers.’

    So the growth side of the equation is not without its challenges, technological as well as political. Google (which has a similar running-out-of-humans problem) is working on ‘Project Loon’, ‘a network of balloons travelling on the edge of space, designed to extend internet connectivity to people in rural and remote areas worldwide’. Facebook is working on a project involving a solar-powered drone called the Aquila, which has the wingspan of a commercial airliner, weighs less than a car, and when cruising uses less energy than a microwave oven. The idea is that it will circle remote, currently unconnected areas of the planet, for flights that last as long as three months at a time. It connects users via laser and was developed in Bridgwater, Somerset. (Amazon’s drone programme is based in the UK too, near Cambridge. Our legal regime is pro-drone.) Even the most hardened Facebook sceptic has to be a little bit impressed by the ambition and energy. But the fact remains that the next two billion users are going to be hard to find.

    That’s growth, which will mainly happen in the developing world. Here in the rich world, the focus is more on monetisation, and it’s in this area that I have to admit something which is probably already apparent. I am scared of Facebook. The company’s ambition, its ruthlessness, and its lack of a moral compass scare me. It goes back to that moment of its creation, Zuckerberg at his keyboard after a few drinks creating a website to compare people’s appearance, not for any real reason other than that he was able to do it. That’s the crucial thing about Facebook, the main thing which isn’t understood about its motivation: it does things because it can. Zuckerberg knows how to do something, and other people don’t, so he does it. Motivation of that type doesn’t work in the Hollywood version of life, so Aaron Sorkin had to give Zuck a motive to do with social aspiration and rejection. But that’s wrong, completely wrong. He isn’t motivated by that kind of garden-variety psychology. He does this because he can, and justifications about ‘connection’ and ‘community’ are ex post facto rationalisations. The drive is simpler and more basic. That’s why the impulse to growth has been so fundamental to the company, which is in many respects more like a virus than it is like a business. Grow and multiply and monetise. Why? There is no why. Because.

    Automation and artificial intelligence are going to have a big impact in all kinds of worlds. These technologies are new and real and they are coming soon. Facebook is deeply interested in these trends. We don’t know where this is going, we don’t know what the social costs and consequences will be, we don’t know what will be the next area of life to be hollowed out, the next business model to be destroyed, the next company to go the way of Polaroid or the next business to go the way of journalism or the next set of tools and techniques to become available to the people who used Facebook to manipulate the elections of 2016. We just don’t know what’s next, but we know it’s likely to be consequential, and that a big part will be played by the world’s biggest social network. On the evidence of Facebook’s actions so far, it’s impossible to face this prospect without unease.

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