Tuesday, January 26, 2016

Saudi Arabia’s Big Mess

Oil’s continued plunge is vying with China for the early financial headlines in 2016.
Yet many U.S. investors are missing the most important aspect of oil’s collapse: the dramatic effect oil’s falling prices are having on Saudi Arabia.
In November 2015, I speculated that the Saudis may have to devalue their currency, the riyal, versus the U.S. dollar for the first time since 1986.
Today my prediction looks prescient, as this supposed long-shot, black swan event is now becoming a distinct possibility.

Saudi Arabia’s Gigantic Budget Problem

The low price of oil – caused in part by the Saudis’ market share war – has blown a hole in the country’s budget.
Saudi Arabia announced at the end of 2015 that it ran a record budget deficit of $98 billion. That’s 15% of the country’s gross domestic product. To stem the bleeding, the Saudi government slashed its 2016 budget by 14%, and increased domestic fuel prices by two-thirds, even though it’s still only around $0.20 per gallon.
Meanwhile, the Saudis have also taken other measures to right the ship.
A few months ago, their sovereign wealth fund began repatriating funds from overseas money managers. This served to drain liquidity from global financial markets and hurt stocks. The Kingdom also sold sovereign bonds for the first time since 2007, and plans to sell at least $32 billion in sovereign bonds in 2016.
Finally, the Saudi Arabia announced that parts of its crown jewel – Saudi Aramco – will be sold in an IPO. Of all the recent moves made by the Kingdom, this is surely the most telling.
Saudi Aramco dwarfs any other oil company and will fetch a pretty penny. But it would’ve gotten a lot more if the sale had occurred when oil prices were high. That’s why I think the juiciest parts will not be part of this IPO.

Thinking the Unthinkable?

Even selling part of Saudi Aramco is unlikely to get the country out of the hole it has dug itself into with the oil share war. Bank of America estimates that $30-per-barrel oil will balloon the Saudi budget deficit to nearly $180 billion this year.
Thus, the smart money is betting that the Saudis will break the riyal-dollar peg, which has been set at 3.75 riyal to the dollar since 1986. The 12-month forward contracts on the riyal-dollar rate are trading at a 17-year high.
The Saudis have begun blowing through their massive reserves in trying to defend the peg. Sounds a lot like the Chinese problem, doesn’t it?
Reserves have declined from a peak of $746 billion in August 2014 to $635.2 billion at the end of November 2015.
Even the former head of asset management at the Saudi central bank, Khalid Alsweilem, thinks the peg will be history. He told the U.K.’sTelegraph, “If the reserves keep going down as they are now, they will not be able to keep the peg.”
If the Saudis opt to not devalue the riyal, they’ll have to cut oil production to get the price back up. I believe they’re too far down the path of trying to eliminate their competition to suddenly reverse course, and end up saving the U.S. shale producers from bankruptcy.
Any devaluation would have global implications and upset stock markets again.
Alsweilem said, “The consequences will be dramatic.” After all, the dollar peg has been the anchor of Saudi economic policy and global credibility for the past three decades. A change would surely stir up turmoil within the royal family, and give a boost to those opposed to the regime (such as the Iranians).
Let’s just hope the Saudis can control any devaluation and this doesn’t spiral out of control.
Good investing,
Tim Maverick

Sunday, January 24, 2016

ILQ Investor, Harald McPike, Backs UK Banking Startup Starling with $70M Investment

Alongside the centuries-old banks in the UK is a new crop of digital-only banking startups poised to enter the market. Licensed from the Bank of England last year were Tandem Bank and Atom Bank, with Mondo Bank and Starling Bank aiming to become fully regulated this year.
Among these digital startups, the common denominator is that they have been built from the ground up, and are banking solutions catering to the online and mobile based world. As such, in place of bank branches are multi-feature mobile apps that provide banking solutions as well as other tools focused on personal finance. However, traditional banks have also shown that they are evolving with the times with many firms having created digital brands of their own.
With the race for digital banking supremacy on, startups are battling their larger banking brethren to both acquire a new generation of customers as well as grab market share from existing account holders seeking innovative approaches to banking. Gaining a larger cash chest for this battle is Starling which has announced that it has raised $70 million from investment manager Harald McPike.
Founded by CEO Anne Boden, previously the Chief Operating Officer of AlB, Starling will be using the funds to help it enter the UK market and solidify its team as it finalizes its offering and awaits regulatory approval. In addition to the new funds, Starling announced its Board of Director appointments. The board will be chaired by former Standard Bank non-executive director Oliver Stocken, and include Victoria Raffé formerly of the FCA, as well as Marcus Traill and Craig Mawdsley as non-executive directors. The four join Mark Winlow and Steve Colsell who were appointed in 2015.
For McPike, the investment in Starling Bank is his latest in the financial field. Operating the QuantRes group of companies, McPike’s endeavors include algorithmic trading and quantitative investments. A previous investment for McPike was US-regulated online forex broker ILQ for which he also served as a company principal. Operating under the NFA’s jurisdiction, McPike was noted for providing material financing to help ILQ meet minimum capital requirements for operating a forex broker which are higher in the US than anywhere else in the world.
Regarding the investment, Anne Boden stated: “It was important to us to have an investor with not just the financial strength but who also shared our ambition of empowering people with meaningful insight into their own financial information. With his background in algorithmic trading, risk management and technology, Harald sees the significant potential of technology in the retail banking sector. His commitment of $70m is the catalyst needed to propel Starling’s launch.”
Harald McPike, Founder of QuantRes, added: “Starling Bank will provide people with the kind of innovative leaps in their financial lives that they have experienced in transportation and video streaming, so this is an investment opportunity I could not pass up. I share Starling’s vision of creating genuine positive change in peoples’ lives and will enjoy seeing a revolution in the banking experience. Mobile technologies continue to alter fundamentally our lives and expectations of how we manage them, but it seems that traditional banks are not able to adapt fast enough. Anne and her team bring strong capabilities, passion and determination to finally provide people a modern, mobile-first bank.”


We’re starting to get a little morbid around here – first with the “Is Trend Following Dead?” piece a couple weeks back, and now an “autopsy” of sorts on what went wrong at John W. Henry’s self-named firm. Some of the sales teams in the industry may prefer to avoid discussing such subjects, probably thinking something along the lines that doing so will “scare away the customers,” but to hear that John W. Henry was shutting down his eponymous managed futures shop was the kind of news that draws us like a moth to a flame.
Here was an industry stalwart in every sense of the word. A man who helped put managed futures on the map, and helped his pocket book to the tune of becoming a billionaire. He is a literal Hall of Famer, having received the Futures Hall of Fame award (whatever that is) from the Futures Industry Association. This isn’t quite Paul Simon hanging up his guitar, or Steven Spielberg deciding to get out of the movie business – but it’s close in terms of shock factor in the managed futures space.
This raises one huge question - well, actually, it raises hundreds of questions - but the big one is this: what in the world happened? We don’t just mean this week in the announcement that he was done, either. What happened in the past 8 years to transform a behemoth into a blip on the radar? Where did John Henry go wrong? Eight years ago he was managing $3 Billion and on top of the managed futures world, with a hot young upstart called Winton measuring in at only about 1/3 the size of Henry’s managed futures empire.
John Henry Asset Trends
Why was 2004 the top for Henry, yet just a launching point for Winton and other billion-dollar managers?  But most importantly for investors - how can we learn to identify when a top-tier managers’ best days are behind them?
Did he take his eye off the ball?
Excuse the all too easy baseball pun here – but the easy answer for many is to say things started to go downhill when Henry started to stray from his managed futures roots and dabble in sports, buying the Florida Marlins, then Boston Red Sox, a Nascar team and an English soccer squad. If he had only spent less time analyzing pitchers and trying to hire the next Billy Beane – and instead spent more time researching new models and risk parameters for his CTA – then things might have been different… or so the logic goes. 
This would be exactly the kind of shift that an ongoing due diligence program is designed to catch, and something we wrote about not long ago in a newsletter. The general idea is that by staying in close contact with a manager, you can get a feel for when things might be going awry in a way that might impact performance. There is never a guarantee that you'll see the curve ball coming, but you've always got a better chance of it if your eyes are open. 
The problem is that this logic starts to fall apart when we look at just when Henry started these other business ventures, which, according to the Disclosure Document for the JWH programs, began as early as 1987:
“Since the beginning of 1987, [Henry] has devoted, and will continue to devote, a substantial amount of time to business other than JWH and its affiliates.” 
Even if we use the later date of 1998, according to a great 2007 blog post (they had blogs back then?) from the now-deceased Greg Newton (as if this story wasn’t morbid enough already), the shift of focus to include a sports empire doesn’t appear to have affected the performance (which held up until the end of 2004).
His heavy-duty distractions did not begin until he became involved in major league baseball… Henry bought the Florida Marlins in 1998. 
Maybe it’s the Boston Red Sox curse, which Henry supposedly lifted by bringing a World Series title to Beantown? He became involved there in 2002, and things have been bad on the managed futures side for most of the time since.
So while the brains of the operation shifting his focus to baseball seems like an easy due diligence red flag, the numbers don’t really support it as the cause of the decline. Regardless, any investor after the year 2000 would have known of this concern.
A more nuanced “taking his eye off of the ball” argument – and something to consider when conducting due diligence on a manager – is the number of programs in the stable. For JWH, the answer is: quite a few. There are 17 different “capsule performance” tables in the JWH D-Doc. This can be another worry in the due diligence process – can a manager run 17 world-class programs at once? And if not, which would you rather see: 17 mediocre programs, or 1 excellent one?
It’s a plausible story, but in this case, perhaps a more likely culprit in terms of “who’s minding the store” is the high manager turnover.
Manager turnover
So if the boss isn’t always running things, you had better have a very high level of confidence in whoever is picking up the slack. Leadership transitions are often due diligence red flags, but as it turns out – this one isn’t all that straightforward, either.
We’ll borrow heavily from Greg Newton in parsing the Disclosure Document and news clippings on Henry company hires here:
Like those stomach-churning drawdowns, management turnover is nothing new at JWH. Before Rzepczynski’s record tenure ended in January [Others shown the door at much the same time as Rzepczynski included long-time marketing executive Ted Parkhill; Bill Dinon, head of sales; and Andrew Willard, director of technology], past holders of the president title included Verne Sedlacek, now president and chief executive officer of Commonfund; Bruce Nemirow, now a principal of Capital Growth Partners, a third-party marketing company; and Ken Tropin, who, after a distinctly less than amicable split with Henry, went on to found Graham Capital Mgt Inc in 1994. That firm’s assets passed JWH’s several years ago.
Between Nemirow and Sedlacek, Peter Karpen, a former chairman of the Futures Industry Association; and David Bailin, now head of alternative investments at US Trust, held similar responsibilities, without the title of president.
It’s easy to look back on it in hindsight and say that a bunch of people jumping ship in 2007 was a bad sign, but consider how it looked in the moment: the person leaving had been there 9 years, while the person replacing him had been there 12 years. That certainly doesn’t look so bad, especially when compared with a program (Winton) which is just getting started or a management team with 5 years or less of experience.
Adapt or Die (but careful with those adaptations)
Did hubris play a part? Again, from Greg Newton:
JWH generally has not changed the fundamental elements of the portfolios due to short-term performance, although adjustments may be, and have been, made over time. In addition, JWH has not changed the basic methodologies that identify signals in the markets for each program. JWH believes that its long-term track record has benefited substantially from its adherence to its models during and after periods of negative returns; however, adherence to its strategy may lead to prolonged periods of market losses and high risk, according to its current disclosure document.
Did a stubbornness to adhere to the models which had worked in the 80s, 90s, and start of this century cause those models to become outdated? That seems doubtful. As we say around here, “Systems don’t break, they just become more risky.” It would appear that this is exactly what happened to JWH. Of course, some on the risk management side of a successful CTA might say that a model becoming more risky is the same thing as that model breaking. After all, the risk is the most important part. And we wouldn’t argue too much there.
In the end, it looks like it may have been the worst of both worlds for Hentry: sticking with the base models but tweaking the position sizing. Per page 34 of the JWH D-doc, we learn that the position sizing has been changed 16 times across 9 programs since 2003.  And these weren’t all position size reductions – many were increases. On one hand, if you are taking losses at a high trading level, then trying to gain those losses back at a reduced level, it’s going to take much longer to return to profitability. But if those losses we due to unresolved flaws in your trading method, raising your position sizes is just doubling down on a losing strategy.
Live and Die by the Volatility
Most of those in the industry will tell you John W. Henry was simply too volatile for modern tastes, and you can see when taking a look at his programs’ track records some big numbers on both sides. Take the financials & metals 36% annualized volatility for example, or the multiple years with above 40% gains or more than -17% losses, and you can see that Henry’s model was one of high risk for high return.
But it’s more than just the fact that the JWH programs were volatile – what stands out is how much more volatile they were than “normal” and the fact that they were getting more volatile compared to the competition.
John Henry Composite Volatility Comparison
The above look at the ratio between the JWH composite’s rolling 12mo annualized volatility and that of the BarclayHedge CTA Index shows that the JWH programs were about 2.25 times more volatile, on average, than the index during their boom times (the first 20 years), and had jumped to 3.49 times more volatile, on average, in the past 8 years.
Again, this is something more easily seen with hindsight, but this is easy enough to analyze in real time. It’s especially concerning how volatile a program is not just in absolute terms, but in relation to its benchmark as well. And if it’s 5 times more volatile – as JWH was a few times in 2008 – you had better be sure you are getting 5 times more the return as well.
Which brings us to…
You have to make money
At the end of the day in this business (or any other), no amount of name recognition nor bulletproof due diligence can make up for the failure to make money for your clients over a five year period, and that, more than anything else, led to John W. Henry closing up shop.
Consider the Financials & Metals program again. Heading into 2005 the program had never experienced back-to-back losing years. In fact, only once had the program suffered more than 1 losing year in any 7 year period (losing two out of three between 92 and 94). The program then saw losses in three consecutive years between 2005 and 2007, and when including this year’s down performance, the program has now lost money in 5 of the past 7 years.
John Henry Period Profitability
 The three years of losses ending in 2007 are likely what led to Merrill pulling the plug in that year (right before the program experienced a big bounce back, but that’s a topic for later), but the table above shows that something is materially different in the past eight years when compared to the first 20 for the Financials & Metals program.
A CTA’s job is twofold. First, to generate absolute return performance, so that a customer who gives the program at least three years to do its job will be rewarded with positive performance. And second, to stay ahead of the competition.
It’s no easy task, to be sure, and John Henry’s gold-lined trash cans are probably filled with the brochures of contenders who tried and failed. But since 2004, it has been Henry’s programs which have failed on both counts. They haven’t remained positive across the bulk of the rolling three year periods, with some of the rolling three year returns falling below -20%. And while those years haven’t been kind to many other CTAs, JWH failed to stay ahead of the competition. They spent most of the past eight years with rolling 36 month returns below that of the BarclayHedge CTA Index.
John Henry 36 Month Rolling Returns
Henry was lagging the index and seeing large negative 36 month returns as early as 2005, meaning there were chinks in the armor that appeared well before Merrill pulled the plug in 2007.  But pulling the plug on an underperforming advisor has to be one of the hardest things to do for the individual investor. Especially when you are considering pulling the plug on a Hall of Famer.
It’s all Relative
It’s a zero sum game, as managed futures detractors like to say. But the reality is that it is not that black and white. There isn’t always one clear winner and one clear loser. It’s more like a few thousand winners, a few thousand losers, and many more in between.
The job of the investor, then, isn’t necessarily to find the winner and avoid the loser, but to find the one doing a better job of winning than the others. What does that mean? Providing return with less volatility, more consistency, experiencing smaller drawdowns, shorter drawdowns – the list goes on.
Which brings us back to Henry. You see, while he is up (big time) in the zero sum game overall, the biggest takeaway for us following this pseudo-autopsy on the John W. Henry programs was in how the program started to become one of the worst winners according to our ranking algorithm.
The biggest warning flag to us was seeing how his ranking fell despite the program going on to make new equity highs.
You see, we don’t just rank on performance – we rank on comparative performance, across many time frames, and incorporate risk metrics to normalize the performance across programs. So you not only have to do well – you have to play the game better than the next guy in terms of controlling risk, delivering consistency, and more.
John Henry Attain Rankings
The fact that the John Henry programs started to fall in our rankings after their 1999 drawdowns is a sign of poor relative performance. In other words, they weren’t just doing poorly because of a bad managed futures environment – they were doing poorly AND performing worse than their peers were in that same environment. You can get away with rough years, but you can’t do worse than your peers for an extended period of time and hope to stay in the game.
Lessons Learned:
But do pay attention to the potential lessons within this story:
1.       Past performance is not necessarily indicative of future results. It’s not just a disclaimer, and the performance of the Henry Financials & Metals program shows the reality of that – with winning years in 17 out of its first 20 years followed by losing ones in 5 out of 7.
2.       Know what sort of program you are getting involved with. John Henry’s programs were notoriously high volatility, and willing to take larger losses in exchange for home-run type years - meaning  losses of -20% and more shouldn’t have surprised anyone.
3.       Beware the big brokerage house (Merrill Lynch types) selling a big brand name managed futures program. While Henry was a poster child for managed futures as late as 2004, there were warning signs for his programs well before that.  The big brokerages believe they are being conservative when selecting the well-known program with a long history of success, but they could be better served identifying lesser-known programs with the risk and reward profile their clients want. They are often late to the party and late to get out.
4.       Henry is still a Hall of Famer. Yeah, we know… we said there were warnings, his main program has our lowest ranking, and we wouldn’t recommend a JWH program for our clients. But having said all that, he also made a lot of money for a lot of people in his early days (and knowing how these things cycle he’ll likely go on to make himself another small fortune just by trading his own money). We’ve never met him, and don’t know what sort of person he is – but we’re willing to bet that many of the clients involved with him during the ‘80s and ‘90s still think he’s worthy of that hall of fame distinction. 

Saturday, January 23, 2016

Norway's Biggest Bank Demands Cash Ban

The war on cash is escalating faster than many had imagined. Having documented the growing calls from the elites and propagandist explanations of the "benefits" to their serfs over the last few years, with China, and The IMF entering the "cashless society" call most recentlyInternational Business Times reports that Norway - suffering from its own economic collapse as oil revenues crash - has joined its Scandi peers Denmark and Sweden in a call to "ban cash."
By way of background, as we explained previously, What exactly does a “war on cash” mean?
It means governments are limiting the use of cash and a variety of official-mouthpiece economists are calling for the outright abolition of cash. Authorities are both restricting the amount of cash that can be withdrawn from banks, and limiting what can be purchased with cash.
These limits are broadly called “capital controls.”
Why Now? Why are governments suddenly so keen to ban physical cash?
The answer appears to be that the banks and government authorities are anticipating bail-ins, steeply negative interest rates and hefty fees on cash, and they want to close any opening regular depositors might have to escape these forms of officially sanctioned theft. The escape mechanism from bail-ins and fees on cash deposits is physical cash, and hence the sudden flurry of calls to eliminate cash as a relic of a bygone age — that is, an age when commoners had some way to safeguard their money from bail-ins and bankers’ control.
Forcing Those With Cash To Spend or Gamble Their Cash
The conventional answer voiced by Mr. Buiter is that recession and credit contraction result from households and enterprises hoarding cash instead of spending it. The solution to recession is thus to force all those stingy cash hoarders to spend their money.

And the benefits of a cashless society to banks and governments are self-evident:

1. Every financial transaction can be taxed.

2. Every financial transaction can be charged a fee.

3. Bank runs are eliminated.

In fractional reserve systems such as ours, banks are only required to hold a fraction of their assets in cash. Thus a bank might only have 1 percent of its assets in cash. If customers fear the bank might be insolvent, they crowd the bank and demand their deposits in physical cash. The bank quickly runs out of physical cash and closes its doors, further fueling a panic.

The federal government began insuring deposits after the Great Depression triggered the collapse of hundreds of banks, and that guarantee limited bank runs, as depositors no longer needed to fear a bank closing would mean their money on deposit was lost.

But since people could conceivably sense a disturbance in the Financial Force and decide to turn digital cash into physical cash as a precaution, eliminating physical cash also eliminates the possibility of bank runs, as there will be no form of cash that isn’t controlled by banks.
So, when the dust has settled who ultimately benefits by this war on cash - government and the central banks, pure and simple.
Which explains why Norway's biggest bank, DNB, has called for the country to stop using cash which is just the latest move in a country that has been leading the global charge toward electronic money in recent years, with several banks already not offering cash in their branch offices and some industries seeking to cut back on paper currency.
DNB's proposal suggests eliminating the use of cash would cut down on black market sales and crimes such as money laundering.

“Today, there is approximately 50 billion kroner in circulation and [the country’s central bank] Norges Bank can only account for 40 percent of its use. That means that 60 percent of money usage is outside of any control. We believe that is due to under-the-table money and laundering,” Trond Bentestuen, a DNB executive, told Norwegian website VG, the Local reported.

“There are so many dangers and disadvantages associated with cash, we have concluded that it should be phased out,” he added.

The country has already moved in this direction. Bentestuen estimated that only about 6 percent of Norwegians use cash on a daily basis, with the numbers higher among elderly people.
Norway’s Ministry of Finance is opposed to the proposal, however, and other critics have raised concerns about privacy issues as well as how the change would affect tourists. Privacy advocates in Norway have expressed worries for years that, without cash, there would be no way for an individual to purchase something without being tracked.
In 2014, Finans Norge, a financial industry organization in Norway, said the country was on pace to be a cashless society by 2020, Ice News reported. While DNB said its proposal will take time to complete, executives suggested the country start phasing out cash by discontinuing the 1,000 kroner note so it could focus on updating its banking system.
“Eighty-five percent of our customers say that they never or only very rarely go to the bank. Therefore we think it is a mistake to maintain a very old structure with local branch offices. It is better to follow the customers and improve the offers where the customers are: digital,” Bentestuen said.

In the meantime, DNB and Norway’s second largest bank, Nordea, have already stopped using cash in their branch offices. And the movement toward a goal of no cash has been going on for a while. The Norwegian Hospitality Association pushed to eliminate consumers’ right to pay cash at all stores and restaurants in 2013, The Local reported.

Other countries including Denmark and Sweden have made similar pushes as their populations also rely largely on electronic money.
If allowed to continue, state wealth control will exist.
And thus, as we concluded previously, if you can’t withdraw your money as cash, you have two choices: You can deal with negative interest rates...or you can spend your money. Ultimately, that’s what our Keynesian central planners want. They are using negative interest rates and the War on Cash to force you to spend and “stimulate” the economy.
If you ask us, these radical and insane measures are a sign of desperation.
The War on Cash and negative interest rates are huge threats to your financial security. Central planners are playing with fire and inviting a currency catastrophe.

Friday, January 22, 2016

Stackelberg competition

The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. It is named after the German economist Heinrich Freiherr von Stackelberg who published Market Structure and Equilibrium (Marktform und Gleichgewicht) in 1934 which described the model.
In game theory terms, the players of this game are a leader and a follower and they compete on quantity. The Stackelberg leader is sometimes referred to as the Market Leader.
There are some further constraints upon the sustaining of a Stackelberg equilibrium. The leader must know ex ante that the follower observes its action. The follower must have no means of committing to a future non-Stackelberg follower action and the leader must know this. Indeed, if the 'follower' could commit to a Stackelberg leader action and the 'leader' knew this, the leader's best response would be to play a Stackelberg follower action.
Firms may engage in Stackelberg competition if one has some sort of advantage enabling it to move first. More generally, the leader must have commitment power. Moving observably first is the most obvious means of commitment: once the leader has made its move, it cannot undo it - it is committed to that action. Moving first may be possible if the leader was the incumbent monopoly of the industry and the follower is a new entrant. Holding excess capacity is another means of commitment.

Tuesday, January 19, 2016

U.S. Government Has Long Used Propaganda Against the American People

The United States Senate Select Committee to Study Governmental Operations with Respect to Intelligence Activities found in 1975 that the CIA submitted stories to the American press:
Wikipedia adds details:
After 1953, the network was overseen by Allen W. Dulles, director of the CIA. By this time, Operation Mockingbird had a major influence over 25 newspapers and wire agencies. The usual methodology was placing reports developed from intelligence provided by the CIA to witting or unwitting reporters. Those reports would then be repeated or cited by the preceding reporters which in turn would then be cited throughout the media wire services.

The Office of Policy Coordination (OPC) was funded by siphoning off funds intended for the Marshall Plan [i.e. the rebuilding of Europe by the U.S. after WWII]. Some of this money was used to bribe journalists and publishers.
In 2008, the New York Times wrote:
During the early years of the cold war, [prominent writers and artists, from Arthur Schlesinger Jr. to Jackson Pollock] were supported, sometimes lavishly, always secretly, by the C.I.A. as part of its propaganda war against the Soviet Union. It was perhaps the most successful use of “soft power” in American history.
A CIA operative told Washington Post editor Philip Graham … in a conversation about the willingness of journalists to peddle CIA propaganda and cover stories:
You could get a journalist cheaper than a good call girl, for a couple hundred dollars a month.
Famed Watergate reporter Carl Bernstein wrote in 1977:
More than 400 American journalists … in the past twenty?five years have secretly carried out assignments for the Central Intelligence Agency, according to documents on file at CIA headquarters.


In many instances, CIA documents show, journalists were engaged to perform tasks for the CIA with the consent of the managements of America’s leading news organizations.


Among the executives who lent their cooperation to the Agency were [the heads of CBS, Time, the New York Times, the Louisville Courier?Journal, and Copley News Service. Other organizations which cooperated with the CIA include [ABC, NBC, AP, UPI, Reuters], Hearst Newspapers, Scripps?Howard, Newsweek magazine, the Mutual Broadcasting System, the Miami Herald and the old Saturday Evening Post and New York Herald?Tribune.


There is ample evidence that America’s leading publishers and news executives allowed themselves and their organizations to become handmaidens to the intelligence services. “Let’s not pick on some poor reporters, for God’s sake,” William Colby exclaimed at one point to the Church committee’s investigators. “Let’s go to the managements.


The CIA even ran a formal training program in the 1950s to teach its agents to be journalists. Intelligence officers were “taught to make noises like reporters,” explained a high CIA official, and were then placed in major news organizations with help from management.


Once a year during the 1950s and early 1960s, CBS correspondents joined the CIA hierarchy for private dinners and briefings.


Allen Dulles often interceded with his good friend, the late Henry Luce, founder of Time and Life magazines, who readily allowed certain members of his staff to work for the Agency and agreed to provide jobs and credentials for other CIA operatives who lacked journalistic experience.


In the 1950s and early 1960s, Time magazine’s foreign correspondents attended CIA “briefing” dinners similar to those the CIA held for CBS.


When Newsweek waspurchased by the Washington Post Company, publisher Philip L. Graham was informed by Agency officials that the CIA occasionally used the magazine for cover purposes, according to CIA sources. “It was widely known that Phil Graham was somebody you could get help from,” said a former deputy director of the Agency. “Frank Wisner dealt with him.” Wisner, deputy director of the CIA from 1950 until shortly before his suicide in 1965, was the Agency’s premier orchestrator of “black” operations, including many in which journalists were involved. Wisner liked to boast of his “mighty Wurlitzer,” a wondrous propaganda instrument he built, and played, with help from the press.)


In November 1973, after [the CIA claimed to have ended the program], Colby told reporters and editors from the New York Times and the Washington Star that the Agency had “some three dozen” American newsmen “on the CIA payroll,” including five who worked for “general?circulation news organizations.” Yet even while the Senate Intelligence Committee was holding its hearings in 1976, according to high?level CIA sources, the CIA continued to maintain ties with seventy?five to ninety journalists of every description—executives, reporters, stringers, photographers, columnists, bureau clerks and members of broadcast technical crews. More than half of these had been moved off CIA contracts and payrolls but they were still bound by other secret agreements with the Agency. According to an unpublished report by the House Select Committee on Intelligence, chaired by Representative Otis Pike, at least fifteen news organizations were still providing cover for CIA operatives as of 1976.


Those officials most knowledgeable about the subject say that a figure of 400 American journalists is on the low side ….

“There were a lot of representations that if this stuff got out some of the biggest names in journalism would get smeared” ….
Former Newsweek and Associated Press reporter Robert Parry notes that Ronald Reagan and the CIA unleashed a propaganda campaign in the 1980’s to sell the American public on supporting the Contra rebels, utilizing private players such as Rupert Murdoch to spread disinformation:
Reagan-MurdochPresident Ronald Reagan meeting with media magnate Rupert Murdoch in the Oval Office on Jan. 18, 1983, with Charles Wick, director of the U.S. Information Agency, in the background. (Photo credit: Reagan presidential library)
In the 1980s, the Reagan administration was determined to “kick the Vietnam Syndrome,” the revulsion that many Americans felt for warfare after all those years in the blood-soaked jungles of Vietnam and all the lies that clumsily justified the war.

So, the challenge for the U.S. government became: how to present the actions of “enemies” always in the darkest light while bathing the behavior of the U.S. “side” in a rosy glow. You also had to stage this propaganda theater in an ostensibly “free country” with a supposedly “independent press.”

From documents declassified or leaked over the past several decades, including an unpublished draft chapter of the congressional Iran-Contra investigation, we now know a great deal about how this remarkable project was undertaken and who the key players were.

Perhaps not surprisingly much of the initiative came from the Central Intelligence Agency, which housed the expertise for manipulating target populations through propaganda and disinformation. The only difference this time would be that the American people would be the target population.

For this project, Ronald Reagan’s CIA Director William J. Casey sent his top propaganda specialist Walter Raymond Jr. to the National Security Council staff to manage the inter-agency task forces that would brainstorm and coordinate this “public diplomacy” strategy.

Many of the old intelligence operatives, including Casey and Raymond, are now dead, but other influential Washington figures who were deeply involved by these strategies remain, such as neocon stalwart Robert Kagan, whose first major job in Washington was as chief of Reagan’s State Department Office of Public Diplomacy for Latin America.


Declassified documents now reveal how extensive Reagan’s propaganda project became with inter-agency task forces assigned to develop “themes” that would push American “hot buttons.” Scores of documents came out during the Iran-Contra scandal in 1987 and hundreds more are now available at the Reagan presidential library in Simi Valley, California.

What the documents reveal is that at the start of the Reagan administration, CIA Director Casey faced a daunting challenge in trying to rally public opinion behind aggressive U.S. interventions, especially in Central America. Bitter memories of the Vietnam War were still fresh and many Americans were horrified at the brutality of right-wing regimes in Guatemala and El Salvador, where Salvadoran soldiers raped and murdered four American churchwomen in December 1980.

The new leftist Sandinista government in Nicaragua also was not viewed with much alarm. After all, Nicaragua was an impoverished country of only about three million people who had just cast off the brutal dictatorship of Anastasio Somoza.

So, Reagan’s initial strategy of bolstering the Salvadoran and Guatemalan armies required defusing the negative publicity about them and somehow rallying the American people into supporting a covert CIA intervention inside Nicaragua via a counterrevolutionary force known as the Contras led by Somoza’s ex-National Guard officers.

Reagan’s task was made tougher by the fact that the Cold War’s anti-communist arguments had so recently been discredited in Vietnam. As deputy assistant secretary to the Air Force, J. Michael Kelly, put it, “the most critical special operations mission we have … is to persuade the American people that the communists are out to get us.”


According to the draft report, the CIA officer who was recruited for the NSC job had served as Director of the Covert Action Staff at the CIA from 1978 to 1982 and was a “specialist in propaganda and disinformation.”


Federal law forbade taxpayers’ money from being spent on domestic propaganda or grassroots lobbying to pressure congressional representatives. Of course, every president and his team had vast resources to make their case in public, but by tradition and law, they were restricted to speeches, testimony and one-on-one persuasion of lawmakers.

But things were about to change. In a Jan. 13, 1983, memo, NSC Advisor Clark foresaw the need for non-governmental money to advance this cause. “We will develop a scenario for obtaining private funding,” Clark wrote. (Just five days later, President Reagan personally welcomed media magnate Rupert Murdoch into the Oval Office for a private meeting, according to records on file at the Reagan library.)

As administration officials reached out to wealthy supporters, lines against domestic propaganda soon were crossed as the operation took aim not only at foreign audiences but at U.S. public opinion, the press and congressional Democrats who opposed funding the Nicaraguan Contras.

At the time, the Contras were earning a gruesome reputation as human rights violators and terrorists. To change this negative perception of the Contras as well as of the U.S.-backed regimes in El Salvador and Guatemala, the Reagan administration created a full-blown, clandestine propaganda network.

In January 1983, President Reagan took the first formal step to create this unprecedented peacetime propaganda bureaucracy by signing National Security Decision Directive 77, entitled “Management of Public Diplomacy Relative to National Security.” Reagan deemed it “necessary to strengthen the organization, planning and coordination of the various aspects of public diplomacy of the United States Government.”

Reagan ordered the creation of a special planning group within the National Security Council to direct these “public diplomacy” campaigns. The planning group would be headed by the CIA’s Walter Raymond Jr. and one of its principal arms would be a new Office of Public Diplomacy for Latin America, housed at the State Department but under the control of the NSC.


In the memo to then-U.S. Information Agency director Charles Wick, Raymond also noted that “via Murdock [sic] may be able to draw down added funds” to support pro-Reagan initiatives. Raymond’s reference to Rupert Murdoch possibly drawing down “added funds” suggests that the right-wing media mogul had been recruited to be part of the covert propaganda operation. During this period, Wick arranged at least two face-to-face meetings between Murdoch and Reagan.


Alarmed at a CIA director participating so brazenly in domestic propaganda, Raymond wrote that “I philosophized a bit with Bill Casey (in an effort to get him out of the loop)” but with little success.


Another part of the office’s job was to plant “white propaganda” in the news media through op-eds secretly financed by the government. In one memo, Jonathan Miller, a senior public diplomacy official, informed White House aide Patrick Buchanan about success placing an anti-Sandinista piece in The Wall Street Journal’s friendly pages. “Officially, this office had no role in its preparation,” Miller wrote.

Other times, the administration put out “black propaganda,” outright falsehoods. In 1983, one such theme was designed to anger American Jews by portraying the Sandinistas as anti-Semitic because much of Nicaragua’s small Jewish community fled after the revolution in 1979.

However, the U.S. embassy in Managua investigated the charges and “found no verifiable ground on which to accuse the GRN [the Sandinista government] of anti-Semitism,” according to a July 28, 1983, cable. But the administration kept the cable secret and pushed the “hot button” anyway.


As one NSC official told me, the campaign was modeled after CIA covert operations abroad where a political goal is more important than the truth. “They were trying to manipulate [U.S.] public opinion … using the tools of Walt Raymond’s trade craft which he learned from his career in the CIA covert operation shop,” the official admitted.

Another administration official gave a similar description to The Miami Herald’s Alfonso Chardy. “If you look at it as a whole, the Office of Public Diplomacy was carrying out a huge psychological operation, the kind the military conduct to influence the population in denied or enemy territory,” that official explained. [For more details, see Parry’sLost History.]
Parry notes that many of the same people that led Reagan’s domestic propaganda effort in the 1980’s are in power today:
While the older generation that pioneered these domestic propaganda techniques has passed from the scene, many of their protégés are still around along with some of the same organizations. The National Endowment for Democracy, which was formed in 1983 at the urging of CIA Director Casey and under the supervision of Walter Raymond’s NSC operation, is still run by the same neocon, Carl Gershman, and has an even bigger budget, now exceeding $100 million a year.

Gershman and his NED played important behind-the-scenes roles in instigating the Ukraine crisis by financing activists, journalists and other operatives who supported the coup against elected President Yanukovych. The NED-backed Freedom House also beat the propaganda drums. [See Consortiumnews.com’s “A Shadow Foreign Policy.”]

Two other Reagan-era veterans, Elliott Abrams and Robert Kagan, have both provided important intellectual support for continuing U.S. interventionism around the world. Earlier this year, Kagan’s article for The New Republic, entitled “Superpowers Don’t Get to Retire,” touched such a raw nerve with President Obama that he hosted Kagan at a White House lunch and crafted the presidential commencement speech at West Point to deflect some of Kagan’s criticism of Obama’s hesitancy to use military force.


Rupert Murdoch’s media empire is bigger than ever ….
An expert on propaganda testified under oath during trial that the CIA now employs THOUSANDS of reporters and OWNS its own media organizations. Whether or not his estimate is accurate, it is clear that many prominent reporters still report to the CIA.
John Pilger is a highly-regarded journalist (the BBC’s world affairs editor John Simpson remarked, “A country that does not have a John Pilger in its journalism is a very feeble place indeed”). Pilger said in 2007:
We now know that the BBC and other British media were used by the British secret intelligence service MI-6. In what they called Operation Mass Appeal, MI-6 agents planted stories about Saddam’s weapons of mass destruction, such as weapons hidden in his palaces and in secret underground bunkers. All of these stories were fake.


One of my favorite stories about the Cold War concerns a group of Russian journalists who were touring the United States. On the final day of their visit, they were asked by the host for their impressions. “I have to tell you,” said the spokesman, “that we were astonished to find after reading all the newspapers and watching TV day after day that all the opinions on all the vital issues are the same. To get that result in our country we send journalists to the gulag. We even tear out their fingernails. Here you don’t have to do any of that. What is the secret?”
Nick Davies wrote in the Independent in 2008:
For the first time in human history, there is a concerted strategy to manipulate global perception. And the mass media are operating as its compliant assistants, failing both to resist it and to expose it.

The sheer ease with which this machinery has been able to do its work reflects a creeping structural weakness which now afflicts the production of our news. I’ve spent the last two years researching a book about falsehood, distortion and propaganda in the global media.

The “Zarqawi letter” which made it on to the front page of The New York Times in February 2004 was one of a sequence of highly suspect documents which were said to have been written either by or to Zarqawi and which were fed into news media.

This material is being generated, in part, by intelligence agencies who continue to work without effective oversight; and also by a new and essentially benign structure of “strategic communications” which was originally designed by doves in the Pentagon and Nato who wanted to use subtle and non-violent tactics to deal with Islamist terrorism but whose efforts are poorly regulated and badly supervised with the result that some of its practitioners are breaking loose and engaging in the black arts of propaganda.


The Pentagon has now designated “information operations” as its fifth “core competency” alongside land, sea, air and special forces. Since October 2006, every brigade, division and corps in the US military has had its own “psyop” element producing output for local media. This military activity is linked to the State Department’s campaign of “public diplomacy” which includes funding radio stations and news websites. In Britain, the Directorate of Targeting and Information Operations in the Ministry of Defence works with specialists from 15 UK psyops, based at the Defence Intelligence and Security School at Chicksands in Bedfordshire.

In the case of British intelligence, you can see this combination of reckless propaganda and failure of oversight at work in the case of Operation Mass Appeal. This was exposed by the former UN arms inspector Scott Ritter, who describes in his book, Iraq Confidential, how, in London in June 1998, he was introduced to two “black propaganda specialists” from MI6 who wanted him to give them material which they could spread through “editors and writers who work with us from time to time”.
The government is still paying off reporters to spread disinformation. And the corporate media are acting like virtual “escort services” for the moneyed elites, selling access – for a price – to powerful government officials, instead of actually investigating and reporting on what those officials are doing.
One of the ways that the U.S. government spreads propaganda is by making sure that it gets its version out first.   For example, the head of the U.S. Information Agency’s television and film division – Alvin A. Snyder – wrote in his book Warriors of Disinformation: How Lies, Videotape, and the USIA Won the Cold War:
All governments, including our own, lie when it suits their purposes. The key is to lie first.


Another casualty, always war’s first, was the truth. The story of [the accidental Russian shootdown of a Korean airliner] will be remembered pretty much the way we told it in 1983, not the way it really happened.
In 2013, the American Congress repealed the formal ban against the deployment of propaganda against U.S. citizens living on American soil.  So there’s even less to constrain propaganda than before.
Another key to American propaganda is the constant repetition of propaganda.    As Business Insider reported in 2013:
Lt. Col. Daniel Davis, a highly-respected officer who released a critical report regarding the distortion of truth by senior military officials in Iraq and Afghanistan ….

From Lt. Col. Davis:

In context, Colonel Leap is implying we ought to change the law to enable Public Affairs officers to influence American public opinion when they deem it necessary to “protect a key friendly center of gravity, to wit US national will.”

The Smith-Mundt Modernization Act of 2012 appears to serve this purpose by allowing for the American public to be a target audience of U.S. government-funded information campaigns.

Davis also quotes Brigadier General Ralph O. Baker — the Pentagon officer responsible for the Department of Defense’s Joint Force Development — who defines Information Operations (IO) as activities undertaken to “shape the essential narrative of a conflict or situation and thus affect the attitudes and behaviors of the targeted audience.”

Brig. Gen. Baker goes on to equate descriptions of combat operations with the standard marketing strategy of repeating something until it is accepted:

For years, commercial advertisers have based their advertisement strategies on the premise that there is a positive correlation between the number of times a consumer is exposed to product advertisement and that consumer’s inclination to sample the new product. The very same principle applies to how we influence our target audiences when we conduct COIN.

And those “thousands of hours per week of government-funded radio and TV programs” appear to serve Baker’s strategy, which states: “Repetition is a key tenet of IO execution, and the failure to constantly drive home a consistent message dilutes the impact on the target audiences.”
Of course, the Web has become a huge media platform, and the Pentagon and other government agencies are influencing news on the web as well. Documents released by Snowden show that spies manipulate polls, website popularity and pageview counts, censor videos they don’t like and amplify messages they do.
The CIA and other government agencies also put enormous energy into pushing propaganda through movies, television and video games.
In 2012, the Pentagon launched a massive smear campaign against USA Today reporters investigating unlawful domestic propaganda by the Pentagon.
End Notes: 
(1) One of the most common uses of propaganda is to sell unnecessary and counter-productive wars. Given that the American media is always pro-war, mainstream publishers, producers, editors, and reporters are willing participants.
(2) Indeed, the media provides so little insight into opinions contrary to the status quo that a history professor says that it "has rendered the constitutional right of free press ineffectual".
(3) A 4-part BBC documentary called the “Century of the Self” shows that an American – Freud’s nephew, Edward Bernays – created the modern field of manipulation of public perceptions, and the U.S. government has extensively used his techniques.
(4) Sometimes, the government plants disinformation in American media in order to mislead foreigners. For example, an official government summary of America’s overthrow of the democratically-elected president of Iran in the 1950′s states, “In cooperation with the Department of State, CIA had several articles planted in major American newspapers and magazines which, when reproduced in Iran, had the desired psychological effect in Iran and contributed to the war of nerves against Mossadeq” (page x).