The Shock Doctrine

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War, Terror, Catastrophe: Profiting From 'Disaster Capitalism'

Paul B. Farrell, Dow Jones Business News, October 16, 2007

Hot tip: Invest in "Disaster Capitalism." This new investment sector is the core of the emerging "new economy" that generates profits by feeding off other peoples' misery: Wars, terror attacks, natural catastrophes, poverty, trade sanctions, market crashes and all kinds of economic, financial and political disasters.

In this Orwellian future, everything must be seen with new eyes: "Disasters" are "IPOs," opportunities to buy into a new "company." Corporations like Lockheed-Martin are the real "emerging nations" of the world, not some dinky countries. They generate huge profits, grow earnings. And seen through the new rose-colored glasses of "Disaster Capitalism" they are hot investment opportunities.

To more fully grasp this new economy, you must read what may be the most important book on economics in the 21st century, Naomi Klein's The Shock Doctrine: The Rise of Disaster Capitalism, whose roots trace back the ideas of three 20th century giants:

President Dwight D. Eisenhower, who warned us against the self-perpetuating and ever-expanding economic power of our "military-industrial complex."

Nobel economist Milton Friedman, who said economic change never occurs without a crisis shocking the system; whether the crisis is natural, induced or merely perceived, as with enflaming public fears of war and terror threats.

Economist Joseph Schumpeter, whose saw "creative destruction" as a healthy process by which new technologies and new products made old ones obsolete.

"Disaster Capitalism" is financing a new world economic order says Klein, not just in "the divide between Baghdad's Green and Red zones" but in other disaster zones, from post-tsunami Sri Lanka to post-Katrina New Orleans.

Disasters come in many forms: Weapons destroying power plants and hospitals, nature weakening bridges, hurricanes wiping out towns, ideological conflicts turning Africa's farmlands into deserts, global banking systems favoring investors over public works, shopping malls over schools, sewage treatment and power plants, and so on.

Yes, this is a hot-button political issue. But for the moment, let's put aside partisan politics, which many will find disturbing for the future of America. Let's look at this strictly as investors and briefly consider what may also be a guide for aggressive investors searching for investment opportunities in "Disaster Capitalism." In a brilliant Harper's excerpt from The Shock Doctrine, Klein makes clear how this new economy is the wave of the future for certain investors:

"Today, global instability does not just benefit a small group of arms dealers; it generates huge profits for the high-tech-homeland-security sector, for heavy construction, for private health-care companies, for the oil and gas sectors -- and, of course, for defense contractors."

Big bucks

This new market is enormous: "Reconstruction is now such a big business that investors greet each new disaster with the excitement of a hot new stock offering: $30 billion for Iraq reconstruction, $13 billion for tsunami reconstruction, $110 billion for New Orleans and the Gulf Coast."

Get it? Disasters are "IPOs!" followed by on-going revenues for "projects" like the Blackwater security contracts and constructing the world's largest embassy in the isolated Baghdad Green Zone.

Think positive: "Disaster Capitalism" played a major role in bringing America's economy out of the 2000-2002 bear-recession: "The scale of the revenues at stake was certainly enough to fuel an economic boom. Lockheed Martin, whose former vice president chaired the Committee for the Liberation of Iraq, which loudly agitated for the invasion, received $25 billion in U.S. government contracts in 2005 alone."

Putting that in perspective, Klein quotes U.S. Rep. Henry Waxman: That sum "exceeded that gross domestic product of 102 countries, including Iceland, Jordan and Costa Rica [and] was also larger than the combined budgets" of the Departments of Interior and Commerce, the SBA and the entire legislature.

"Lockheed itself deserved to be characterized as an emerging market. Companies like Lockheed (LMT) (whose stock price tripled between 2001 and 2005) are a large part of the reason why the U.S. stock market was saved" after 9/11, helping the recovery more than the housing boom did!

Plus energy: "The oil and gas industry is so intimately entwined with the economy of disaster -- both as a root cause behind many disasters and as a beneficiary from them -- that it deserves to treated as an honorary adjunct of the disaster-capitalism complex."

Citing the "outrageous fortunes of the oil sector -- a $40 billion profit in 2006 for ExxonMobil alone (XOM) ... Like the fortunes of corporations linked to defense, heavy construction and homeland security, those of the oil sector improve with every war, terrorist attack and Category 5 hurricane."

How to invest in the new 'Disaster Capitalism'

It's easy to invest in "Disaster Capitalism" and the new economy. See the Spade Defense Index (DXS) of defense, homeland security and aerospace stocks. Klein says it "went up 76% between 2001 and 2006, while the S&P 500 dropped 5%." You can trade the Spade Index as a PowerShare Aerospace and Defense ETF (PPA) .

In addition, the Fidelity Select Defense & Aerospace Fund (FSDAX) offers another opportunity. According to Morningstar data, there are similar stocks in both, including: General Dynamics (GD) , Raytheon (RTN) , Rockwell Collins (COL) , Boeing (BA) , Harris (HRS) , Northrop Grumman (NOC) and United Technologies (UTX) .

"The Shock Doctrine" is one of the best economic book of the 21st century because it reveals in one place the confluence of cultural forces, the restructuring of a world economy as growing populations fight over depleting natural resources and the drifting away of America from representative democracy to a government controlled by multiple, competing, well-financed and shadowy special interests. Here's an overview of trends from the book and related ideas:

1. Free market competes with government

In the past when major catastrophes resulted in economic disruptions and human losses governments responded with "New Deals" and "Marshall Plans," says Klein. Today, "Disaster Capitalism" companies see government agencies (like FEMA) and nonprofits (Red Cross) as "competition" taking away new business. A military draft, for instance, would lower the need for private mercenaries.

2. Privatization of government for the investor class

These new forces are screaming to privatize our economy and government: After the Minneapolis bridge collapse Klein saw many calls for more private toll roads and bridges across America. Same with calls to privatize New York's subways after rain closed them temporarily. Ditto with airports and their security. And in New Orleans, reconstruction moneys rebuilt private schools in upscale areas and neglected infrastructure in poor areas.

3. War generates profits, peace hurts free markets

"Disaster Capitalism" firms need wars to generate profits. And by sidestepping the draft, Iraq became a privatized war employing over 185,000 (20,000 more than the military), including truck drivers, PX clerks and mercenary soldiers. Blackwater was near bankruptcy before the war. Through secret no-bid contracts the U.S. pays for training centers which the companies now own. Peace does not generate disaster profits.

4. Plutocratic government favoring wealthy over masses

"The vast infrastructure of the disaster industry, built up with taxpayer money, is all privately controlled" through special interests favoring the wealth classes during reconstruction. In New Orleans Klein saw the "so-called FEMA-villes: desolate out-of-the-way trailer camps for low-income evacuees [with guards that] treated survivors like criminals;" while the wealthy gated communities quickly received water and power generators, private school and hospital services.

5. Shadow banking system

Private equity firms and hedge funds are making our Federal Reserve Bank less and less relevant. Today a private banking system is emerging nationally and globally that operates in relative secrecy outside the established system and beyond the oversight of securities and banking regulators and the legislature, out in a parallel universe beyond the comprehension of the vast majority of American taxpayers and Main Street investors.

So folks: Is "Disaster Capitalism" merely a hot short-term investment opportunity for you? Or is it a national "crisis," a warning bell, a "shocking" call to rise above euphemisms like "creative destruction," get into action and rein in the "military-industrial complex" mindset that's pushing America into a disastrous, self-destructive future? Tell us.
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