Everybody Makes Mistakes

Nothing much happens in Bremo Bluff, Virginia. I used to drive through the town on my way down to even more remote areas of the state. It is little more than a bend in the road; the little town offers little in the way of diversion, which leaves a man plenty of time to think.

Thus, with time on his hands, Bremo Bluff resident and military historian Bevin Alexander has wondered about WWII and how it might have turned out much differently.

What a different world it was 60 years ago.

In February of 1941, Germany had already invaded France. Erich von Manstein had seen and understood the weakness of the French defensive strategy. He figured out how to outflank the French and cut off virtually the entire French and British force encamped near the Belgian border.

The French had, on paper, the strongest army in Europe at the time. But their tactics were 20 years out of date. It was a new era in warfare and only a handful of military men – mostly in the Wehrmacht, realized it.

Had the French not been such blockheads, one could argue, the 2nd World War would never have developed as it did. The Germans would have attacked. They would have met effective resistance and the balance of power in Europe would have been maintained.

But errors, dear reader, are inevitable. It was no more possible for the combatants of WWII to avoid making mistakes than it was for investors in the Great Bubble of 1995-2000.

Yesterday, Henry Blodget explained why his top recommendations were down an average of 79%: “The market went from saying ‘we like companies that are growing quickly but are losing a lot of money’ to saying ‘We want to see earnings.’ It’s very hard to predict a 180-degree turn like that.”

Some things are predictable. Who could not see that investors would sooner or later want the companies they owned to make money? It is also 100% predictable that people will be blockheads.

As events happened, two generations ago, the Germans attacked where they were not expected…and in a manner the French had never seen. Tank commanders such as Heinz Guderian and Erich Rommel cut through the French line and then kept going…moving so fast and showing up in places so far from where they were thought to be that Rommel’s group became known as the “ghost division.” Not only were the French and British forces unable to respond effectively – they had no idea of how to respond. They did not know where the enemy was, what he was doing, nor even why he was doing it.

In a few weeks, the French army collapsed. Soldiers threw down their weapons and fled. The French government, in a panic, saw the situation as hopeless and surrendered. The British, along with a few remnants of the French forces, were driven into the sea at Dunkirk.

By February of the following year, the Battle of Britain had already been waged…with an inconclusive result. Churchill

had rallied his nation – at the last moment – and, barely, fended off the German assault.

Rommel was in North Africa preparing his Deutsche Afrika Corps and a series of breathtaking victories.

The German Army was preparing an invasion of Yugoslavia and Greece.

Hitler was furious with General Franco in Spain, calling him a “Jesuit swine,” after the latter resisted Hitler’s requests to allow German armies to cross Spain in order to attack the British fortress at Gibraltar, which guarded the Atlantic entrance to the Mediterranean. He was also furious at various other people for various other reasons.

In 1941, the entire world map might have been regarded as a game board – with national forces aligned, arrayed, in motion or hors de combat such as the shifting fortunes of the players decreed.

Life is competitive. People compete alone and in groups – in sports, politics, fashion, sex, business and economics. In the 1940s, nation state competition had reached a frenzy – an episodic peak. Germany did this. Russia did that. Greece did such and such. Britain did something else. For a few years, almost everyone and everything in Europe was brought into the game. A person could be conscripted into a labor battalion, sent to the front lines in combat, or herded into a cattle car and shipped to an extermination camp. Politics is a game of force… played for mortal stakes.

Today, you’d have to read the business pages or the editorial page to find a similar contests. Microsoft vs. Oracle…Yahoo! vs. AOL… GM vs. Toyota. Nobody really cares what Greece does. The game has moved from politics to the market, played out no longer with political power and lethal results…but with economic power and an outcome that is measured in dollars and sense. The competition is no longer a worldwide trajedy…but a comedy on a global scale.

Bevins sees the world through the eyes of a military historian. From his roost in Bremo Bluff, Virginia, he thinks he espies critical mistakes that change the course of history. In this case, the mistakes were those of Adolf Hitler.

You will recall that Francis Fukayama lays the miserable history of the 20th century on the shoulders of another German speaker – General von Kluck. Von Kluck’s error in 1914 – failing to stick to the Shleiffen’s plan of attack – cost the Germans a quick and critical victory.

Bevins maintains that Hitler’s first mistake was failing to crush the British at Dunkirk, when he had the chance. The second, and more important error, was attacking Russia in a way that made no sense tactically or strategically.

“The attack against the Soviet Union on June 22, 1941,” Bevins writes, “is the most powerful example in the 20th century of how a leader and a nation – in this case Adolf Hitler and Germany – can ignore clear, eternal rules of successful warfare, and pursue a course that leads straight to destruction.”

In just a few months, Hitler had put together an empire that dominated Europe. The Germans occupied half of France. The line of occupation in the west ran only a few miles from my house in Poitou. From this point in central France, Germans controlled all the territory of Europe to the center of Poland in the east, and from Norway in the north down to the tip of Greece and the island of Crete in the Mediterranean (and large sections of Africa too).

But empires that rise up quickly, like bull markets, tend to collapse quickly too. The Third Reich was destroyed within just 4 years after Hitler attacked the Soviet Union.

Fierce and farcical competition in politics continued for another 45 years, until the collapse of communism in Russia.

Now it is a new world again – an era of fierce economic competition…with plenty of mistakes, opportunities, and comic results.

Bill Bonner, London, England March 8, 2001

A blockhead on occasion

*** “US economy is close to a standstill, says the Fed” proclaims today’s Financial Times headline. The nation’s federal reserve banks reported “sluggish” or “mixed” results in the Jan-Feb period.

*** But “Wall Street sees a turn in the market” says another headline. Yesterday, Abby Joseph Cohen raised the stock allocation in her model portfolio from 65 to 70 percent and slashed her recommended cash holdings to zero. This follows similar strategic advice from Morgan Stanley Dean Witter and Merrill Lynch earlier in the week.

*** Abbey went a little further. “The imbalances…have been resolved,” said she, adding that the Dow could hit 13,000 by the end of the year. Mr. Bear must be smirking.

*** The Fed is doing its part with rate cuts and easy credit. “I’m going to worry about avoiding the recession,” said Dallas Fed governor McTeer, “and we can get back to inflation later.”

*** Consumer credit expanded $16 billion in January, far in excess of the $6.5 billion estimate. December’s numbers were revised upwards too – to a $7.1 billion increase, rather than just $3 billion.

*** Consumers seem to be rising to the bait. “Chain Store Sales Show Consumers Spending,” says a headline I read a minute ago, but whose source I have already forgotten. According to the Redbook Average, sales grew 2.1% in Feb.

*** All this spending “suggests that people are pretty confident about their income prospects, [and] about their employment prospects,” said another Fed governor, William Poole of the St. Louis branch.

*** Both investors and consumers think they’ve seen the big bottom. The Dow rose 138 points yesterday. The Nasdaq managed only a 19-point increase.

*** Big Bottom or no Big Bottom…the future doesn’t look so good for stock buyers, says Richard Russell. Historically, when the average P/E of the S&P 500 hits 22, Russell reminds us, investors can expect a return of only 5% per year for the next 10 years. And about a third of the average return on stocks over the last 73 years has been from dividends. Currently, the P/E of the S&P 500 is 24…with a dividend yield of only 1.2%.

*** There were 1924 stocks advancing. 1163 declined.

*** The dollar moved little. Gold is reported as either having risen $1.50 yesterday – or fallen $1.20 – depending on your source of information.

*** More people have lost more money in Cisco than in any other stock in history. The market value of the stock has declined from $590 billion to just $200 billion.

*** “You can’t leave the building” said a voice from reception. Lord Rees-Mogg and I were meeting at his office on Bloomsbury Square. We have heard the sirens wailing – but this is nothing unusual. But when the meeting was over we found that a bomb threat had caused police to seal off the street in front of the building. The English have been living with bombs and bomb threats for such a long time…they actually seem to enjoy them, much like children enjoy a blizzard. “I wouldn’t stand in front of the window,” advised Lord Rees-Mogg as I stare out. A few minutes later, traffic was once again moving, or rather, not moving very much, as usual and I was able to get on with my day.

*** The London press was a big disappointment today. No naughty vicars. No maudlin tales of dying children. No missing limbs. Instead of tragedy or comedy – the media decided to devote itself to farce: Gordon Brown’s budget, which seemed to offer something for almost everyone. Even alcoholics got a break, as the Brown budget freezes duties on booze.