Monsters to Destroy

On the 4th of July, 1821, John Quincy Adams looked into the future and offered some advice.

America, he noted, "goes not abroad in search of monsters to destroy. She is the well-wisher to freedom and independence of all. She is the champion and vindicator only of her own… She well knows that by once enlisting under other banners than her own, were they even the banners of foreign independence, she would involve herself beyond the power of extrication, in all the wars of interest and intrigue, or individual avarice, envy, and ambition, which assume the colors and usurp the standard of freedom. The fundamental maxims of her policy would insensibly change from liberty to force… She might become the dictatress of the world. She would be no longer the ruler of here own spirit."

Luxembourg poses no threat to world peace. Nor does Belgium. Nor Barbados. Even with its strategic location in the Atlantic, Bermuda is not likely to interdict shipping. Not because it wouldn’t like to impose some tax of its own on every ship making its way from Rotterdam to Miami. But it can’t.

And who knows? In the long, gray winter – deprived of sunlight for months – a love-starved Luxembourger might begin building a bomb in the trunk of his Mercedes. He might perfectly well drive across the open border to Paris… or Frankfurt… or Milan and blow up a historic monument… or maybe an office building.

Luxembourgers are just as likely to go mad as everyone else, of course. But there are just not enough of them to engender much worry.

America gave the world little trouble in the first decades of its life, she was too small and too remote. But by the 20th century the world had changed.

"During the 20th century," writes my old friend, Rick Maybury, "U.S. forces were sent into foreign conflicts no less than 188 times. Since 1898, every president, both democrat and republican, has ordered American troops into far corners of the globe, usually not to defend liberty, but to train, equip or provide other kinds of help to the armed forces of crooks and tyrants. These Washington-backed terrorists have included Saddam Hussein in Iraq, Manuel Noriega in Panama, President Diem of Vietnam, the Shah of Iran, Marcos of the Philippines, Batista in Cuba, Mobutu in the Congo, Chiang Kai-shek in Taiwan, General Park in Korea, Suharto and Habibie in Indonesia and many others."

Give a man enough credit, we recall writing, and he will find some way to blow himself up. Give a man enough power, we might add, and he will eventually be a danger to everyone around him – and himself too.

Friday, we drifted away from markets – pushed by the gentle wind of a flimsy pretext. Might there be some geopolitical trend, we wondered, that will overshadow markets… and trump the normal pattern of greed and fear? You know our Daily Reckoning secret: left to their own devices, markets will eventually give investors not what they expect, but what they deserve. But what about politics? Does politics not offer investors a different way of losing money – one that is not their own fault?

Today, we continue to float amid the carriers and heavy cruisers of 21st century military power. We begin by noticing that nothing like this armada has ever been assembled before: never before in human history has there been such an imbalance in military power.

"In military terms," writes Paul Kennedy in the Financial Times, "there is only one player on the field that counts."

With nothing standing in its way, where might America’s War Against Terrorism (WAT) take it? We don’t know, but we suspect the Bush administration will find some rocks somewhere.

If the U.S. wishes to throw its weight around, who can stop it? There are no conventional armed forces that can meet the U.S. head to head… so enemies must resort to terrorism.

"You are either with us or against us," warns George W. Bush, saying something that is obviously untrue. Doubters "only aid terrorists" says John Ashcroft. Pretty soon, mushy minds in high places can’t tell a skeptic from an opponent from an enemy from a terrorist.

"With Washington’s blessing, anyone who might take a potshot at any Washington-backed dictator is now designated a ‘terrorist,’" writes Maybury in his Early Warning Report. Rick explains that there are two types of Islamic militants: localists and globalists. "A localist may hate Washington, but he mostly focuses his efforts on overthrowing the [local]… regime that terrorizes his family and friends."

All over the Islamic world, governments supported by Washington have been given the green light to eliminate these ‘terrorists’ by any means they choose.

"At least 20,000 people are in Egyptian prisons without trial," Rick elaborates, "yet billions of U.S. tax dollars continue pouring into the Egyptian government’s coffers.

"The government of Turkey, another ally of Washington, has launched a new crackdown on its Kurdish rebels. Even the dictatorship in Yemen is receiving U.S. tax dollars to exterminate its ‘terrorists.’"

What do these local ‘terrorists’ do when they are confronted by oppressive, U.S.-backed regimes? They often become globalists – joining the thousands of other radicalized Moslems who "want to strike the U.S. directly."

Most people are neither with America nor against it. Instead, they just want to be left alone. The more military force the U.S. throws around… the more people come to detest it. As greater efforts are used to strike down ‘terrorists,’ the more terrorists are created. And the WAT, as Doug Casey points out, risks becoming the "Forever War" – un-winnable, expensive and absurd.

Your editor,

Bill Bonner
March 18, 2002 — Paris, France

The U.S. economy is staging a remarkable recovery, as everyone knows… or at least, as everybody says.

But how can it be sustained? Even Alan Greenspan notes that the consumer is already spent out – he rose to the patriotic call after September 11 and bought a new car and a new house. With debt at an all-time high – and late payment rates at record highs – what more can we expect from him?

So, it’s up to business to do the spending. But how? All this recovery talk "is well ahead of what is taking place with profitability and cash flow," says Moody’s chief economist, John Lonski. Debt defaults are set to hit a new record. Moody’s expects $30 billion in defaults during the first 3 months of this year, up from $18 billion in the last quarter of 2001 and $22 billion in the first quarter of last year.

So far this year, 57 investment-grade companies have been downgraded, while only 8 have had upgrades. This is the most negative ratio ever.

Stock prices may be rising… but both businesses and consumers are struggling with debt. Meanwhile, long-term interest rates rise – making it harder keep up with payments. Eventually, debt will crush them all.

But, Eric, what’s up on Wall Street?


Eric Fry on Wall Street…

– Consumers are confident and so is Mr. Market. Even though he’s been brimming with confidence for weeks, the upbeat economic news released last Friday seemed to put some extra spring in his step.

– The Dow Jones Industrial Average gained 90.09 points at 10607.23, while the Nasdaq tacked on 14 points to 1,868.30.

– According to the Federal Reserve, America’s factories belched a little more smoke in February than in January. Industrial production and factory utilization both bounced for the second straight month. Output at the nation’s factories, mines and utilities rose 0.4 percent last month – the strongest monthly increase in nearly two years. Meanwhile, the capacity utilization rate also improved.

– And don’t forget about those indomitable consumers. The University of Michigan’s preliminary consumer sentiment index rose in March to 95.0 from 90.7 in February – the highest reading since December 2000.

– Now that the recession-that-never-occurred is drawing to a close, consumers are striding fearlessly into an all-but-certain recovery. Is this surging confidence the General George Patten variety or the General George Custer variety? No one knows, of course, but we should not rule out either possibility. A few modest economic victories do not preclude a financial Little Big Horn.

– At the moment, however, confidence is high and rising. Low levels of corporate profitability? Not a problem. High levels of consumer debt? Not a problem. Soaring interest rates? Not a problem.

– A nation of leveraged corporations and maxed-out consumers could be forgiven for worrying about rising interest rates. But no one admits to any anxiety.

– All this good news and surging confidence is infectious. Thanks in part to the strong stock market, consumers are becoming increasingly confident. As their confidence increases, so does their appetite for stocks – which drives the stock market higher, which then drives consumer confidence higher and which then drives the stock market higher.

– And of course, the more that stocks go up, the more that Wall Street likes them. "Buy" recommendations are sprouting again like spring wildflowers, and that might be a troubling contrary indicator according to one skeptical Wall Street analyst.

– "Richard Bernstein, of Merrill Lynch, voices an unusually skeptical attitude about sell-side research despite his employment circumstances," observes Apogee Research. "Bernstein looked at what he calls the ‘Sell Side Indicator’ and saw that Wall Street strategists, as a group, are recommending investors hold nearly 70% equities for a ‘balanced’ portfolio. (Since 1985, the Sell-Side Indicator has averaged 55.4%; it broke out of its previous upper range of about 60.7% only after the market peaked in 2000.) Bernstein, who interprets the data as a contrarian indicator, says it points to a total return for the S&P 500 over the next 12 months of a negative 22." Sounds like Bernstein forgot to take his confidence pill!

– "If this recession has now ended – as most economists, including Federal Reserve Board Chairman Alan Greenspan, apparently think – then there will be a supreme irony in its passing," the Washington Post reports. "The main engines of recovery will have been the workhorses of the Old Economy."

– Put another way, neither eyeballs, nor page views, nor B2B e-commerce platforms can claim credit for the recovery. These quasi-economic staples of the New Economy amounted to little more than "vaporware." Good old-fashioned consumer spending on good old-fashioned stuff like refrigerators and dishwashers has fueled the recovery thus far.

– Greenspan proudly dubs this phenomenon, "trickle-up economics." Is this a good thing? Should it inspire confidence in our economic growth prospects that the folks who are least able to spend, much less continue to spend, have been sustaining the economy?

– Barton Biggs is not convinced. "The evidence continues to mount that a recovery is under way, and most economists have declared the recession to be over," Biggs concedes. "I am still dazzled that the strongest, longest expansion can be followed by a one-quarter recession that is the mildest in history. I still believe the American consumer is over-leveraged and under-saved, and that there is too much capacity around the world for a sustainable capital-spending boom. Therefore, the recovery will be insipid and will abort sooner rather than later.

– Biggs also thinks stocks are "very expensive." Hey Barton, where’s your confidence?


Back in Paris…

*** How expensive are stocks? It depends on what numbers you use. Barron’s has switched from GAAP to operating earnings for the divisor of the P/E ratio. Operating income is otherwise known as "Earnings Before all the Bad Stuff." Even so, it yields a P/E ratio of 28.67 – about twice as high as the historical average.

Decisionpoint takes the capitalizations of the S&P and divides by the earnings per share numbers than come from the quote system. It gets a P/E of 44.5.

And for the S&P 500, columnist John Crudele just gave a P/E number of 62.5.

Can you believe it, dear reader? Profits drop. Debts and defaults rise. And stock prices go up! Choose any number you like – stocks are so expensive, you are not likely to make any money buying them now.