Noble Retaliation

“This is not the first time that America has been at war
with Muslim terrorists,” writes Ben Macintyre in the
London Times.

Exactly 200 years ago, President Thomas Jefferson faced
“a daunting enemy: a loose-knit, ill-defined group of
barbarous Muslim terrorists armed with knives,
bankrolled by a wealthy extremist who…declared war on

The cast of characters of the drama included the new
president, who came to office with scarcely any greater
mandate than George W. Bush. But unlike President Bush,
President Jefferson presided not over a superpower, but
a mini-power…a small, newly-hatched nation that had
only been able to win its independence from Britain
thanks to the intervention of the French Fleet.

Instead of being on top of the world, as America is
today, the United States was closer to the other end.
“On Jefferson’s accession,” explains Macintyre, “almost
$2 million, one-fifth of the entire annual revenue of
the United States, was being paid out in tribute, or to
retrieve Americans captured by the corsairs.”

Which brings us to another important character, the
Pasha of Tripoli, the Osama bin Laden of his day. The
Pasha encouraged the “barbary pirates” to capture
American vessels and hold them for ransom. American
sailors were often killed…or “took the turban,”
converting to Islam to escape death.

Another character who needs introduction is General
William Eaton, a former U.S. army officer who had been
made consul in Tunis and promoted himself to the rank of
general. “Bad tempered, foulmouthed and a hard-drinking
habitu? of the local brothels,” Eaton sounds like a man
we might like. Eaton so detested the Pasha of Tripoli
that his anger sometimes “rendered him semi-incoherent,”
says Macintrye.

Jefferson sent the U.S. navy, which, like America’s
naval and air forces of today, could shell Tripoli from
a safe distance. But the real breakthrough came when
Eaton launched a daring overland attack.

And here, dear reader, I interrupt the story for
editorial comment and philosophical reflection. What is
striking about this tale is the modesty of both the
means and aims of the U.S. forces. Here at the Daily
Reckoning we have a fondness for modesty. In fact, it
may be our only redeeming charm. We like stocks at
modest P/Es, wine at modest prices and women with modest
tastes. We know that we are neither smart enough, nor
well-informed enough, nor lucky enough to understand the
latest technologies or to predict the future. Nor do we
even hope to outperform the market’s long-term mean
performance. If we have one hope, it is to progress up
to the mean, rather than regress down to it. We aspire
to mediocrity…and feel happy to achieve it.

And if we have a competitive edge it is a modest one. We
know we are fools; we don’t have to wait for the market
to prove it to us. So rather than race down the highway
of life, we poke along like an old, owlish drunk,
knowing that our faculties are impaired and our judgment
is poor. Oddly, driving so slowly, after a lap or
two…we often find ourselves in the lead!

And so, we appreciate the scale of General Eaton’s
endeavor. Macintrye describes it: “Eaton’s ‘army’ gave
new definition to the word motley, consisting of 16 U.S.
Marines and other American sailors, 40 Greeks, a number
of itinerant Italians, a squad of Arab cavalry, a
hundred other assorted mercenaries and 190 camels.”

With this force at his command, Eaton set off across 500
miles of the Sahara desert, from Alexandria to Tripoli.
The troops nearly starved to death or died of
dehydration. The mercenaries mutinied three times…each
time checked by the marines, who threatened to shoot
them. Finally, the rabble arrived, “half-dead” at the
seaport of Derna. Three American brigs opened fire from
the port while Eaton, “half mad before the march and
considerably madder at the end of it,” immediately
attacked. Most of Eaton’s army were too frightened or
exhausted to move forward. Still, the audacity of his
attack carried the day. The Arab force, much larger and
better armed, surrendered.

The Pasha sued for peace and a treaty was negotiated.
The Pasha agreed to stop interfering with American

This was, however, not the end of America’s problems
with North African pirates. A few years later, the U.S.
was again at war with Britain and pirates based in
Algeria once again preyed on U.S. ships. James Madison
announced a war of “noble retaliation.” Minor skirmishes
were fought with the pirates over the next 3 years –
until 1815, after which no further tribute was paid.

Bill Bonner
Paris, France
September 21, 2001

P.S. Pirates plagued the Mediterranean long before the
Declaration of Independence. The Roman historian Appian
wrote that by 67 BC the pirates of Asia Minor had become
a power in their own right.

“From attacking ships at sea they began to assail
harbours, castles and whole cities. It seemed a great
and difficult undertaking to destroy so large a force of
seafarers who were scattered abroad, had no fixed
possessions to encumber their flight, no single
homeland. It was such an unprecedented type of war,
subject to none of the rules and with nothing clear-cut
or certain about it, that it caused a sense of
helplessness and fear in the capital.”

But Pompey the Great (106-48BC) decided to rid the
Mediterranean of them. With 500 ships, 5,000 horses, and
120,000 troops, he swept the sea, from Spain to Libya to
Cilicia, now part of Turkey. Finally, cornering the
pirate fleet, Florus writes that “as soon as they saw
the beaks of our ships all round them, they threw down
their weapons and oars, and with a great clapping of
hands – which was their sign of supplication – begged
for their lives.”


Another nasty day on Wall Street. Eric provides
details below.

But first, in keeping with our new upbeat outlook,
I’ll pass along the good news:

“War is bullish,” wrote Joe Granville on the eve of
another war 10 years ago. Indeed it was. The Gulf War
knocked the Dow down 4%. But within a month, stocks were
up nearly 20%…and never looked backed.

“By tragic irony,” writes Gene Epstein in Barron’s,
“the death and destruction [last Tuesday] should
stimulate the economy just at the point when stimulus is

Wars provoke spending. In the present case, the
Social Security “lock box” has already been opened. A
$40 billion package of emergency spending has been
proclaimed by Congress. Rebuilding, more security
measures, insurance claims…not to mention the war of
Infinite Justice…all must be paid for.

And then there’s the “multiplier effect,” which is
supposed to amplify these outlays at least by 100%. The
result: “the money that is about to flow as a direct
result of this catastrophe has changed the outlook for
the better” writes Epstein.

And last night, the maestro himself, Alan
Greenspan, confirmed what we all wanted to think:
terrorists dealt the economy a nasty blow…but the long
term looks very bright, especially with all this new
economic stimuli.

Heck, if you can head off a recession by knocking
buildings down…why not level all of the Bronx and
trigger a real boom?

And maybe someone should mention this to the
Japanese. They’ve been spending like crazy – running
such huge fiscal deficits that they’ve created the
world’s largest public debt. They’ve built bridges,
railroads, tunnels, airports…they’ve spent money they
didn’t have on projects they didn’t need. And for what?
Japan is still in a slump 12 years later…with its
Nikkei Dow racing its Wall Street counterpart for the
bottom. Maybe Japan should try destroying things instead
of building them up.

Eric, what do you think?


Eric Fry, reporting from New York:

– Wall Street is returning to something that resembles
normal. A few of the sandwich shops are not only open
for business but are actually receiving some. I ate
lunch in a nearby restaurant where people had to wait
for a table.

– But inside the Exchange, life is anything but
“normal.” They must have forgotten to tell investors
that war is bullish. Stocks just keep grinding lower.
The trading action seems remarkably placid. But the
phrase “orderly decline” is cold comfort to anyone whose
stocks are declining in an orderly fashion.

– The Dow Jones Industrial Average dropped 383 points,
or 4.4%, to 8,376. The Nasdaq fell 3.7%, to 1,471. For
those of you keeping score at home, the once-adored
index has now tumbled 71% from the all-time high it set
in March of 2000.

– The losses are beginning to feel like real money. For
investors trading on margin, the losses are feeling like
lots of real money.

– A friend of mine who is president of an independent
brokerage firm down here on Wall Street tells me, “We’re
having to sell out a lot of accounts right now to meet
margin calls. It’s very painful. Closing these accounts
when people have lost so much money is like taking your
dog to the vet to have it put to sleep.”

– The award for the largest margin call met by a single
individual yesterday goes to Sid Bass, one of the
(somewhat less) wealthy Bass Brothers from Texas.
Somehow, Mr. Bass incurred a margin call approaching $2
billion that he satisfied by handing over to Goldman
Sachs 135 million shares of Walt Disney Co.

– For us plain folk, selling $2 billion worth of stock
to meet a margin call is remarkable on two counts. First
of all, $2 billion is simply a lot of money for one guy
to be tossing around to satisfy leveraged wrong-way bets
in the stock market. Secondly, why isn’t Sid Bass
playing golf? What’s the thought process here? “A multi-
billion personal fortune is not bad, but my life would
be so much easier if I just had a couple more billion.”

– Goldman Sachs paired off against the gold market
yesterday and Goldman won. The New York brokerage raised
its rating on the shares of Newmont Mining yesterday to
“Market Outperform.” (That’s pretty good for a gold
stock). Thanks to the endorsement, Newmont rallied more
than 4%, despite the fact that gold fell $2.50.

– Italian fashion house Prada Holdings (you know, the
folks who make shoes with the coveted red stripe down
the back) has decided to postpone its planned IPO. This
fashion victim of the global stock market slump may be
waiting awhile. Who knows when the next once-in-a-
lifetime opportunity to sell the richly valued shares of
a luxury goods company will present itself.

– Going out on a limb, the Wall Street Journal predicted
yesterday “Jobless Rate Likely to Increase.” The
question is not whether joblessness will increase, but
by how much. The airline industry alone has announced
more than 100,000 job cuts in the last 48 hours. Each
one of these lost jobs will beget at least one or two
more. This is not pretty.

– Like it or not, economies in a recession shed jobs.
And like it or not, stocks in a bear market fall. For
Leon Cooperman, a well-known hedge fund manager, that
sometimes means it’s wise to sell stocks short. “I’m
doing what’s economical for my investors and it has
nothing to do with patriotism,” he tells the Wall Street
Journal. “I’m very patriotic. I have a flag in front of
my home. I cried a lot over the weekend. But I owe it to
my investors to do what is rational.”

– A friend of mine sent me the following email: “If you
had purchased $1000 worth of Nortel Networks stock one
year ago, it would now be worth $49. If you bought $1000
worth of Budweiser (the beer, not the stock, at $3.80
per six-pack) one year ago, drank all the beer, and
traded in the cans for the nickel deposit, you would
have $79. Those lucky Michigan residents who receive 10
cents per can would of course have $158.”

– There’s a lot to be said for tangible assets.

*** Uh…thanks Eric…

*** GE fell 7% yesterday. Fannie and Freddie, the twin
mortgage monsters, fell 4%.

*** More and more evidence comes out showing that the
U.S. economy was already going down before September 11.
Housing starts fell 6.9% in August. U.S. exports
plummeted in July by $2.1 billion – the largest ever
decline. Nothing is more dangerous to the world economy
than declining trade…it was a collapse in trade that
marked the Great Depression…when wealth walked
backwards for several years.

*** As Eric mentioned, since the terrorists’ attack the
aviation industry alone has laid off 100,000 employees.
And the costs and delay of additional security costs are
estimated to cost the economy half of 1% of GDP. But
maybe that’s good too?

*** An email message of uncertain provenance suggested a
solution to the kamikaze threat: “If the FAA solemnly
announced that passengers were free to carry private
firearms, that would end discussion of the plane-hijack
option among terrorists, whose greatest fear is to die
in humiliating failure.”

*** I doubt the FAA will go along. But I hope Daily
Reckoning readers are still willing to fly. I’m flying
to Las Vegas at the end of October for a major
investment conference. “We’re calling together a panel
of investment experts and advisors – from all over
Europe and North America – to meet with Agora
subscribers for a serious discussion about our financial
future…,” writes my colleague Addison Wiggin. “We’ll
be gathering at the Las Vegas Regent Hotel for 4 days,
Oct. 31st – Nov. 3rd 2001. If you’d like to reserve a
place call Agora Travel at 1-800-926-6575 or 1-561-266-
6570.” Both Eric Fry and I will be speaking…

*** “Dad,” my daughter Maria asked last night, “how
could war be good for the economy?…I mean, everything
gets blown up, people get killed…We read about the
second world war in school. People were, like,
starving…and their houses had all been completely

*** We were dining together on the rue des Lombards at a
small restaurant with good food and bad waiters. It was
too late in the evening to try to explain the paradox of
savings…the multiplier effect…and Keynesian
economics. Besides, after a few glasses of wine, I could
barely recall them myself.

*** “I don’t know…” I replied truthfully. “But
whatever it is, I doubt people are better off for it…”