The God of War

“Americans are walking right into a trap,” said a friend at lunch the other day.

“Terrorists don’t expect to defeat the U.S. They know they can’t do that,” he continued. “These people are not dumb…I lived among them for many years. They have a different idea of how the world works.

“They had a reason for striking the U.S.” he explained. “It was very simple. They wanted to show the rest of the radical Muslims that they could reach right into the heart of the ‘Great Satan.’ More importantly, they wanted to provoke a response. As big a response as possible. They don’t care if they live or die. They will measure their success by the extent they set the world on edge and radicalize other Muslims.”

Here at the Daily Reckoning our beat is money. But we look to the rest of life – love, war, poetry – for instruction. A man may be driven wild by love, or by war, or by a bubble market. He may act wisely…or foolishly…depending on the circumstance.

And he may be ruined or saved, often as not, by the grace of the gods as by his own perspicacity.

von Clausewitz: Gavrilo Princip

What turns our attention to war is the fact that we seem to be in one. And what causes us to comment is the fact that the nation’s bellicose spirit seems to have formed a grand alliance with its wishful bullishness…thus we are drawn into the war by alliances…like Germany and Russia into WWI.

That war, too, began with a terrorist incident. Gavrilo Princip, too, wanted to stir things up…to provoke the authorities. He succeeded beyond his wildest dreams. By the time the war was over, the major monarchies of Europe had all fallen – the Hohenzollerns in Germany, the Romanoffs in Russia and the Hapsburgs in Austro-Hungary – and every major government of Europe had been replaced.

Ninety-three years later, Wall Street and the Pentagon march to the same drummer. One of the causes of yesterday’s 169-point increase in the Dow was a rumor – that Osama Bin Laden had been captured or killed. In the group mind, the “war on terrorism” (the war of “infinite justice” has been quietly dropped…) is as certain as a bull market on Wall Street. It may take time. There may be ups and downs…but the inexorable march of history is towards higher prices on Wall Street and an American victory against terrorism.

We do not know better, or worse. But a victory over bear markets and terrorism is so widely anticipated and so little questioned that we cannot help but wonder – in today’s letter – what surprises the gods may have in store.

von Clausewitz: On War

“Surprise lies at the foundation of all undertakings, [in war] without exception,” wrote Carl von Clausewitz, in his tome “On War” in the early 19th century. Clausewitz, a Prussian soldier, had seen Napoleon’s army sweep through Europe. He, too, wondered who the god of war might favor, and why.

A general who catches his enemy off-guard has control of the field, Clausewitz noticed. Not only does he cause confusion and discouragement in the opposing troops, he also determines the place and terms of battle – an immense advantage.

In the present war, such as it is, it was the enemy who made the surprise move. The American response, as far as we can tell, has been as predictable as a teenager’s slouch. It is not only the response the enemy expected…but the one he wanted.

Sometimes you can win by doing what the enemy intends. But few enemies are gracious enough to set traps for themselves. More often, they set traps for their opponents.

That is why it is rarely wise to attack an enemy head-on. Instead, a smart commander, Clausewitz explains, attacks at the unexpected point – on the enemy’s flanks. “By directing a force against the enemy’s flank and rear its efficacy may be much intensified,” the Prussian continues.

von Clausewitz: Doing Moronic Things

Military history – like the history of markets – is a sad chronicle of mob-thinking inspiring people to do moronic things. Among the common stupidities is the direct attack against fortified positions. “The defensive form of war is in itself stronger than the offensive,” Clausewitz believed. Military strategy should be focused not on how to attack the enemy, but how to get the enemy to attack you. The enemy then exhausts himself – like the Confederate army at Gettysburg…or the French in the early days of WWI – against the defensive barriers.

This principle is especially relevant in cases of guerilla warfare. The guerilla knows he cannot beat his enemy in a pitched battle, so he hits with limited resources at carefully-selected targets – blowing up trains…shooting archdukes…or driving commercial aircraft into skyscrapers – inviting his opponent to strike back with massed force.

“The immediate object here is neither the conquest of the enemy’s territory nor the defeat of his armed force,” Clausewitz observed, “but merely to do him damage in a general way.” If the god of war smiles on your enterprise, the enemy is provoked to attack in force and then he is worn out by “a gradual exhaustion of the physical powers and of the will by the long continuance of exertion.”

That is what happened to the Soviets in Afghanistan. Could it happen to U.S. forces too?

I don’t know. But, occasionally, the gods go over to the other side.

Your editor, American, and flaunting it…

Bill Bonner
February 21, 2003

P.S. I have nothing against people killing themselves for what they believe in – especially if it is something insane. But, given my preference, I’d rather die of natural causes…and I’m not even very happy with that.

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Coming back from a vacation in Latin America is like awaking from a coma. We are rested, relaxed…but completely ignorant. What has happened in the last two weeks, we wonder?

Nothing much.

Stocks fell again yesterday…with the Dow ending the day down 85 points.

Bonds are still near their recent highs. Commodity prices may signal inflation…but bond investors aren’t worried about it. They’re too busy trying to protect their capital from a bear market in stocks. The risk of inflation – whatever it is – seems slight compared to the risk of losing another 20% in equities this year.

International investors continue to allow Americans to live beyond their means; the U.S. trade deficit hit a new record last month. But they are getting edgy about the dollar – gradually turning towards the euro and gold for refuge. The euro rose again yesterday – and is now above $1.08.

Gold, meanwhile, pulled back from recent highs, but still acts as though it were beginning a long-term bull market.

Here at the Daily Reckoning, we are delighted to see the price of gold fall. We are accumulating it; the cheaper it is, the more we get for our money. At $353 per ounce, gold is not nearly as cheap as it was a year ago…but it’s probably a lot cheaper than it will be in the years ahead.

For while the Bernanke Fed produces more and more dollars “at virtually no cost”, each new ounce of gold arrives on the market stained with the blood, sweat and tears of millions of miners, geologists, truck drivers, smelters, speculators, Vancouver stock promoters and gold bug investors.

“Nothing comes from nothing,” we sigh. We prefer the something of a rare metal to the nothing of federal reserve notes in electronic form…So we hope the price of gold goes down again today, so we can get more something for less nothing than we got yesterday.

More idle comments below…

But first, here’s more market news from Addison…

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Addison Wiggin, back in New Hampshire, making his way toward the DR HQ in Paris…

– In a bizarre twist, yesterday, investors on Wall Street took bad news for…um, bad news…and knocked stocks flat.

– The Dow shed 85 points to close below 8,000. The Nasdaq dropped 3 to 1331 and the S&P 500 fell effortlessly…closing at 837. Dismal economic numbers released early in the day helped cast a pall over the snowy streets of New York.

– Oh…and there’s that Iraq thing, too. Analysts all over – TV, radio, newspapers, Internet – are conveniently placing blame for the US’ economic malaise on ‘geopolitical uncertainty’. (As if ‘geopolitical uncertainty’ is preventing companies drowning in a glut of IT from buying new computers, laying cable and engaging in their annual ‘technology rotations’.)

– Never mind that the economy is drowning in credit. Aided by the inflationistas at the Fed, interest rates remain artificially low. Mortgage rates, for example, and by extension, dropped to their lowest point since 1971. Housing prices – in 39 key markets around the nation – continue to soar.

– Yesterday we pointed out the growing relationship between the record trade deficit and the ‘mortgage bubble’…today, we notice another polyp growing on large intestine of the U.S. economy: wholesale price inflation and its effect on stock prices.

– “Naturally the jump [in PPI] set tongues wagging about how inflation is just around the corner,” observes CNNMoney, “But for investors, the real worry is that those costs are eating into profits.’

– Trouble is, companies already suffering from earnings shortfalls, and under pressure from slowing consumer spending, can’t pass those costs to consumers. “You can see a margin squeeze there,” frequent Daily Reckoning contributor Paul Kasriel told CNN. “Higher prices are making it into the pipeline, but they’re not making it to the faucet.”

– Corporate earnings are getting pinched between the rock of falling consumer spending and the hard reality of inflationary Fed policies. The CRB Index – a measure of the price companies have to pay for raw materials to produce goods – has recently climbed over 250…its highest level in 5 years. In the current race for a dwindling supply of consumer capital, corporations are going to have to eat those costs and expense them out against future earnings, too.

– The real concern for wage earners is a little more immediate. Unemployment numbers also ‘surprised’ analysts by jumping up 402,000 last week. Claims for the week before were also revised higher, marking the third increase in a row. “The labor market is not improving,” remarks Economy.com. “Initial jobless claims remain at a level consistent with a rising unemployment rate.” Meanwhile, ‘real wages’ in December and January remained unchanged.

– One of the great myths of the Great Bull Market of ’82- ’00 was that rising stock prices would help bring prosperity to all strata of society. Au contraire! While researching our book (to be published by Wiley & Sons), we discovered that ‘reality’ has the appearance of a different beast altogether.

– From 1947-1973, there was a steady increase in household productivity and compensation. But from 1973 through 1993, the years heralded by the press as “the decades of greed”, there was zero family income growth.

– To stay even, more wives entered the work force. But it had an unforeseen consequence: the real wages of men fell. In 1979 a man earned $677 a week, on average. In 2000, 21 years later – he earned $33 a week less. Women, on the other hand, saw an increase of only $47 per week over the same 20-year period. And their incomes remain lower than those of men.

– “The total hours worked by American families increased,” Gary North shows. But as a review of median income growth reveals, “joint family income stagnated, except for the richest fifth of Americans”.

– The richest families continued to work more hours as a group throughout the 21-year period, but all other income groups increased their working hours dramatically. Yet family incomes did not increase.

– “No explanation for this reduction of per capita income has been widely accepted by economists,” says North. “[These statistics] are some of the most discouraging in recent economic history.”

– More to come…

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Back in Delray Beach…

*** “Pretty good for a fat, homely bastard…”

The question was, “How’re you doin’, Bob?” The answer came from a huge man with tattoos, a pony tail, a black leather motorcycle jacket, and enough chains and rings to set off metal detectors in neighboring states.

The big man took a seat at the counter at the Green Owl, a popular breakfast spot in Delray Beach, next to retired Wall Street stockbrokers in wire rim glasses… and another big man with a big gold watch who was speaking into cell phone while eating his eggs and bacon.

The man on the cell phone was working a real estate deal. We could not hear the conversation, but caught words such as “condo,” “financing,” “points” “cost-per-square-foot” and so forth.

Your editor used breakfast to catch up on the zeitgeist of America in the 3rd year of the 3rd millennium. Seated with two men named Mark, he listened:

“I think this war thing is a personal vendetta,” said the first Mark. “These U.N. inspectors are doing a good job. And they haven’t found anything. Yeah, it’s possible that Saddam is moving stuff around…but how much of that can he do…?

“Besides, Iraq is probably the last country that will do any harm to America. Saddam is a survivor. And he knows that if there’s even a hint of trouble from Iraq, the U.S. will blow him off the face of the earth…Bush would love any excuse to eliminate the guy…

“And what’s really behind it is probably oil…”

“Oh, I don’t know,” said the second Mark. “I think Bush has been told that he can pull this off and be a hero. It will only cost, say, 1,000 American lives and, say, 40,000 Iraqi casualties. He figures he will then have control of a place there and can shape it into a model for the whole region…”

*** Meanwhile, Chris Ruddy of Newsmax.com has launched his own war effort – against France! “Our national ‘Boycott Cowardly France Campaign’ will expose France, support our President, and tell the truth to America and the world,” says Ruddy’s remarkable email. “Ultimately what’s at stake is nothing less than the lives of thousands of soldiers and millions of Americans.

“This campaign can also rally all those people now sitting on the fence and provide our men and women in uniform with the support they need to win.

“The French claim they are fighting for peace and taking the moral high ground by attempting to block support for America’s campaign to eliminate Saddam Hussein.

“That’s a pack of self-serving lies.

“The reality is that France has been in bed with the genocidal Iraqi dictator Saddam Hussein for decades.”