Armageddon in Manhattan

"…Sen. Zell Miller, a turncoat Democrat, whose discourse included such extravagant flights of fancy he almost crashed into the rafters." It’s Friday! By Gum…

The national conventions have lost their sweaty charm. Air conditioning is partly to blame. And television.

Like mobsters on winter holiday in Mexico, celebrating delegates used to meet in hot rooms – some public, many private – to work out how they would divvy up the stolen loot. A senator from Iowa might get the post of secretary of Defense…where he would be able to rout a few dollars back to the folks in Des Moines – if he could deliver votes to the Chicago machine. The mayor of New Orleans might be promised a bridge, a base or a place on the ticket – if he could bring along the rubes from Dixie. And so the deals were made, and the republic bumbled along.

But now, the national conventions are a disappointment even to insomniacs. The main TV channels have given up on them. Only the cable shows bother to carry convention highlights.

Everyone is cool now. The delegates – mostly schoolteachers, parole officers and postmasters – are almost all already on the government payroll. All pretend to be heirs to revolutionaries such as Jefferson and Hancock, but none has any intention of upsetting things. Every event is carefully staged. And every speech is run through an editing process designed to remove any spark of genuine thought, originality or honesty. Speakers are trained to stay "on message" the way pack animals are kept plodding forward – that is to say, stupidly…without really understanding where they are going or why. They move forward with no visible or audible effort of thought; premises are never considered, alternatives are never discussed. Instead, the whole thing marches ahead dumbly – towards whatever humbug the managers are trying to sell.

Zell Miller: Turncoat Democrat

The only interesting speech coming out of the Republican’s get-together so far was the one by Georgia Sen. Zell Miller, a turncoat Democrat, whose discourse included such extravagant flights of fancy he almost crashed into the rafters.

Three years ago, Miller looked up at the Democratic candidate and saw nothing not to like. Kerry was announced as "one of the nation’s authentic war heroes." But Kerry’s stock seems to have fallen – at least in the cracker senator’s eyes. For this week, Miller saw nothing to like about Kerry. The Democrats’ man "would let Paris decide when American needs defending. I want Bush to decide."

Sen. Miller seemed unaware or unconcerned that the U.S. Constitution puts the burden on Congress to decide when America needs defending. It alone has power to declare war…and to pay for it. But no one in the convention hall noticed or cared. The Grand Ol’ Party that at least used to mention the Constitution a few times has forgotten about it. Forgotten, too, is all concern about a balanced budget, which used to come up from time to time at Republican conventions. And balanced trade. And a man’s right to do as he pleased without what Ronald Reagan called "big guvmint" getting in his way.

What was also missing was any mention of "peace." Typically, a political convention is an opportunity to promise "peace and prosperity." Both parties promised prosperity, but forgot peace. But neither judged the wedge of "peace" voters big enough to try for a slice of it. Besides, the conventions are now designed – like TV itself – to avoid anything that might light up a brain scan. Mentioning peace could upset the voters, or the delegates, or the candidates themselves. America’s "War on Terror" may be a challenge for intellectuals – but it has been a big hit with the voters.

Terror is not, strictly speaking, something you can make war against. You need an enemy, not a method.

Zell Miller: The War Against Frying Pans

House-fraus in Germany, a country with tough gun-control laws, found that the best way to bump off their husbands was to hit them in the head with a heavy frying pan. Germany might have declared war on frying pans; it would have made as much sense.

Enemies who use terrorist tactics – the Chechens in the former Soviet Union, the Basques in Spain and France, the IRA in the UK, as well as assorted crackpots and future national leaders – are a dangerous nuisance. But they are hardly worthy of a real war. They use terror because they are not capable of a real war…they may threaten republicans, in other words, but not the republic itself.
Still, Americans act as though they were on the verge of such Armageddon-like showdown. With whom? Why? They can’t be bothered to wonder.

Nothing is quite so thrilling as being at war…especially with an enemy who can’t do you much harm. For every terrorist capable of striking a blow at the United States, there must be at least 10 bodyguards around the convention in New York. Terrorists were rumored to be planning an attack. None appeared. Why they would want to disrupt such a pointless and lifeless event was never explained.

Yet Americans like to imagine themselves as if they were engaged in some heroic struggle; they long to bring the enemy to battle and annihilate him on primetime TV. Terrorists were so few and far between that the war party had to make do with Third World nations – Afghanistan and Iraq – as proxies for the wispy terrorists.

Mr. Kerry judged the public’s mood correctly. The voters were practically foaming at the mouth for war. So he showed them pictures of himself as a young warrior – he is the only presidential candidate…and perhaps the only Homo sapiens below the rank of general…to ever re-enact battle scenes of himself while the war was still going on around him. Which just goes to show how farsighted the Democratic candidate is: He couldn’t use the phony newsreel footage for another 35 years…until "peace" disappeared finally from the convention promises.

But then came the Swiftees, and all of a sudden the campaign seemed to turn on how big a liar John Kerry is; Bush’s whoppers were forgotten.

And now, the fever mounts. Americans appear to have decided to give war a chance. The election of 2004 seems little more than a contest of who can promise to make it most fun.


Bill Bonner
The Daily Reckoning
September 3, 2004

What has been most surprising in the financial world is the remarkable lack of anything surprising. Something new and astonishing must be born; we have been boiling water for months. But something old must pass away first to make room for it.

The world inhales and exhales. Things go up…and then down. In with the new, out with the old. We are astonished that the old is still with us. Still breathing.

"That’s what’s nice about the financial markets," we told our friend Tim Price, a London-based money manager, yesterday. "You expect something to happen…and then, when it doesn’t happen, you’re surprised. After awhile, you begin to expect that it will never happen; then you’re surprised when it does."

The financial world is always full of surprises.

We wait now for something to happen…like waiting for a war to begin. People have been waiting so long they’ve come to believe that the peace will last forever. Then, when the last end-of-the-worlder comes out of his bomb shelter – all hell breaks loose.

On the eve of World War II, after war had been declared but before the shooting began, people went about their business. Here in Paris, the cafes were full, as they are now. The streets bustled, as they do now. Politicians bluffed and blustered, as they do now. And people began to believe that the "phony war" would never become a real one.

"It’s been amazing that no major bank has run into serious trouble," said Price. With all the derivative positions they have…and the surprising strength of the bond market…you’d think that at least one of them would have been pushed over the edge.

But nothing has happened.

Our guess is that when things change, they will change all at once. Stocks will go down. A few big hedge funds will reveal staggering losses. The banks that lent to them will show themselves unable to honor their commitments to other lenders and counter-parties. The thing that began as a small crack in the world financial system – like the failure of a single Austrian bank at the beginning of Great Depression – will open wide. People will stare into the yawning crevice; their jaws will drop and their eyes will widen at the horror of it. All of a sudden people will stop worrying about the return ON the money and begin fretting about the return OF their money. All of a sudden, consumers will stop thinking about how they can spend more and begin to wonder how they might get by with less.

Something will finally have happened.

In the meantime, here’s Eric Fry with more of what is happening now:


Eric Fry, from somewhere along the Eastern seaboard…

– "You boarding this Amtrak train?" a state trooper grunted to your New York editor yesterday.

– "Yes," came the reply.

– "Anyone search your bags?"

– "Nope."

– "Lay your bags down on the platform and back away," said the trooper.

– Your editor complied, as the K-9 unit began searching his bags. A law-enforcing German shepherd, prompted by his handler, sniffed your editor’s luggage from all sides. When the handler unzipped the suitcase – presumably to facilitate the circulation of critical olfactory clues – the excited pooch dipped his head inside, thrust his moist snout against your editor’s Ermenegildo Zegna dress shirt and then withdrew.

– "You’re free to go," said the trooper.

– Thus did law enforcement personnel throughout New York City protect the citizenry yesterday. Your editor felt more amused than comforted by his brush with the law…but more annoyed than amused that he would be wearing a canine saliva stain to his 4:00 meeting…

– Meanwhile, the stock market provided amusement aplenty yesterday, as the Dow Jones Industrial Average jumped 122 points, to 10,290 – its best closing level since July 1. The Nasdaq gained 1.2%, to 1,873.

– The first two days of September have treated stock market investors quite well. But let’s not break out the champagne just yet. According to the Stock Trader’s Almanac, September tends to come in like a lion but go out like a lamb…or a bear. In seven of the last eight years, the market has started the month well, but ended badly. September is, of course, notorious for ending badly. Throughout the history of the U.S. stock market, investors have lost more money, on average, than in any other month. Over the past 32 years, says the almanac, the Dow fell 1.6% on average in September – worse than any other month of the year. So far this September, the stock market is proceeding on cue…

– But the "ending badly" part may be starting a little earlier than usual this year. After the close of trading, Intel presented its midquarter update, which was more like a "down-date." The giant semiconductor company cut its revenue estimates for the quarter, while slashing its gross margin target to 58%, from 60%.

– "Our third-quarter change encompasses both a weaker demand picture and an inventory correction," said a chagrined CFO, Andy Bryant. "The result of this change is an outlook calling for growth at the low ends of historical expectations for the third quarter."

– Investors pummeled Intel shares in after-hours trading. The former tech icon tumbled to a 15-month low and is now down more than 40% for the year. Earnings throughout Techland are falling well short of expectations. This is not the sort of performance that sustainable stock market rallies are made of. Investors cannot wish the market higher for very long if the market’s pillars are crumbling beneath them.

– Meanwhile, the stubbornly high oil price continues to erode the bulwark of bullish sentiment. During the course of trading yesterday, crude oil futures jumped above $45 a barrel. But by the end of the session, oil closed up just 6 cents, at $44.06 a barrel. The oil market has become as volatile as the stuff itself.

– Adding to the oil market’s anxiety – and helping to push prices higher – is the menacing approach of Hurricane Frances, a Category 4 storm with winds of 131-155 mphour. Best case, this great big storm will shut down tanker traffic through the Caribbean for the next few days.

– Expect hurricane season to last much longer than usual this year…on Wall Street.


Bill Bonner, back in Paris…

*** Jobs, jobs, jobs…

Americans’ spending is slowing down. At least, that’s what the nation’s largest retailers say. Auto sellers, too, report a lack of interest in new wheels.

Why would the world’s best spenders lose interest?

They are running out of money, is our guess. Studies show clearly that consumer spending is tightly correlated with consumer income. Makes sense. When you don’t have any money, it’s hard to spend. But the studies also show that recently, incomes and spending have parted company. Americans have spent far more than they have earned. In July, for example, spending exceeded income by an 8-1 margin.

How can you spend more than you make? You can borrow. Or you can spend the money you get back in tax refunds. But neither borrowing nor cutting taxes (without also cutting government spending) provides much of a foundation for long-term, solid growth in consumer spending. Eventually, the lines – real income and real spending – have to come back together. Why not now?

*** What provides consumers with more real spending money are more real jobs.

We do not like to be the bearer of bad tidings, dear reader, but we do not expect much wage growth in America for, say, the next 50 years!

A study by Deloitte Research tells us that even Wall Street’s jobs can be done by foreigners. As many as 2.3 million jobs in banking and securities could be exported overseas, the study concludes.

Information technology, taxes, administration, human resources, benefit management – many of the "service" jobs that fill up Dilbert cartoons – could also be done in Calcutta or Bombay.

And, of course, manufacturing. Even America’s homebuilding industry could be challenged – by factory-made modular units produced overseas and brought here on cargo ships.

Incidentally, ships are arriving from Asia at Southern California ports in record numbers. Also in record numbers are they returning whence they came – empty, deadhead. We import; we do not export. We consume; we do not produce. Gadgets and geegaws are coming in; money is going out. We sail towards our own destruction, not to glory.

*** Competition for jobs by strangers in strange places probably means deflation in wage rates worldwide. Since the pool of labor in the Far East is almost infinite…and since the gap between Western compensation levels and those in Asia is so wide…and since the technological advances that make globalization pay keep coming…we can expect the trend in declining labor costs to last for decades.

Deflation, dear reader. Deflation.

The golden age of the West is dying. People in Houston can no longer expect to earn 10 times more than people in Haiphong. Now, they will have to compete with the rest of the world…and bid for the world’s energy…its gadgets and geegaws…its Monets and Modiglianis…and even its food…in a market crowded with rich foreigners.

The old order has to pass away. It can die easy. Or it can die hard. That is the story we will watch for the next half a century.

*** A Daily Reckoning reader:

"What if the world economy – led by the United States – really were
slipping into a long, slow, soft decline, as you have written? What if it were inevitable that the leader would not lead forever?"

"But what if this decline were being orchestrated by others? What if, as you implicitly imply (a tortured phrase, I know), the Chinese were doing this on PURPOSE (I know you have showcased other writers who have proposed the same thing, so I am not being novel, but here goes).

"What if the Chinese were selling us the rope (on credit) to hang ourselves with? Would the CIA not care?

"By releasing these claims [U.S. Treasurys] in the marketplace (downstream), the dollar would take a hit so large, along with probably all the financial marketplaces, that confidence would be overwhelmed, and, once lost, not easily recovered.

"We would be drowning in our own mess. Interest rates would swamp Noah’s Ark. The resulting depression would be a flood of lost jobs, lost homes, lost wealth, purchases no longer viable with depreciated dollars (the Chinese, as you note elsewhere, do not have to sell to us forever).

"I believe that the Chinese are very carefully watching America. Any move to partly and intentionally reduce the value of their Treasury holdings via monetization, or other Fed techniques to achieve the same end, will result in a snap of the leash around America’s financial neck. They can, and will, keep the Fed and others on a very short leash.

"We will soon know who is the dog and who is the master."

The Daily Reckoning