Bush's War

Washington has already alienated many important political allies. Now, William Rees-Mogg suggests, waning international support makes Bush’s "War On Iraq" more risky than ever. How dangerous is Saddam anyway?

There are undoubtedly serious concerns in Britain about the prospect of war against Iraq. The Government seems to be willing, if reluctant, to join an American action against Saddam Hussein. But the majority of Labour supporters, including probably the majority of backbenchers, seem to be against joining another war.

Even among Conservatives – who are traditionally inclined to support the American alliance in almost all circumstances – there appear to be doubts. Tony Blair puts the US alliance first, for very good reasons, but even he seems fairly reluctant to commit himself to military action.

The European Union is even more skeptical. If President Bush does decide to go to war with Iraq, he will not get much support from Europe – but he will receive a lot of criticism. In the United States, there is solid support for military action, particularly at the level of public opinion. The American voter remembers September 11th and regards Saddam Hussein as a dangerous tyrant who threatens world peace in his development of weapons of mass destruction and his support for terrorism. But intellectuals and academics, particularly democrats of a liberal persuasion, are not convinced.

The American and British Governments both have intelligence information about the danger that Saddam Hussein represents, and this information has not yet been made available to the American or British public. But I am impressed by the way in which those who know most about the danger seem to be most concerned about it.

Certainly Washington is convinced that the danger is real and immediate, not merely theoretical and longer term. The administration considers that the war on terrorism cannot succeed so long as Saddam Hussein is in power in Baghdad. Tony Blair knows what the intelligence reports are and he too takes them very seriously.

If George Bush does decides to go to war in order to change the Iraqi regime, he cannot afford to lose the battle, either from the point of view of US authority, or of his own survival for a second term.

The United States has an even greater technological superiority than at the time of the Gulf War. The problem now is the lack of an alliance in any way similar to the one that supported American action to free Kuwait. Then the US was able to build up its forces using Saudi Arabian bases, and with European support. Now the US has little Arab support, apart from Kuwait, and little European support.

Even Kuwait would need guarantees against possible Iraqi reprisals. They do not want to be invaded again.

When I visited Kuwait in February, the Kuwaitis were perfectly sympathetic to the American desire to change the regime in Baghdad. The Kuwaitis have even more reason than the Americans to detest Saddam Hussein, but they are worried about the absence of a coalition of support. They agreed that the US should try to improve relations with Iran, which has reasons of her own to detest the Saddam Hussein regime. The Kuwaitis I met also hoped the US would make progress towards the establishment of a Palestinian state. That would free pro-American Arab countries – including Saudi Arabia – to help the US to deal decisively with Saddam Hussein. But neither course has been adopted.

The United States has gone out of its way to tie together Iran and Iraq as "rogue states", part of the "axis of evil". Washington has seemed to be interfering in the politics of Iran. No progress has been made in developing a peace settlement between Israel and the Palestinians, let alone creating an independent Palestinian state.

On the contrary, Washington has backed Sharon, whom all Arab leaders regard with distrust and hostility. The failure to create, or even try to create, an anti-Iraq alliance in the Middle East itself probably represents a defeat for Colin Powell, the Secretary of State, at the hands of Donald Rumsfeld, the Secretary of Defense.

Yet it leaves the US with very restricted policy options. A commando raid on Iraq would probably fail to kill or capture Saddam Hussein himself. It would be a very high-risk gamble. Yet a major campaign, like that of the Gulf War itself, would need bases, support, over flying rights, logistical preparation. Without allies that would be hard to achieve.

If one accepts the US argument that Saddam Hussein should be overthrown as an immediate threat to world peace, one may still wonder how that can be done. An unsuccessful attempt would be worse than none at all.

Regards, William Rees-Mogg,
for The Daily Reckoning
August 30, 2002

Editor’s note : Leading political editor William Rees- Mogg is the former Editor-in-Chief for The Times of London and a member of the House of Lords. Lord Rees- Mogg has been credited with accurately forecasting glasnost and the fall of the Berlin Wall – as well as the 1987 crash. His superbly perceptive, startlingly well-informed, but often controversial insights can be found in Strategic Investment.

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Strategic Investment

The latest numbers from the Commerce Dept. show the economy growing in the last quarter at a 1.1% rate. We don’t know how much crunching was done to them, but even after tarting up by the government, the numbers show the economy barely growing.

Only two things keep them positive: autos and houses.

If the reports we read are correct, you can walk into an auto dealer and drive away in a new car – without paying a penny. Even the taxes and tags are finance – at zero percent. Of course, now you have a big liability on your balance sheet, but who cares about that? And who needs savings? Cash flow is all that counts…and as long as the cash flows, just in time to pay the bills, all is well.

Want to buy a new house? Same deal. You can get one without putting up a farthing or a fare-thee-well. Mortgages are written without points…without verifying income…without down payments…without equity. Heck, you’re even encouraged to get a bigger mortgage than you need…or to ‘take some cash out’ in order to pay down your other debts.

But the latest report from Goldman Sachs says that people don’t use the money to pay off other debt. They spend half of it.

But so what. It’s cash flow that counts. Each time they refinance they may end up with a bigger mortgage, but it’s only the monthly payments they worry about.

You see, dear reader, a consumer economy is a cash-flow economy. As long as it is expanding…and there are plenty of jobs and plenty of credit…and lower interest rates with rising asset prices – everyone is happy.

The public is still confident…it still sees the economy as benign. Cash flow is not yet a major problem.

And so durable orders keep coming in. In fact, they were up a remarkable 8.7% in July. But wait…what’s this? Those figures were seasonally adjusted, Lance Lewis points out. Without the adjustments, the raw figures were actually down 13%!

And sales at the nation’s chains stores are slowing too. Is it the heat? Or are people running out of cash flow?

Sooner or later they will – at least, that’s our guess – when house prices stop rising, and they can no longer ‘take out equity.’ Then those balance sheets – with beaucoup debt and little in assets – are likely to tilt the consumer into a different state of mind. He’s likely to discover that the economy is not so benign after all…and that rather than depend upon the cash coming in ‘just in time’ to pay his bills, he’d prefer to have some savings ‘just in case’ the cash doesn’t flow as well as he’d hoped. Then, he stops refinancing…and slows his spending. And then, the economy stops growing…and the world as we have known it comes to an end.

But let’s turn to Eric’s report from Wall Street for the latest news from the heart of capitalism:


Eric Fry, in Manhattan:

– Helplessly and dejectedly, the bulls are watching their summer rally fade away like the warm nights of August. The chill of autumn is in the air. Soon it will be September, when kids return to school, baseball players refuse to play baseball and the stock market often tumbles.

– It’s true; October grabs most of the headlines, but September is, on average, the worst month of the year for stocks. This year, September seems to be getting an early start. Since the Dow’s close above 9,000 on August 22, the blue chip index has slipped 4%. Yesterday, the market offered a little something for everyone. The Dow dipped 23 points to 8,671, while the Nasdaq gained 21 to 1,336.

– "Big is the death of cool," says Danny Kwok, co- founder of Quiksilver, a cool surfwear company. In other words, once a fashion brand becomes mainstream, it loses its cachundefined. "Cool" surfwear, by definition, cannot be purchased at Wal-Mart.

– What’s true of "extreme sports" fashion is also true of finance. "Big" is the death of investment performance. When stocks become a big national phenomenon, value has long since fled the marketplace. Popular stocks usually carry a big valuation, and paying a big price for a little bit of earnings is a hard way to make money (although it’s a very good way to lose money). That’s why a popular stock market is a very "uncool" stock market to own. Buying stocks when they’re out of favor – now THAT’S cool!

– From extreme sports to extreme real estate…San Francisco tops an ignominious list of "extreme" real estate markets, according to research and advisory firm, Property and Portfolio Research LLC. "An extreme office market is defined in this report as one where construction has ground to a near halt," the Wall Street Journal explains. "Construction of office buildings nationwide fell about 43% for the six months ended June, from a year earlier…But in tech-wrecked San Francisco, construction starts dropped a whopping 97%."

– Despite the construction bust, the vacancy rate in the Bay Area continues to soar. Here in Manhattan, the office property market is holding up somewhat better, but vacancy rates are rising nonetheless. The vacancy rate for prime Manhattan office space rose to 10.2% in July, according to Colliers ABR Inc., up from 6.2% one year earlier. In terrorist-stricken Lower Manhattan, the vacancy rate has soared to 14.7% in July from only 5.8% one year earlier.

– There’s no sign of a turnaround, yet. And there won’t be one until companies start hiring more folks than they’re firing. But weekly jobless claims spiked above 400,000 again last week, to the highest level in almost two months. The four-week-average of new claims rose for a third straight week to 392,750.

– "The rise in claims is in line with a survey showing the number of consumers who considered jobs hard to get this month was the highest in more than six years," Bloomberg News reports.

– Confirming the grim employment outlook, the Conference Board’s Help-Wanted Advertising Index dropped again in July.

– "The U.S. labor market is treading water," says Conference Board Economist Ken Goldstein. "With an economic recovery not yet strong enough to produce new jobs, businesses simply aren’t increasing their recruitment efforts."

– Is it any wonder that consumer confidence has plunged to its lowest levels since last November? Still, somehow, the determined American consumer finds a way to consume. The most popular means of consumption right now, of course, is to swap some of that "excess" home equity for a new car, a DVD player, a Stairmaster or whatever else consumers deem a necessity. We are smack in the middle of the fifth distinct mortgage-refinancing surge since 1997, and this current surge is by far the most spectacular. Refinancing activity is literally "soaring off the charts."

– Is this, too, a bubble about to burst?…"Yes," is the implicit answer from the home-building industry. "Executives across the US home-building industry have been selling shares in their companies at a record pace this year," the Financial Times reports, "Corporate officers and board members in publicly traded US building companies sold a record $258 million-worth of shares more than they bought in the second quarter…Of the 16 homebuilders with the largest market capitalization, seven had reduced their executive shareholdings by the largest amount seen in individual records going back two decades."

– So what’s driving this housing-bubble-cum-insider- selling-opportunity? The Financial Times provides a handy summary: "Home values may be increasingly fuelled by excess credit, a subsequent deterioration in lending standards and unsustainable expectations among prospective home buyers for more double-digit percentage gains."

– If it walks like a duck…


Back in Ouzilly…

*** Bloomberg reports that Alliance Capital, the 8th largest fund management company in the world, has managed to lose $7.9 billion of its clients’ money. How did it do it? It was easy; they simply turned the simplest investment rule on its head: buy high, sell low. While the smart money sells out, the dumb money rushes to take its place. For example, they bought Worldcom at $79 in November of 2000 and sold it a year later at 28 cents.

*** Despite the August rally, the Dow threatens to end down this month – for the 5th month in a row.

*** Meanwhile, the dollar is beginning to slip and the price of gold is moving up. Gold rose $3.50 yesterday.

*** All over the developed world, the zeitgeist seems be growing gloomy. Bloomberg tells us that the Swedes are feeling less confident. And the Poles are having trouble too, says the International Herald Tribune. Small businesses in Poland are going bust at an alarming rate.

*** Here in France, it is the children who are gloomiest. Long faces on short bodies tell the story: the summer is over. School starts up next week. All over the country, people are putting away the tennis rackets and warm clothes…packing up…closing shutters…and locking the doors of their country houses. Roads will be jammed this weekend – as the annual migration back to Paris begins.

*** "Are you looking forward to going back to school?" I asked Jules yesterday.

All I got in reply was a sour look.

*** More on the coming deflation, from my old friend, Rick Ackerman:

"I’ve been writing about deflation for ten years, but new manifestations of it continue to outpace my imagination. There’s the eerie rally in Treasurys, for instance – "eerie" because, as far as I can determine, there are no healthy coordinates for it in the U.S. economy. Granted, a related and seemingly positive development is that mortgage borrowers are able to reduce their monthly payments as rates in general fall. But this is not strengthening the economy; it is merely keeping it afloat – barely – to the extent that robust consumption levels can be temporarily sustained as U.S. incomes stagnate or fall. But what many observers seem to be overlooking is that consumers’ reduced borrowing costs come at the expense, in particular, of investors whose portfolios are loaded with mortgage-backed securities. They have been exchanging these securities for Treasurys by the truckload in recent weeks, since a new wave of mortgage refinancings threatens to devastate mortgage yields.

"The run on Treasurys is an unintended consequence of the Fed’s last-ditch effort to keep the housing boom alive. One could argue that lower rates all around have the potential to make everyone a winner, but this ignores a few disquieting facts. For one, there is the huge hit to savers and their institutional proxies who are weighted in mortgage-backed securities. For two, the unnaturally heavy skew of money toward housing is creating an asset bubble vastly larger in size, even, than the S&L bubble; and, three, all bets will lose if the dollar falls. On that last point we should wonder whether, merely by becoming unthinkable, so potentially catastrophic an event becomes inevitable."

The Daily Reckoning