Casus Belli

“I am not going to be the first president in U.S. history to lose a war.” Not to “that raggedy-ass little fourth-rate country.”

Lyndon Johnson

Why do people rush into war?

“Because you have to draw the line somewhere,” replied my friend John Mauldin after dinner on Tuesday. We had just finished a delicious dinner lubricated with a generous lavage of California wine; so the conversation came easily but the recollection of it is hard.

People are not computers, I recall myself thinking. They need to whoop and holler, fight, bleed and die,occasionally, just to get it out of their systems. John, a more reasonable man, continued: “But I think Bush is doing a pretty good job. It’s easy to criticize. And who knows how it will turn out. But if I were in his shoes I don’t know what I would do differently.”

John’s view is the majority one. Recent Gallup polls put Bush’s approval level among the public at the highest levels ever recorded. Nearly 9 out of 10 people think he is doing a great job. Among Republicans, 97 out of a 100 give the president, and the war, their approval.

Here at the Daily Reckoning, dear reader, we would not presume to judge the president’s performance nor offer advice. Among the things of which we are ignorant, the “Performance of the President” lies between the “Perforation of the Palm Beach Chads” and the “Perfusion of Liquid Crystals” on a very long list. And if some freak electoral event placed us, suddenly and improbably, in his shoes – we would immediately demand a recount!

Still, a recent article in the French newspaper, Liberation, lit a fuse in our brains and set off a thought. “Afghanistan,” said the paper, “is the U.S.’s latest Vietnam. Just as it was the Soviet’s Vietnam in the 1980s.”

Vietnam ruined the Johnson Administration. From very high ratings when Johnson took office in 1963, the public’s approval fell so low that Johnson risked losing his own party. Coincidentally, the stock market was ruined too…from an epic high early in the Johnson years, stocks had no where to go but down. It took time. And there were plenty of ups and downs to confuse things. But by the time Ho Chi Minh finally took control of Saigon – in 1975 – Lyndon Johnson’s reputation was in shambles and stocks had lost 75% of their value. Could Bush’s approval ratings – and stocks – also fall together? Perhaps it is worth looking again at America’s involvement in Vietnam. The analogy might be instructive.

America was lured into Vietnam for good reasons and bad ones. Almost immediately after the war in Korea was settled it became “clear” to the National Security Council “that Southeast Asia is the target for a coordinated offensive directed by the Kremlin.”

This later proved irrelevant. The Kremlin could no more control events in Southeast Asia than the U.S. But already the lines were being drawn. After WWII, the U.S. had re-established the French in Indo-China…taking French troops to Hanoi on U.S. ships. Later the U.S. would become France’s major backer – paying most of the bills – in its “mission civilisatrice” in Vietnam.

The French were trapped at Dien Bien Phu in a trap of their own making. Then, after 8 years and 50,000 of its troops killed, the French gave up. They handed the keys to the U.S. and walked away…commenting that their Vietnamese ally Ngo Dinh Diem “was not only incapable, but mad” and that it would take half a million men to hold the country and even then it was doubtful that it could be done.

The U.S. might have welcomed Ho Chi Minh as a liberator. Instead, it chose to treat him as a menace. Though he had never violated the homeland security of the U.S., and seems a saint in comparison, he was given the bin Laden treatment even before Osama was born. He became Public Enemy #1 in the U.S. in the mid-’60s. On college campuses, however, and much of the rest of the world, he was a hero.

Ho’s troops were rarely concentrated enough to fight major battles. Instead, they were forced by circumstance to fight a guerrilla war. They usually hit and ran…assassinating local politicians, attacking small towns and villages, setting booby traps for their enemies. Vicious, ruthless and opportunistic, they used a campaign of terror to destabilize the U.S. backed regime.

America might have let the Vietnamese decide for themselves how they would be misgoverned, but the “domino theory” suggested that it would be impossible to contain the communists. If Vietnam went, so the logic implied, so went all of Southeast Asia. America would have to retreat all the way back to San Francisco, said the hawks…ignoring geography but capturing the spirit of the time.

“We will not pull out until the war is won,” said Dean Rusk.

“How could Dien Bien Phu be so ignored?” asks Barbara Tuchman in her book, “The March of Folly” (whose title gives away her point of view on the issue.) She quotes Kennedy: “Well, that was the French. They were fighting for a colony, for an ignoble cause. We’re fighting for freedom, to free them from the Communists, from China, for their independence.”

In his coma of high-mindedness, John Kennedy brought in Robert McNamara as Secretary of Defense. MacNamara was a digital man. His specialty was management through “statistical control.” Adding up the planes, the bombs, the tanks and guns…McNamara figured he could control events by simply doing the numbers.

“We have the power to knock any society out of the 20th century,” he told a Pentagon briefing.

One small problem never seemed to occur to him: Vietnam – like Afghanistan – was not in the 20th century. Bombs could blow up factories and rail terminals. But against jungle or rocks, they do little damage.

Still, the Johnson Administration launched its campaign as though it were a Rock & Roll Tour. “Rolling Thunder” got underway March 2, 1965. Did it bomb the North Vietnamese “back to the stone age?” Did it stop communist aggression in Southeast Asia? Did it keep the stock market from getting blown away?

Tune in tomorrow…as “Rolling Thunder” continues…

Bill Bonner
November 8, 2001

“People seem to be spending their money differently,” said a businessman in Baltimore yesterday. “They’re spending as if they cared about the money…as if it would be hard to replace.”

Little by little, all over the world, attitudes are changing. “Things are still pretty good,” they say. And then they touch wood. Because all around them, that confident, robust world of the late 20th century is disappearing.

“The Global Economy Is Teetering,” announces an article in the LA TIMES. Spending is down again in Japan, after a 12-year economic slump. Factory orders in Germany had their biggest drop in 6 years. In Malaysia, industrial production fell 9.7% in a single month – September. Brazil, too, saw industrial production fall – by 1.9% in September.

In Japan, as reported here yesterday, the drop in industrial production hit a 20-year record. And Bloomberg warns that Argentina’s bondholders may lose 58% of their money.

Meanwhile, U.S. long bonds rose again on Wall Street yesterday, while key commodities, such as copper and lumber, fell to record lows. Fed governors and other clowns may not realize it, but the market is signaling worsening economic conditions, not better ones.

Futures Magazine says the S&P is still far overvalued. In order to get to a 6% dividend yield, the S&P would have to fall to 261 they figure. The S&P closed yesterday at 1115. Uh…would that be a loss of nearly 80%?

Yesterday, Wall Street began scaling back prices…modestly. The Dow fell 36 points. Eric, what else happened?


Eric Fry from New York…

– Sometimes Mr. Market is as inscrutable as an Afghani woman wearing a burqua – we simply have no idea what’s behind the veil.

– Is he a serious, humorless sort who’s determined to trudge higher no matter how bad the economy looks? Or is he just toying with us – getting us to buy in to all this “recovery in 2002” stuff before he slaps us around again?

– Maybe he’s a wide-eyed optimist. Certainly optimism pervades the stock market these days. The approximate group outlook goes something like this: The worst is past; Greenspan and Rumsfeld guarantee it. Corporate earnings are bottoming out, consumer demand is recovering, borrowing costs are falling and we’re winning the war on terrorism.

– All of which means that Osama bin Laden is a short sale and everything else is a buy.

– Maybe all these hopeful beliefs are true…I hope they’re true. But even if they are, most stocks are expensive. Oh sure, there are a handful of attractively valued stocks in our mostly expensive stock market. For that matter, you might occasionally see a handful of straight women in a gay bar. But if it’s straight women that you’re hoping to meet, there are probably better places to look.

– Intel typifies the stock market “leadership” that has been driving the stock market’s recent rally. Intel shares have soared more than 50% from their September low. This despite the fact that the news from the semiconductor sector is unambiguously awful.

– Worldwide semiconductor sales fell 45% in September, according to the Semiconductor Industry Association. U.S. sales were even worse – falling 59%.

– Responding to the collapsing demand, Intel slashed 5,000 jobs from its payroll.

– Semiconductor prices seem to be falling even faster than demand. “We’ll double your memory for free,” a recent Dell Computer ad promises. “Get 128MB of SDRAM for the price of 64MB.” In other words, the nation’s largest direct seller of computers is giving away semiconductor memory like banks used to give away toasters.

– We’re sure Intel’s a great company…everybody says so. Still, it probably makes more sense to buy computer chip stocks like Intel when people are actually buying computer chips.

– Semiconductors aren’t the only commodity whose prices are spiraling downward. Yesterday, copper prices fell to their lowest level in 14 years. Scrap steel prices tumbled to new 16-year lows.

– For a recovering economy, things sure look awfully weak. Does Greenspan see it the same way? Why else would he cut the Fed funds rate for the tenth time in eleven months? Economic strength does not beget so radical a response from the Fed.

– The world outside the New York Stock Exchange remains a fairly uninviting place, economically speaking. According to the Fiscal Policy Institute, the September 11th attack will wipe out $21.2 billion of New York City’s annual output. The nonprofit research group also says that 105,200 New York City jobs will be lost as a direct result of the attack.

– “Low-wage workers are suffering the most in the economic fallout,” Crain’s reports. “Most of the layoffs are among waiters and waitresses, janitors and cleaners, retail salespeople, food prep workers and cashiers.” No paycheck, no spending, no GDP growth.

– About the only things that grow when jobs become scarce are bad loans. The number of non-performing or delinquent credit card loans is rising rapidly, according to Moody’s. The credit card companies are writing off about 25% more uncollectible loans this year than last.

– “Increasing personal bankruptcy filings continue to be a major driver of loss rates,” said one Moody’s analyst. Of course, in the Brave New World of finance, bankruptcy is no impediment to borrowing even more money. It seems that lending money to bankrupt companies is becoming a new growth industry, led by none other than GE Capital.

– “Debtor-in-possession financing – providing money to companies that already have declared bankruptcy – has jumped 30 percent this year,” Bloomberg reports. As the news organization explains matter-of-factly, GE Capital and other finance companies are “aiming to boost profits as other loan businesses suffer from less demand and rising defaults…”

– Let me get this straight: GE is trying to “boost profits” by lending to bankrupt companies because GE’s “other loan businesses suffer” from “rising defaults?” Makes sense to me.

– The nice thing about lending to bankrupt companies is that you never have to worry about finding new customers. A growth industry indeed.


Back in Baltimore…

*** Next year could be the first year that total spending on information technology actually falls – ever. What happened to the Information Age?

*** Who knows. But most people have realized that information alone is the key neither to profits nor happiness. It is an analog world after all…not a digital one. More below…

*** But technology continues to improve our lives – and make them worse – in countless ways. Edward told me he wanted an electronic puppy for his birthday. So, I’m going to take one back with me as I leave for Paris, this afternoon.

The Daily Reckoning