Defeat is often a disguised blessing…while victory may portend disaster. Could our friend Sir Alan possibly learn anything from the French?
"And the last shall be first…"
– Jesus of Nazareth
Everyone cheers the winners. Today, we give a loud huzzah for the losers.
According to the papers, Alan Greenspan has won his battle against deflation. In fact, the ‘maestro’ seems to have won all his battles. He has brought stocks back near their epic highs; Google, 2004, is practically as absurd as AOL, 2000. He has tamed inflation. He has beaten the business cycle senseless. He has tortured interest rates into the shape he wanted. He has bamboozled consumers into carrying the heaviest burden of debt ever.
Praising the Fed Chairman, "Americans could do much worse than Alan Greenspan…" says a commentary.
Yes, they could do worse; they could believe him.
Winning a fight against cancer, for example, deserves celebration. But a triumph at war, central banking or investing is often worse than defeat. At certain things, dear reader, losers lose least.
We say that after reading accounts of the Battle of Dien Bien Phu in today’s Figaro. May 7th marks the 50th anniversary of French defeat.
Dien Bien Phu: The French Advantages
The French had a number of advantages – similar to the advantages Americans were bringing to bear in Vietnam 10 years later. They controlled the air. Using airpower, they brought in 15,000 soldiers to a remote airfield west of Hanoi. The idea was to install themselves there, disrupt Giap’s supplies, block his move into Laos, and bring him to a pitched battle in which superior French firepower would be decisive.
"A defeat can be borne from a victory," begins the Figaro’s 50-year look-back. "In order to understand Dien Bien Phu, you have to remember Na-San. This battle, won by the French army, explains the other…and brought the whole thing to disaster. Eighteen months separated them. General Giap, commander of the Vietminh forces, used these 18 months to learn from his defeat. The French high commander, on the other hand, became more sure of himself than ever."
At Na-San, the French established a base…on a plateau. Giap attacked. The French were able to hold their ground while the Vietminh staggered away. In a single night, Giap lost 3,000 men.
If the French were going to destroy themselves in Southeast Asia, they had to find a better way. They found it at Dien Bien Phu.
The broad outlines of the battle were as follows: French parachutists took control of the airfield followed by 15,000 troops under Colonel Christian de Castries. The French dug trenches and set up bases, to which they gave women’s names.
Dien Bien Phu: Unexpected Artillery
Dien Bien Phu was not on a plateau, but in a depression, surrounded by hills covered in jungle. If the Vietminh brought up heavy artillery, the French goose would be cooked. But neither de Castries nor the French high command thought Giap could do it.
The surprise began on the 13th of March, 1954. Giap’s artillery threw off its camouflage and opened fire in the afternoon. A shell hit the French every 6 seconds…off an on…for the next 56 days.
Then, Giap sent in waves of infantry. Camp "Gabrielle" was taken by the Vietminh…and then retaken by the legionnaires, before being abandoned to the enemy. "Beatrice" was lost after its commander was killed…Anne-Marie fell.
The French held. But the Vietminh noose was getting tighter. On March 26, a plane managed to get off the ground with a cargo of wounded men. It was the last one. After that, the French lost control of the airfields. The only way to get supplies was to drop them from the sky; often they fell into the hands of the enemy.
The weather turned against the French, says the Figaro. They fought in a blast furnace. Then came the rains and they were up to their knees in mud. Doctors operated in mud.
On the 6th of May, Giap ordered a general assault. Dominique and Eliane were quickly overrun. On the 7th, the order was given to blow up the munitions. Colonel Piroth committed suicide. By 5.30 p.m. a cease-fire was sounded, though Isabelle held out until 1 a.m. the following day.
Thousands of French were captured. From the evidence, the Vietminh did not seem particularly mean to them, but indifferent. The victors had little to eat themselves, and hardly any medicine. The French, many of them wounded, died quickly. They were forced to march 500 to 600 kilometers; many didn’t make it. Only about 3,900 of them ever returned to France.
Still, the French should cheer. It was a small price to pay to "put an end to illusions," as today’s Figaro describes it.
General Giap should have been so lucky. Indochina probably never had it so good as when the French were there. But hoisted on his own successful illusions, he soon took on his compatriots in the south…and then the entire American army.
Americans seemed to learn nothing from the French experience. De Gaulle warned Kennedy that Vietnam would be a graveyard for American soldiers. But in the inflationary boom of the first ‘Guns and Butter’ administration – that of Lyndon B. Johnson – Americans must have thought they could do what the French couldn’t. They spent far more money, and lost far more men, but Giap beat them…just as he had the French.
While France and America enjoyed their defeats, Vietnam suffered its own dreary independence like a war wound.
for The Daily Reckoning
May 7, 2004
P.S. General Giap is still alive. The old man, 91, interviewed by the Figaro, was asked what he thought of America’s situation in Iraq:
"When you try to impose your will on a foreign nation you will be defeated. Every nation that struggles for independence will win."
"What we’ve done," continued the old man, dreaming, "was to fight for the right of each man to live and develop as he chooses…and the right of each people to enjoy national sovereignty."
"The Era of Cheap Money is Over," proclaims the Economist.
Everyone seems to agree. "Inflation’s back," says today’s headline in the News Observer.
Dairy products are rising sharply. Oil is at a 13-year high. At the pumps, prices have never been higher. Tuition, health care, housing – everything that can’t be made in China is going up sharply.
People like to spend money, of course. But only when they can do so foolishly. They rush to buy Google at 183 times earnings, for example. At one-tenth the price, they would turn up their noses.
Adidas is coming out with a $250 pair of running shoes. Electronic sensors are connected to little cables…which are connected to little motors…which are connected to pads of rubber and so forth…which are all connected directly to the runner’s brain to make him think he is superior to people in ordinary sneakers.
And news came yesterday of an art auction in which a man with more money than sense paid $104 million to get his hands on a painting by Picasso. The painting – a boy with a pipe – was done before Picasso even got his act together. It dates from the artist’s rose period and had been bought by John Hay Whitney in 1950 for the then-outrageous sum of $50,000.
On the other hand, nobody feels better about himself when he pays more for a quart of milk. He does not congratulate himself for having a good eye…or a good palate. His friends do not tell him what a shrewd investor he is. Nobody admires his milk carton or asks where he got it.
And so, wherever it goes, inflation of consumer prices – in contrast to asset prices – is always unwelcome.
And yet, the Fed counts on it. Investors depend on it. America, the world’s greatest debtor, needs it desperately.
Thank God, say the nation’s economists, inflation is back. It’s a done deal. The recovery is on. The economy is ‘heating up.’ Soon, the Fed will have to raise rates in order to control the growth and keep inflation acceptably moderate.
But, here at the Daily Reckoning, we do not believe it. Not quite. Not yet. On this, the 50th anniversary of the French surrender at Dien Bien Phu, (more below) we see a monumental firefight coming.
Inflation on the one side – backed by every central banker, every debtor, every financial business (even GM!), and almost every homeowner and credit card holder in America… Deflation on the other – with massive excess capacity standing at the ready in China…interest rates rising…10 million Americans ready to declare bankruptcy…100 trillion in derivatives ready to blow up!
Oh reader! Pay your debts. Hoard your gold. Stock your firewood and bottles of wine. And get ready to enjoy the show.
While we’re waiting, here’s Addison with a show of his own:
Addison Wiggin, from Historic Baltimore…
– Gold bugs have a new friend – Osama bin Laden. He has promised 10kg of gold for the man who kills Paul Bremer, the U.S. legate in Iraq, or the commander of American forces in Iraq…or their assistants. 10 kilograms…that’s 357 ounces…or, at today’s gold price, $138,571 dollars.
– The bearded freak also offered 1kg of gold to anyone killing U.S. or U.K. soldiers or citizens. The heads of citoyens from the other Allied countries, Japan, Italy and more, earn a mere 500g…17.8 ounces…or $6,929 dollars.
– "First a 244 year-old disclaimer," writes Mitsui Global’s Andy Smith. "’When we hear news we should always wait for the sacrament of confirmation,’ Voltaire wrote to the Comte d’Argental, August 28, 1760. So it should be stressed that what we hear in a new ‘audio message’ reputedly from Osama Bin Laden on a website ‘known for Islamic messages’ enjoys no such ‘sacrament,’ yet.
"On the basis that Osama – if it is he – has a mission statement to kill all 132,000 U.S. and 24,000 non-U.S. troops in Iraq," continues Mr. Smith, "this bounty implies a 144-tonne potential long position."
– With friends like Osama, who needs enemies? "The gold market is so very thin," John Myers points out, "if just one in 1,000 of the world’s nouveau riche were to buy even a paltry few ounces of the Midas metal, its price would soar." John has been predicting that bin Laden and his cave-dwelling band of hoodlums would try to use the 1,300 year old ‘gold dinar’ to undermine the U.S. economy. Today proves he’s thinking a little more overtly about gold’s possible uses.
– The ancient metal lost $5.40 in yesterday’s trade to close at $388.
– Interest rates are going to rise – and they are going to rise soon. This is a fact. Or maybe not. But seems likely. The Labor Department reported 288,000 new jobs in April. And readjusted February and March numbers higher as well. They held tight on Tuesday, but with these numbers, they will surely be tempted to kick the Fed rates up 50 bps or so when they meet again June 29. Elsewhere, rates have already started to rise. Today the Bank of England raised short-end rates a quarter point to 4.25%.
– When interest rates rise, house prices go down and consumers become stingy. Which is bad news for companies and their stock. Overextended consumers are still responsible for driving 71% of America’s GDP, according to the Washington Times.
– Long bonds continued to sell off yesterday, driving 30-year rates up to 5.375%, and adding 8 basis points during the week. The Dow declined, too…losing 70 points or 0.68%. The Nasdaq lost a percent to close at 1,937.
– "If rates head up from here, there’s going to be hell to pay," cautions Richard Russell. "There is now about $22 trillion in domestic debt. On top of that there is an estimated seven times that in outstanding derivatives. Roughly 85 percent of all derivatives are interest-rate oriented. So the truth…nobody, I repeat, NOBODY including the Fed, has the answer to what could or will happen if rates suddenly start to spike."
– You could be forgiven, dear reader, for thinking, like we do, that clever insiders knew all along that interest rates would ultimately rise. Prompted by a rare spell of fair financial weather and a favorable tailwind, execs took the opportunity to offload their stocks. They knew loose money and tax cuts would support the market. They knew the lumps would buy.
– This does not just apply to the company shares sold by greedy directors. Greedy real estate brokers are selling houses as if they were going out of fashion. Corporations are issuing, and have been issuing bonds, in enormous quantities, to take advantage of the temporary low rates. They are the smart money.
– Short positions in houses or stocks or bonds are smart-money positions. What side of the trade are the people who manage your stocks, your health care plan, your insurance, your mortgage and your real estate on? What side of the trade are you on?
– Warren Buffett puts it succinctly: "It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors)."
– "Sell in May and go away" may very well turn out to be sound advice in 2004. As your intrepid New York-based editor Eric Fry pointed out yesterday, this week’s rally was looking rather sickly, like there’s just no diesel left. "A lesser market would have been flat on it’s back already," he said. Stocks know that interest rates matter – they matter more than good news…or even evil bad news.
Bill Bonner, back in Paris…
*** We’ll believe the recovery story, we recall writing a couple years ago, when we see real people, really earning more money.
"No single economic indicator matters more to the Fed right now than wages," writes colleague Dan Denning. Today, the latest number comes out.
"…I’ve posted a couple of charts from the folks at Briefing.com," Dan continues. "One shows that since 1998, the average work week has been getting shorter.
"The other one is even more important. It shows that in
1998, average hourly earnings were growing at 4%, or faster than inflation. Since then, wage growth has slowed down dramatically. You might say it’s even been disinflating.
You could certainly say that at 1.6%, it’s not even keeping up with inflation. And that, my friends, is what keeps the
Fed up at night."
*** The Bank of England raised rates a quarter of a point – to 4.25%.
*** What two companies most fully reflect America’s great splurge of the last 4 years? Fannie Mae funded it. Wal-Mart helped people spend it. Refinancing is still booming, as people take this last opportunity to ruin themselves at low rates. Wal-Mart says sales rose at a 4.4% rate in April. But look at the stock prices. Both companies seem to have topped out…and are headed down.
*** The gold standard may be coming back into fashion – at least for bounty hunters. As Addison notes above, Osama bin Laden is offering 22 pounds of gold to the man who takes out America’s headman in Baghdad. The U.S. government clings to the dollar standard, however. Its standing offer is to pay $25 million to anyone who brings in the head of bin Laden. But that is inflation for you. Judas only got 30 shekels.
*** The shame! The stain! Our poor friends from Cumberland, Maryland. They must be looking for excuses and explanations. Their sons and daughters, enrolled in the National Guard reserve, acted very badly.
*** We recall the words of our friend, an old French colonel.
"We could win every battle in Algeria. But it was destroying the integrity of the army." More below…
*** Unpaid correspondent, Byron King, writes from Pittsburgh:
"Last week, I attended the funeral of a relative. He was one of those 1,000 or so American veterans of WWII who depart the scene each and every day. Earlier in his life, he served as a U.S. Marine. Fate made him an enlisted alumnus of vicious fighting in the Pacific Theater in 1944 and 1945, and an officer alumnus of the no less vicious police action in Korea, 1950 to 1952. He did not talk much about his wartime experiences, except to say that he ‘saw a lot of ugly things.’ He was a splendid person in general. He was handsome, and healthy, a fine dancer with a voice for song. Post-wars, he made a career as a businessman in a variety of pursuits, and he earned a respectable living. He was a good husband and father. He practiced his religion, and believed in things that mattered. He died well loved by family and friends, and his life was celebrated in Catholic tradition.
"At the funeral, his coffin was preceded into the church by a cortege of bell ringers. Buried in the midst of the brilliant sound of notes peeling out from the ringers, I detected a familiar strain, played slowly and with the most profound sense of grace…’From the Halls of Montezuma, to the shores of Tripoli…’
"The final liturgy commenced, a mixture of ancient and modern rites, mixed with private words and silent prayers. Late in the service, the priest leaned over, kissed the casket, straightened up, and blessed this man and his life: ‘Well done, good and faithful servant. Enter now into the Kingdom of Heaven.’
"Where this relative of mine found his faith, I cannot say. But he believed in his religion to the end. And his religion kept faith with him, to see him off into the great mystery beyond the edge of human understanding."