Ides of March, 2002
Caesar (to the soothsayer): The Ides of March are come.
Soothsayer: Ay, Caesar; but not gone.
Shakespeare’s "Julius Caesar"
On this day, 2046 years ago, Julius Caesar was assassinated by his friend Brutus and other conspirators. Caesar had it coming, of course. He had crossed the Rubicon with his army – something that was forbidden under Roman law – and had seized power by force. But when Caesar fell to the ‘unkindest cut of all’ it set off a power struggle in Rome that soon had armies on the march all around the Mediterranean and ended up by – among other things – ending Ptolemaic rule of Egypt with the death of Marc’s Anthony’s lover, Cleopatra.
What a marvelous story – full of power, war, deceit, back-stabbing, jealousy, sex… even animals! No wonder people love politics… it is so much like real life.
As promised, today’s letter will not ask long-term Daily Reckoning sufferers to reckon with Alan Greenspan, nor with the Japanese economy.
Instead, we will render unto Caesar what is his – turning our reckoning away from markets and towards politics. That is, away from illusions of wealth towards delusions of grandeur… away from greed and fear towards hypocrisy and larceny… and away from charming rogues towards rogues with no charm whatsoever.
We turn, in other words, from the distortions and hype of the financial pages to the empty headed pomposity of the editorial pages.
In particular, we turn to the newspapers to find out what is happening in the War Against Terror (WAT).
"Fierce fiery warriors fought upon the clouds, In ranks and squadrons and right form of war, Which drizzled blood upon the Capitol; The noise of battle hurtled in the air, Horses did night, and dying men did groan, And ghosts did shriek and squeal about the streets."
Caesar’s wife, Calpurnia, might have been describing the WAT. Instead, she was recalling a nightmare and giving her husband a warning: Beware the ides of March.
But what husband listens to his wife’s bad dreams? Caesar went forth, fearless. "Danger knows full well," says he, "that Caesar is more dangerous than he."
We do not read the news as others do – that is, to avoid doing anything useful or uplifting. Instead, we consult the headlines the way the Romans consulted augurers – looking for things that might cause trouble. Is something happening in the world that might trump the normal patterns of boom and bust, or overrule a financial trend… like WWII is said to have brought an end to the Great Depression?
A preliminary conclusion: nothing in the news suggests that the Axel of Evil is turning any more slowly today than it was before the WAT was announced. ‘Terrorists’ have been rounded up or killed by the thousands. But like the terrorists who bedeviled Roman legions… there will be plenty more to take their places.
And a sneaking suspicion: if the terrorists fail to come forward on their own… we will create them.
The nice thing about being the world’s only super-power, you can launch the most absurd campaigns on the basis of the most preposterous pretenses – and who’s going to stand in your way?
And a further reflection: little noticed in the celebration of America’s victory over Afghanistan – a country hosting one of the world’s governments that is least able to defend itself – is that the U.S. military has far outpaced the rest of the world. It has gotten so far ahead of the competition that it represents a threat to everyone – including itself. With nothing to stand it in its way, it ends up in places it ought not be. And with no enemy capable of delivering a decisive strike – it may have to blow itself up.
"If Congress cranks up the Pentagon’s budget as much as George W. Bush would like," reckons a N.Y.TIMES editorial, "the U.S. will soon be spending more on defense than all the other countries of the world combined. That is just one measure of America’s armed might – and of a global imbalance of power the likes of which has probably not been seen since the height of the Roman Empire."
Even in Caesar’s day, Rome did not enjoy the margin of power that the U.S. does today. There was still another great empire in Persia," writes Paul Kennedy, "and another one in China." (Crassus, a rich Roman, had tried to make a name for himself by launching a military campaign against Parthia [near present day Iraq]. The Parthians attacked on camels – so destabilizing the Roman mercenaries that many broke and ran. Crassus was captured and met his end by having molten gold poured down his throat. His imprisoned soldiers ended up, believe it or not, as mercenaries to a Chinese general and were eventually settled in China.)
"No equivalent concentration of power to a U.S. carrier task forces exists in the world," writes Kennedy, "the few UK, French and Indian carriers are minuscule by comparison, the Russian ones are rusting away."
"This array of force is staggering. Were it ever assembled en masse the result would be the largest concentration of naval and aerial force the world would have seen."
Kennedy notes that he was able to follow the buildup and execution of WAT by looking at the navy’s own websites. "Accompanying the enormous flagship [the carrier Enterprise] by that time," writes Kennedy, "were two cruisers, six destroyers and frigates, two attack submarines, two amphibious vessels with their troops, and supply-dock ships – in all, 15 vessels and 14,300 mean (including 3,250 troops)."
This really is a new era in warfare. As recently as half century ago, the U.S. Navy would scarcely give out to the public the configuration of its battle groups. "Loose lips sink ships," was the motto of the WWII era.
But the enemy today has no weapons to match against U.S. forces. American armies march around the globe – and appear to be invincible. Why not advertise their whereabouts? What can the enemy do about it?
The conclusion that most people draw from the Afghan war is "almost beside the point," Kennedy believes. "The larger lesson – and one stupefying to the Russian and Chinese military, worrying to the Indians, and disturbing to proponents of a common European defense policy – is that in military terms there is only one player on the field that counts."
"Everyone knew," he continues, "that with the Soviet Union’s forces in a state of decrepitude, the U.S. was in a class of its own. But is simply staggering to learn that this single country – a democratic republic that claims to despise large government – now spends more each year on the military than the next nine largest national defense budgets combined.
"Nothing has ever existed like this disparity of power; nothing… "
What does it mean? Has the U.S. military – and its economy – become too big to fail? More to come.
March 15, 2002 — Paris, France
The consumer shopped valiantly throughout the ‘recession.’ He bought a new SUV and mortgaged up his old house – or bought a new one. What more can he do now?
That question, posed in the Daily Reckoning a few days ago, was on Alan Greenspan’s mind as he spoke to bankers on Wednesday.
"Although household spending should continue to trend up," said the Fed chairman, "the potential for significant acceleration in activity in this sector is likely to be more limited than in past cycles."
"That puts the onus on business investment," notes the Bloomberg reports. But businesses have a problem too – they have no money. Profits have declined in each of the last five quarters – with a 21.6% drop in the last 3 months of 2001 alone. But while profits fell, debt rose. And now businesses are finding it harder to borrow more. Post-Enron, lenders are becoming more careful about whom they trust with their money.
What’s more, the cost of carrying debt is going up. As Eric notes, below, long-term yields are rising.
Besides, with no increase in consumer spending on the horizon, why would businesses spend money (at rising rates) to make capital investments?
"The recovery in spending on business fixed investment is likely to be only gradual," Greenspan said. "In particular, its growth will doubtless be less frenetic than in 1999 and early 2000 – a period during which outlays were boosted by the dislocations of Y2K and the extraordinarily low cost of equity capital available to many firms."
The recovery may be modest. Or, it may not happen at all.
"The Fed chairman also discussed the need for Americans to increase their rate of saving," continues the Bloomberg report, "… given the rising share of elderly who will be claiming Social Security benefits. It has two implications, he said.
"First, additional saving will help pay the retirees’ claims. Second, it will add to the store of capital available for investment, which should benefit the economy.
"The rate of saving," said the nation’s central banker, "… surely affects capital investment, which it finances, and the productivity that it engenders."
Uh… yes. But in order for people to save more they must spend less. If they spend less, business sales will go down. Profits will not rise, but unemployment will. And the economy will finally sink into the well-padded easy chair of recession – for a much needed rest.
Eric… over to you…
Eric Fry on Wall Street…
– Nuthin’ much doin’ in the stock market yesterday. The Dow inched up 15 points to 10,517, while the Nasdaq dropped half a percent to 1,854.
– Meanwhile, a very interesting story is unfolding in the Treasury bond market. The story is a very simple one: Treasury prices are falling, which means yields are rising. The yield on the 10-year Treasury note spiked to 5.39% yesterday from 5.26% the day before. Rates have jumped almost 1.25% since last fall and have hit their highest level since July.
– Rising yields – like budding daffodils – are often a harbinger of an imminent economic "spring." From a macro-economic standpoint, therefore, rising yields could be considered a hopeful sign. However, we at the Daily Reckoning get no warm and fuzzy feeling from the rising interest rate trend. Rather, we suspect that higher rates might be just the thing to stop the ‘recovery that isn’t happening’ dead in its tracks.
– After all, rising interest rates are no friend to leveraged companies and consumers.
– It’s also possible that Treasuries are selling off because some folks are growing concerned about the dollar’s health. The euro touched a seven-week high against the dollar yesterday, while gold has been acclimating itself to the thinner air around the $290 level.
– "We are actually about one year into a new gold cycle," Chris Thompson, chairman of Gold Fields Ltd., proclaimed recently. "There’s much more to come. Load up and enjoy!"
– Consider that since the beginning of 2001, the XAU Index of gold and silver stocks has gained more than 20%, while all the major stock indices have LOST ground. Is this merely a head-fake or the beginning of a long- term trend reversal? It’s happened before… but in reverse.
– In 1983, buying gold below $500 per ounce probably seemed like a pretty savvy idea. Only two years earlier, the yellow metal had touched $800 per ounce. Any price below $500 had to be a bargain, right?
– Meanwhile, the stock market, which had gone absolutely nowhere over the 10 years prior to 1983, was self- evidently NOT the place to be. The "smart money" bought gold and avoided stocks. We all know what happened next.
– Ten years later, stocks had more than tripled and gold had gone nowhere. Remarkably, even in 1993, it was almost as easy to find an investor who was bullish on gold as it was to find an investor who was bullish on stocks.
– Isn’t it curious how long perception can survive reality?
– Ten years after the fact, many investors still held a candle for the yellow metal. Bad habits can be so tough to break. Some of us eat a little too much cheesecake, others drink a little too much red wine and others of us hang on to losing investments a little too long… hoping for a turnaround.
– You know, it’s possible that the investment world is already in the throes of another dramatic trend reversal. Maybe stocks have already entered a bear market and gold has entered a bull market. Wouldn’t that be funny?
– "There’s an old Wall Street adage that says, ‘Put 10 percent of your assets into gold and hope it doesn’t work,’" says James Vail, manager of the Pilgrim Precious Metals Fund.
– These days, most investors put zero percent of their assets in gold because they are CERTAIN it won’t work.
– This entrenched bearish sentiment is a propitious contrary indicator, private investor Kevin Duffy told me yesterday.
– "My favorite intermediate-term contrary indicator on gold is warming up," says Duffy. "The assets in the Rydex Precious Metals Fund have ranged from about $25 million to $90 million the past two years. Assets are back down to $44.1 million, towards the low end. Yet the fund’s NAV is just 8% off its recent high and up 65% from its low of late 2000. Obviously, the 22-year bear market has conditioned investors to sell rallies – that’s very bullish. Meanwhile, just 1.25% of total "sector fund" assets are gold-oriented – only $2.2 billion worth. By comparison, tech and telecom funds hold $70.6 billion, or 39.7% of all sector fund assets.
– Duffy concludes, "We’re still in the top of the first inning on the gold rally."
Back in Paris…
*** "Generally, we can find one overriding idea in every major cycle," writes Joe Granville. "This is when virtually everyone is brainwashed into total agreement on one thing. In this case, virtually everybody is looking for an economic recovery this year… everybody agrees that a recovery will take place sometime in 2002.
But "the technical indicators are now saying that the anticipated upturn will not take place this year," says Granville, and "since most people don’t have the slightest idea of how to read the language of the market, they will then be counted among the majority – looking for the economic upswing which won’t take place."
*** Speaking of language… "Let’s get some sarnies," said one of my English associates.
"He was skint," said another.
"When you’re on the coal face… " began a sentence.
""A cracking idea… " concluded a conversation.
When did the Brits stop speaking English? I don’t know, but I spent much of yesterday overcoming the language barrier in London. For the benefit of Daily Reckoning readers, I asked for a translation.
"Sarneys" are sandwiches. "Skint" means penniless. Being "on the coal face" is equivalent to being in the trenches… it is where you can’t really see what is going on around you. And a "cracking" idea is a good one.