It's the War, Stupid

In the last year, there has been a lot of market comment on how the stock market rebounds after crises. Most of the charts show how much stocks rise after 60 days. I recently gathered up the weekly index numbers from our four most recent wars to see what really happened.

The market does not simply “rebound” after a crises that leads to war. It goes straight into an uphill ramp that would support a Mack truck.

The shorter the war, the better it is. Only Vietnam’s rise was subdued – but it is hard to pinpoint when that war really began as “advisors” became soldiers and peace talks preceded troop withdrawals. We can expect the market to rise this time, too.

It doesn’t have to happen, but there’s nothing in the economy standing in the way. Only problems of the kind we’ve fixed before. It’s not the threat of war that has the market down – it’s the delay that is keeping the bull at bay. In fact, I would go so far as to say that you can thank Washington for unplugging the November rally.

Wartime Economy: Looks Like a Big Problem

Of course, by suggesting “war” is the problem, I’m opening myself to a flood of criticism from all the “deep thinkers” out there who are convinced that there is a deeper crisis brewing in the economy, and a pending invasion of Iraq couldn’t possibly have any effect on the markets.

Unfortunately for the brilliant, sometimes, what looks like the big problem IS the big problem.

Up to this point, about the only people to benefit from all this saber rattling so far live in Akron, Ohio. That’s where most of the nation’s supply of duct tape is made. After Tom Ridge’s jerrybuilt Department of Homeland Security scared everyone from New York to Charleston with a code orange terror alert, and then suggested buying duct tape and plastic to create a ‘secure room’, you couldn’t find enough silver stuff on the whole East Coast to repair a hangnail.

That’s the silly side of the PR run-up to this war the president wants so badly. By now, the whole country suspects that even if Saddam Hussein volunteered to retire to a nunnery in Siberia, the White House would still find a reason to attack Iraq.

What is serious about this threat from the Middle East has been made silly in the PR process. On the truly serious side, there are several healthy young men and women who may be living their last weeks now. They may have to fight. I wish this gung-ho administration would mention the cost, but it won’t. The Bush daughters won’t be in Iraq, so the heck with other people’s kids.

Wartime Economy: A Small-Time Thug

Don’t get me wrong…I’m no softie on Hussein, and certainly no admirer. Possibly war is necessary. I am skeptical, because I doubt we’re likely to get anything resembling “truth” from the likes of Defense Secretary Donald Rumsfeld and Homeland Security’s Tom Ridge. Even if these two knew it, why would they want “us” to know it, too?

Hussein is a small-time thug compared to Pol Pot, Idi Amin, or Kim Jong Il. All of whom got “get out of jail free” cards from US administrations. Robert Taylor is about equal to Hussein in the number of political murders committed. Can’t place the name? Taylor’s that guy in Liberia.

As for the nuclear threat…We’re more likely to be hit by some of the lost materiel from the former U.S.S.R. that has fallen to Russian Mafiosi. Pakistan and North Korea are miles ahead of Iraq in nuclear power and about 1000 times more scary.

The problem with the market right now IS Iraq…or more accurately, the very successful PR campaign to keep war talk in the news. It’s not the economy.

This may come as a shock to Daily Reckoning readers, but not one significant bit of market-driving economic news has worsened since November. Far from it. Capital spending is rising; durable goods orders and shipments are up. The inventory overhang is down. Savings are up. Nobody has raised interest rates. Foreign investments in stocks grew another $100 billion last quarter (although direct investment in factories and real estate is down). The GDP is up.

Wartime Economy: It’s the War

Altogether, most of the news is a bit better these days. I’ll admit that the trade deficit is bad and the current account deficit is very bad. But I can assure you, Joe Sixpack doesn’t know any of this. He’s not cutting back on his 401(k) contributions because of the current account deficit.

And yes, the dollar’s weaker. But that’s not even bad news. It’s just what American farmers and manufacturers were praying for a year ago. A little more of this and the trade balance and the current account deficit will self-cure. The last time the dollar weakened, the economy did very well.

It’s not the economy. It’s the war.

Anyone who says otherwise is trying to be clever or got it backwards. The economy doesn’t predict the market…the market is better at predicting the economy six months ahead. And it’s a so-so fit at that.

As an investor, you can skip the economic news if you want to know what’s up with the market. The only question of consequence right now is, “when does the war start?”


Lynn Carpenter
for The Daily Reckoning
March 5, 2003


“Mauve Alert.”

We were so impressed with the administration’s color-coded anti-terrorism system (more below), we decided to make more use of the light spectrum ourselves.

We might have chosen black or blue, which would have been more in keeping with our expectations, but we’re trying to be less depressing. So, today is mauve. Which is not as dangerous as fuchsia but a lot more treacherous than, say, chartreuse.

The reasons for our alarm are many. Yesterday, the Dow reached its lowest level so far this year, tripping Dow Theory sell signals. We are in the second phase of a major bear market, we believe. By fits and starts, stock prices work their way to lower – until they finally reach attractive levels…and people finally give up on them. We don’t know any more than the Bush administration – but we feel a fit coming on…

Normally, this part of the year is the most bullish season. Stocks typically rise in the winter and ease off in the summer. “Go away in May,” has been good advice on Wall Street for several generations.

But instead of rising, the Dow is falling. So is consumer confidence. And consumer spending. And employment. And bond yields. And auto sales. And homebuilding stocks. (Kaufman & Broad fell $2.87 yesterday…Lennar dropped $4.) And the dollar.

Meanwhile, we approach a war…and what could be the biggest economic setback in U.S. history…the End-of-the- world-as-we-have-known-it…when the dollar collapses and foreigners stop financing America’s deficits. All of a sudden, Americans would have to do their own saving…and the economy would sink into a deep, prolonged slump, possibly aggravated by long, drawn-out, costly military adventures in the Middle East.

Oops…that doesn’t sound very up-beat, does it? But won’t it be a delight when what ought to happen does happen? And yes, it is a mess when Humpty-Dumpty falls off the wall, but is it not also amusing?

Michael O’Higgins is looking for a depression to begin soon…or to be already in progress. “Perhaps the greatest deflation and depression of all time,” he told the Miami Herald over the weekend. O’Higgins, author of “Dogs of the Dow,” predicted 3 years ago that stocks would lose half their value. Since then, the S&P 500 has fallen 41%. Now, he says, the damage is far from over. It could be worse than the period ’29-’31, he continued, as today’s depression would come “following the greatest speculative boom…of all time.”

“The hangover may prove to be proportional to the binge,” adds Warren Buffett.

So what do you do when you get a “Mauve Alert”? You move to gold, says O’Higgins, “because it’s real money; because it has held its value for thousands of years, because it’s not subject to manipulation by government or central bankers or dishonest corporate executives.”

Even during the Great Depression, ’29-’39, gold rose 69%. O’Higgins reportedly owns only one stock: Newmont Mining.

Over to you, Eric…


Eric Fry, reporting from New York…

– The stock market stumbled again yesterday, as the Dow fell 133 points to 7,705 – a new closing low for 2003. The Nasdaq slipped about 1% to 1,308. The hapless greenback, meanwhile, fell to a new four-year low of $1.092 against the euro. Bad news for stocks yesterday was good news for the “safe havens” – gold and Treasury bonds. The yellow metal gained $4.00 to $353.30 an ounce, while the 10-year Treasury rallied to push its yield down to a 5-month low of 3.64%.

– Stocks fell for many reasons, but no reason in particular. A bomb blast in the Philippines, dour words about the U.S. stock market from Warren Buffett and continuing Iraqi war jitters all conspired to drag the market lower. The Oracle of Omaha’s annual letter to Berkshire Hathaway shareholders flatly states: “Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us.” (If memory serves, we’ve expressed a similar sentiment once or twice before in the Daily Reckoning.)

– Housing stocks were among yesterday’s conspicuously large losers. The S&P Homebuilding Index tumbled seven percent, notwithstanding the fact that the Chairman of the Federal Reserve was busily assuring a group of bankers in Florida that there is no housing bubble in the U.S.

– “The very large flows of mortgage funds over the past two years have been described by some analysts as possibly symptomatic of an emerging housing bubble, not unlike the stock market bubble whose bursting wreaked considerable distress in recent years,” Greenspan explained. “But any analogy to stock market pricing behavior and bubbles is a rather large stretch…

– “Clearly, after their very substantial run-up in recent years, home prices could recede,” the chairman allows. “A sharp decline, the consequences of a bursting bubble, however, seems most unlikely.”

– That’s a relief!…The same government bureaucrat who failed to see the massive stock market bubble while it was sitting in his lap, now confidently assures the nation that the so-called housing bubble is a figment of our collective imaginations. Interestingly, Greenspan does admit that if the housing-bubble-that-does-not-exist were to burst, or merely deflate, trouble would ensue.

– “Even modestly declining home prices would reduce the level of unrealized capital gains and presumably dampen the pace of home equity extraction,” he says. “Home mortgage cash-outs and home equity loan expansion would likely decline in the face of declining home prices…The frenetic pace of home-equity extraction last year is likely to appreciably simmer down in 2003, possibly notably lessening support to household purchases of goods and services.”

– Should we be worried about a housing bubble? Most of God’s creatures never worry about such things. They don’t worry about the market value of their dwelling places. “The birds of the air,” to borrow from St. Matthew’s gospel, “do not sow; neither do they reap, nor gather into barns,” nor do they worry about how well their nests would appraise against a set of bird-nest “comps”. Then again, the birds of the air don’t have to worry about getting a cash-out refi mortgage in order to buy a big-screen TV. Only Man wrestles with such anxiety-inducing issues, especially when Man is desperate for cash.

– Happily, for the past several years, the strong housing market has been allaying some of Man’s financial anxieties. Thanks to plummeting long-term interest rates and the ready availability of “cash-out” mortgages, homo erectus consumerus has been able to continue accessing money that does not belong to him in order to continue buying things he doesn’t need.

– But the robust housing market is showing some mild signs of weakness. For one thing, within the Conference Board’s recent consumer confidence survey, only 1% of respondents said they plan to buy a house in the next six months. That’s down 20% from the 1.2% who said in December that they were planning to buy a house. Furthermore, the inventory of homes for sale is inching higher, while home prices are slipping lower. The average national home price has slipped about 3% since the middle of last year.

– These data are not terribly troubling just yet, but they bear watching, housing bubble or no.


Back in Paris…

*** Darn. The price of gold jumped yesterday. We got our coin order in time to catch the recent low, but we were hoping to buy more.

*** Maybe gold will go nowhere, of course. Maybe it will even fall in price. But what do we care? We buy it for insurance. No one complains that his wife doesn’t get to cash in his life insurance policy. Likewise, if the price of gold doesn’t go up…then, the U.S. economy has not gone to hell. We still have our jobs…our homes…our piggy SUVs…our snobby wines…

*** Your editor will still have his Savile Row jacket too. He picked it up, finally, from his London tailor on a recent trip. It looks great…well, at least as good as a jacket he could have gotten at Brooks Brothers for a third the price. But now he will treasure it…maybe he will take out an insurance policy on it…or put it in a safety deposit box – for it is too precious to wear. Or else, he will wear it every day, in order to get his money’s worth.

*** “Dad, it looks dorky,” was the judgment of his 9-year- old.

*** “Veddy, veddy English,” came the verdict of his model daughter. “Too bad…”

*** In addition to the thousands and thousands of county and municipal police, security guards, state troopers, FBI, BATF, CIA, NSA, Secret Service, airport security, highway patrol, Coast Guard, Marines, Navy, Air Force, Army, Special Forces, and cross-walk guards…now the Department of Homeland Security is officially open for business. We feel so much safer; for every scrawny terrorist hidden in the caves of Afghanistan, there are now at least 10,000 more fat derrières right out in the open – in cushy office chairs spread across the nation.

The Daily Reckoning