Lethal, but Not Serious

“The heart has reasons reason cannot reach.”

– Sylvie, quoting Sommeil

Man is badly designed. Not in every particular, but in a few.

That insight comes not as a theoretical point, but as a bit of practical information. Sketching out a man’s internal plumbing on a piece of prescription paper, Dr. Moreau of the staff of the American Hospital’s emergency room revealed a design flaw:

“As you can see,” he explained, with the impatience of a nuclear physicist explaining photons to an orangutan, “it’s bound to cause trouble, sooner or later.”

What a strange thing. The same God or Mother Evolution that built such an exquisite universe seemed to have lost interest when he got to man’s entrails. For there, on the left side of the intestinal tract is a little appendix – with no role except to create problems. And then, down below are various tubes and passages. Had one of them been made just a little more commodious…I would have been spared a visit to the American hospital.

“And look at that,” said Dr. Moreau, holding up an x-ray as if it were an aerial photo of the Hindu Kush, “you’re going to have trouble here.” He was pointing to the range of lower vertebra. After years of heavy lifting, the cushions between the bones have been worn down.

“You must have lower back pain from time to time,” the doctor noted.

It is not our place to carp and criticize. But, it would have been nice if the manufacturer had installed more durable cartilage in the 1948 models. And more flexible tubing. “But that is the problem,” said my French tutor. “Men are not as you want them to be; they are as they are.”

America’s Wars: War and Peace

What had set Sylvie off was neither my plumbing nor my neglect of the subjunctive, but my thoughts on war and peace.

“Almost every war Americans have ever fought has turned out to be a mistake,” I had told her. I had taken her on a brief tour of American military history. Every war had its “reasons”, but they were all absurd. What good did the American Revolution accomplish, I wondered aloud, when all of Britain’s other colonies negotiated their way to independence and were no worse off for it? What about the War Between the States? If it was fought to get rid of slavery, it was a poor way to do it. Slavery disappeared from the rest of the world with hardly a single fatality. Or, if it was fought to “Preserve the Union”, it was a fraud; the union was founded on the principle that people could decide for themselves what government they wanted to plunder them.

“As for the Spanish American war, who knows why it was fought…and who cares?

“And the first World War…

“Well, at least you had a good reason for that one…” Sylvie interrupted, “to come to our aid…”

America’s Wars: Leading up to WWII

“Yes, but what was the point? If America hadn’t pumped in so much money and war material and then soldiers, the war probably would have ended sooner. And much better. Both sides were nearly exhausted. They would have had to negotiate an end to the war. But America’s entry gave the Allies ammunition and the Germans targets. America encouraged the British and French to believe they could win the war, so they wouldn’t have to accept a negotiated settlement. So, the war continued until Germany finally capitulated. But it was Germany’s defeat…and the terms imposed on her by the allies…that led to hyperinflation in Germany, the rise of the Nazis, World War II and the Holocaust…

“The average American could not have cared less about the Archduke Ferdinand. He had no idea who Ferdinand was…or where he stood in the pecking order of European politics. He was as ignorant of the Austro-Hungarian Empire as he was of the contents of Austrian sausages. An American of sound mind and decent judgment would have just as soon seen the Archduke stuffed and used as a parlor ornament as revenged.

“But once stirred up by the press – and the big idea of ‘making the world safe for democracy’ – he was ready to enlist and get himself blown up believing that he was protecting Western civilization from the invading Huns.

“World War II was an exception, from a U.S. point of view,” I continued. “America was actually attacked. Both Japan and Germany declared war on the U.S. It made sense to fight back. But for the people who started the war – the Germans and Japanese – it was a complete disaster. It would be hard to imagine a more foolish course of action. Both the nations who caused the war were completely ruined by it.”

Sylvie had sat quietly through this rant – merely correcting my grammar as necessary. But now she calmly replied:

“You’re right, of course. War doesn’t make much sense. But so what? Who ever said it had to?”

America’s Wars: Norman Angell

Meanwhile, Philippe Simonnot explains the failure of economists’ logic as a series of “errors”. In previous letters, we’ve described the first major error of the 20th century: in 1910, Norman Angell, who later won a Nobel Peace Prize, had convinced many of the world’s leading intellectuals that war was a thing of the past. His argument was reasonable, logical…and of course, ridiculous.

But you, dear reader, are already in on the secret – reason is no rampart against imbecility. Man, with his power of reason, is badly designed. Since he is able to reason, he imagines that the world – and he himself – acts the way he thinks reasonable. As often as not, reason merely leads him into absurdity.

Simonnot is working his way through economists’ major errors, and has a long way to go. The second one of the century came just 4 years after the first: “War is costly, therefore it will be short.”

“The Germans want to crush the French as quickly as possible,” he writes, “so they can turn their attentions to the Russians. The Austrians want to get rid of the Serbians as fast as they can so they can turn to face the Cossacks. The Russians must get to the front as soon as possible so they can relieve France. And the French prepare to launch their offensive in Lorraine at the first opportunity. Everyone believes that speed is the key to success.”

“Our soldiers leave and leave gaily,” reported the Figaro of August 2nd, 1914. “They know where they’re going.”

America’s Wars: Done Quickly

“We’ll be back…it will be over quickly,” the Poilus told a reporter from Le Temps.

It was widely believed that, like a barroom brawl, the war would be quick and violent. There was no time to wait…no time to think…no time to second-guess. It was time to throw a punch.

The French commander Joffre believed in “the offensive at all costs”. Why not? The war would be over quickly; why hold back? Colonel Grandmaison explained that “in the offensive, imprudence is the greatest safeguard”.

The logic was impeccable. If the war was to be swiftly decided, the winner would be the one who brought to bear the greatest force of arms the most quickly. Holding back could be fatal.

Colonel Grandmaison was a real thinker. But his thinking couldn’t make the world behave as he thought it should. The war continued for 4 long years, with the outcome finally determined not by the initial attacks, but by what was held in reserve: manpower, material, and money.

Grandmaison’s brain had a design flaw – like all human brains. In his case, it may have been a fatal defect. He was killed in one of the first battles of the war, at Reims.

Surely, on some forgotten monument in some forgotten burg somewhere in France, you will find Grandmaison’s name among the “A Nos Héros…Mort Pour La France”.

Perhaps someone has inscribed a parenthetic remark: Colonel Grandmaison: An imbecile…but a smart one…faithfully imprudent to the very end.

Bill Bonner
April 9, 2003



That is what moves markets. Not what is going on today…but what investors fear or hope for tomorrow.

Expectations move mass politics, too. People become fearful about what the future holds and want to ‘do something about it’. But the currents of expectation are often so deep that people are unaware of them. They think they are buying stocks, for example, because they have made some rational analysis of the stock market…but, in fact, some hidden fear is driving them to it, such as the fear of missing out and feeling like a schmuck when everybody else is getting rich.

Whatever investors say to pollsters, the deep current of expectation in America today is still very warm towards stocks….and war. You have only to check the P/E ratios…and the headlines.

Fortune Magazine reports that profits of the Fortune 500 dropped 66% last year – to levels not seen since 10 years ago. And for only the 6th time since 1955, revenues for the group fell too. An investor who bought the whole group of America’s largest and finest companies would have earned only a 1% return on his money!

It is mad, of course…and only explained, not by logic or reason, but by the persistence of bullish expectations…

Meanwhile, retail sales continue to decline…even as consumer credit climbs. Non-mortgage credit rose $1.5 billion in February, while mortgage debt reached 74% of aggregate disposable income…compared to only 59% 10 years ago.

Americans have deep and inexplicable expectations about the war, too. Militarily, there was never any doubt that they could kick the butts of their one-legged opponents. As we see now, Saddam’s power had reached bubble proportions in the public’s mind…Once pricked by American tanks, it deflated faster than the Nasdaq (more below).

But the deep currents of expectation run far beneath the obvious. Americans seem to feel that the war is more than a military adventure…that somehow, it represents America’s ability to control events…and to not only see into the future, but to improve upon it. And if the commander in chief could do for our safety…could he not also do it for our prosperity? Again, there was nothing logical or reasonable about it…but the deep currents of mass sentiments need no proof, no justification; they are expressions of hopes and fears that do not go away, but drag the public along, submerged and unconscious…

So now what? Will the stock market rally sharply…and a new economic boom begin…now that the war is over? Or is the future unknowable and uncontrollable, after all?

We will see…


Eric Fry, with more thoughts from New York:

– Is he dead or is he alive?…We are referring, of course, to Mr. Market. Although he showed tentative signs of life yesterday, many investors may have felt the urge to hold a mirror to his nostrils. The Dow Jones Industrial Average slipped one point to 8,299 and the Nasdaq nodded 7 points lower to 1,393.

– Yesterday’s stock market inaction suggests that investors are starting to “come down” from their “Baghdad buzz”. Now that the high produced by exhilarating battlefield headlines is fading, investors must resume looking at the somewhat less thrilling economic headlines crossing the newswires each day.

– The economy wasn’t terrific before the war. And we doubt that the expensive and distracting Iraqi campaign has done anything to enhance America’s economic prospects. “With our troops facing their final challenge in Iraq – trying to get past security at the newly upgraded Baghdad International Airport – we are soon to discover whether the mushroom cloud of war will lift to reveal an economic spring in full bloom underneath, as universally expected,” writes Stephanie Pomboy of Macro Mavens. “Any recollection that we were in recession before [the war] has been wiped from the general consciousness. Perhaps this simply reflects the advances in stealth weaponry which can now accomplish swift military victory while simultaneously repairing all woes economic.”

– Pomboy is dubious, and so are we. American consumers and corporations have been sitting on their hands for so many months now that they’ve probably gotten used to that posture. Savings rates continue to climb, as business investment continues to slide. The conquest of Baghdad is unlikely to reverse these trends.

– “The economic damage on the home front may only be beginning,” CBS Marketwatch reports, “American businesses and workers are already paying the price through mounting job losses, slumping travel and a parade of companies warning of lower profits. Jittery investors, executives, and customers are only part of the problem. The invasion of Iraq has set off a wave of anti-American sentiment around the world that might well wash on to the balance sheets of U.S.-based multinationals. Well-publicized boycotts of American consumer brands have been called for, or are underway, in the Middle East and Europe.”

– In short, the occupation of Iraq – like moving in with a girlfriend – may create greater difficulties than the ones it promises to solve.

– This just in from the Closed-Door-After-Horse-Already- Out-Of-Stable Department: Audit committees met nearly 50 percent more often last year, according to a Financial Times analysis of regulatory filings by the 30 companies that make up the Dow Jones Industrial Average. “The 24 Dow companies that have already filed their reports on board activity held 177 audit committee meetings last year,” the FT determined, “compared with 119 at the same companies in 2001, an increase of 48 percent.

– “The same analysis of the proxy filings shows most Dow components that did not have a corporate governance committee in 2001 added one last year, or gave that responsibility to an existing committee of directors. At Intel, directors held 10 audit committee meetings last year, compared with three in 2001…The number of audit committee meetings at Boeing, the aircraft manufacturer, doubled to 12 in 2002. The two big U.S. banks – JP Morgan Chase and Citigroup – held 11 audit committee meetings, up from seven and eight meetings respectively in 2001.”

– We suppose that corporate America’s post-facto vigilance is better than none at all. But an ounce of prevention would have been better than a barrage of audit committee meetings AFTER American shareholders have already been fleeced by unscrupulous managements. Furthermore, a ‘meeting’ does not necessarily equate to vigilant oversight. Aren’t most meetings simply cosmetic affairs that permit all the participants to imagine that they are doing something useful, even when they aren’t? After all, after comparing golf scores, how much time actually remains to perform the tedious task of examining financial statements?

– We would wager that one uninterrupted hour spent examining a company’s financials is worth about 10 audit committee meetings. Unfortunately, no amount of time spent auditing financials will make them show the sort of earnings growth required to justify a stock market selling for 30 times earnings.


Back in London…

*** “More like Ceaucescu than Stalin.”

Lord Rees-Mogg was describing the regime that is just now being changed.

America’s military machine seems to have performed more or less as expected. What is unexpected was the incompetence of the enemy. Saddam, it turns out, posed little threat to anyone – except his own people. His army failed to blow up the oil fields…failed to take out the key bridges leading to the capitol…and then failed to mount the house-to- house resistance that was expected of it. From the roofs of apartment buildings, instead of placing snipers with telescopic lenses, he allowed journalists with telescopic lenses.

Saddam was overbought…like Ken Lay or Osama bin Laden…he enjoyed a period of exaggerated fame and fortune…but now the bubble has popped. And now, gradually, the country can slink off of the world’s newspaper headlines and go back to its usual mismanagement, vice and insignificance.

“It looks as though he was greatly over-rated…” Lord Rees-Mogg continued, speaking of Saddam. “He was merely another crackpot dictator with gold taps in the bathroom…

“I have been in favor of the war…I just thought he was so awful to his own citizens that he should be eliminated. But, of course, if you apply that rule to foreign policy generally, I guess we’ll have to attack Zimbabwe next.”

*** Retail sales are still slipping, the Fed reports. Chain store sales are down.

Little surprise! Americans have less to spend. They’re losing jobs…while their fixed costs continue to rise. The cost of operating an automobile, for example, rose 1.5 cents last year – to 51.7 cents.

*** Gold rose slightly yesterday; the dollar fell. If the Bush administration can control the world and its future…it certainly can control the world’s money, right? The dollar had been rising on that expectation. We don’t know, of course…but we would buy some gold now – at today’s low prices – just in case.

Gold is insurance against what you cannot control. For long periods, it is unnecessary. But then, as people begin to believe they have everything under control…something goes wrong and they wish they were insured. How much gold should you own? Richard Russell says 7% to 10% of your assets should be in gold. If things go really wrong…you’ll wish you had more.

*** “More British soldiers have been killed by Americans than by Iraqis,” said a twitty presenter on British TV this morning, challenging a military expert.

“Well, with all these high tech weapons, and so many coalition troops on the ground and in the air, I’m afraid mistakes will be inevitable,” came the incomprehensible reply.