Lethal, But Not Serious

“The heart has reasons reason cannot reach.”

Sylvie, quoting someone

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.”

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…”

“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. Americans 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?”

Meanwhile, Philippe Simonnot explains the failure of economists’ logic as a series of “errors.” We described the first major error of the 20th century last Thursday: 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.”

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

It was widely believed that, like a bar-room 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 undefinedlan of 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 Heros …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.

More tomorrow…from your badly designed, but still human, editor…

Bill Bonner
April 8, 2002

Those U.S. consumers! What would the world do without them?!

Someday, we’ll find out. The current account deficit is now at 4.6% of GDP. It’s headed to 6% next years.

“In my view,” writes Stephen Roach, “that seals the fate of the coming reversal in the current account deficit… it’s just a matter of when…”

Then, “the rest of the world will have to figure out how to grow on its own.”

But for the time being, U.S. spenders continue to spend more than they can afford. Consumer debt rose by $7 billion in February.

Much of consumers’ purchasing power – and new debt – has come from mortgage refinancing. Fannie Mae was chartered by Congress to help make home-buying more accessible to low-income Americans. Thanks to Fannie, home financing has become so accessible that fewer and fewer people can actually buy one. Less than one in three Californians can now afford to buy median priced digs. In LA County, for example, the median house sells for $267,000 – up 18.8% in the last year.

Eric, what’s up in the stock market?


Eric Fry, our man on Wall Street:

– Bad Feng Shui…That’s got to be the reason stocks are having such a rough time lately. Apparently, too many “south-facing” earnings reports from the tech sector are upsetting Mr. Market’s ch’i – or life-force.

– As the Daily Reckoning noted two weeks, many of the stock market sentiment indicators had become bullish in the extreme, which often means a sell-off is coming. These indicators were arrayed in such a way that the forces of “negative energy” seemed all but certain to throw Mr. Market’s yin and yang out of whack.

– And so it has come to pass. The Nasdaq tumbled more than 4% last week to 1,770, while the Dow slipped 1.2% to 10,273.

– But while the U.S. stock market struggles, the Russian stock market soars. A beneficiary of both an improving economy and a rising oil price, the Russian RTS Index has gained an impressive 34% year-to-date.

– Dan Denning, editor of Strategic Investments , has been urging his subscribers to buy selected Russian stocks since late last summer. Gazprom, a Russian natural gas company, has advanced almost 50% since Dan recommended the stock about seven months ago.

– Dan thinks the Russian Stock market continues to offer an excellent – although somewhat risky – investment opportunity.

– He admits that his recommendation to buy Gazprom “was greeted with skepticism by many readers, and derision by not a few analysts.” Undaunted, Dan says, “I’ve got every reason to believe there is more upside to be had. And not just in Gazprom, but in the entire Russian energy sector.

– “First off, Russia continues to liberalize its economy with remarkable speed…[Russian President] Vladimir Putin announced a much-simplified tax code…Businesses now have a choice of paying either a 20% tax on profits or an 8% tax on revenues…[and] would be able to write off 100% of capital expenditures right away – encouraging new capital investment.

– “What’s going on in Russia is truly astonishing…The Russians are moving faster and farther than anyone else in the world toward creating an equitable tax system which encourages wealth creation.

– “But there are more strategic reasons to be bullish on Russia, namely oil,” says Dan.

– “Russia overtook Saudi Arabia in the month of February as the world’s largest producer,” The New York Times reports, “and its steadily rising output is far beyond the amount the domestic market can absorb.” As a result, many Russian oil companies are trying to expand their market by snapping up pipelines and refineries in Eastern Europe.

– “From a strategic perspective,” Dan winds up, “it’s hard to find a better bet than Russian oil right now.” To be sure, the hostilities in Israel have been lighting a fire under the oil price lately. But it’s interesting to note that the price of oil, like the price of many other commodities, had been rallying strongly well before Israeli tanks rolled into Ramallah.

– “Our enthusiasm for energy stocks is based on [one main] premise,” says Swiss money manager Felix Zulauf. “Oil reserves are depleting at a rate of 6 percent a year, and demand is growing two percent a year. Just to keep reserves even, the industry should find eight percent new reserves per year. That is not happening. Because prices have been low, there is little incentive to find reserves. Oil prices a year from now will be higher – and five years from now will be much higher. That should benefit oil companies with lots of reserves in the ground.”

– If Zulauf is right, oil stocks will provide “positive energy” for investor portfolios. But rising oil prices might upset both the bond market’s yin and the stock market’s yang.

– From BCA Research come these cautionary words: “The recent spike in oil prices is starting to darken the economic outlook.” The spot price for West Texas Intermediate crude has spurted ahead to nearly $28 per barrel last week from about $18 in mid-January.

– BCA notes that the relationship between oil prices and long-term interest rates is very straightforward – a hint: the two tend to move in the same direction. In this context, it matters not at all whether higher demand, reduced supply or irate Arabs cause the oil price to climb. A rising oil price means rising interest rates, and that might suck the life-force right out of the U.S. economy.


Meanwhile, back in the city of light…

*** On Thursday night, Elizabeth and I went to a concert at the church of St. Germain des Pres. It was Mozart’s “Grand Mass,” performed by a huge choir and small orchestra. St. Germain des Pres is a spectacular church…with elaborately painted interior decorations in an almost Orthodox style. The pulpit, for example, looks more suitable for an Ottoman sultan than a sober churchman. It has a little roof of its own – of padded, tufted silk, held aloft by the carved, dark arms of two figures, one on each side, who look as though they may have been eunuchs in a seraglio.

*** “Did you like the performance?” Elizabeth asked as we enjoyed a late dinner at the Brasserie Lipp (one of Hemingway’s favorites) across the street.

*** “Not really,” I replied. “But sitting for an hour and a half on those hard chairs did make me feel superior.”

*** Your editor felt as though he had been struck by a gypsy’s curse on Friday morning. Rushed to the American Hospital in Neuilly, he was relieved to discover that his appendix had not burst…and his problem was nothing more than a design defect…potentially lethal, but not serious…more below…

The Daily Reckoning