More Clashing Of Civilizations

“After 50 years of market ascendancy, government may be
poised to reclaim its role as an integral and admirable
part of American life.”

This hopeful sentiment, from Harvard professor John D.
Donahue writing in the International Herald Tribune,
shouts from almost all of America’s editorial pages
since September 11.

The era of big government, they say, is just beginning.

Here at the Daily Reckoning, we had not noticed that it
ever ended. But since the attacks of September 11, the
partisans of politics and war-mongering have come out
into broad daylight…giving their advice for a better
world, without apology.

Thomas L. Friedman tells the entire Islamic world that
it needs an attitude adjustment…an “enlightenment,” he
calls it.

Philip Bowring tells India not to “Teach Pakistan a

And now that the Taliban has been roughed up and kicked
out of power in Afghanistan, there is no shortage of
advice to the U.S. government on what to do next.

Various editorialists – including Gordon Brown,
Britain’s Chancellor of the Exchequer – have explained
why billions in “development funds” should be sprinkled
over Afghanistan because, they say, poverty is the
“breeding ground” for terrorism. (It has apparently gone
unnoticed that the terrorists – including Osama himself
– are usually well-educated, well-off people with every
opportunity the world can offer. But that is the nice
thing about political ideas…they can ignore the
specific evidence in favor of the grandiose theory.)

Somalia should be the next target, says one writer. Go
after Iraq, say others.

Yesterday’s Wall Street Journal had this idea from Reuel
Gerecht: “Only a war against Saddam will restore the awe
needed to protect American interests abroad and its
citizens at home.”

Government’s star is rising…inspiring awe!

People seem to like these kinds of ideas. We like them
too…in the way that dogs like fire plugs. And we use
them in the same way too…to relieve ourselves of the
everyday cares of our own lives. We are happy to talk
about big, remote – and usually puerile – ideas if it
takes our minds off the burden of the little ones close
to home.

World politics gives people an opportunity to care about
things so far from home that they look simple. Ignorant
of the details, the nuances, the contradictions and
infinite complexity of the situations…they can form a
sleek opinion, unburdened by anything that comes close
to real knowledge.

How else to explain the popularity of Samuel
Huntington’s “Clash of Civilizations” idea…except as a
distraction from the daily clash at the dinner table?

Huntington, regular Daily Reckoning sufferers will
recall, came up with an alternative to George Bush the
elder’s New World Order concept. Following the collapse
of communism and the end of the “cold war,” Huntington
doubted that there would be the New World Order that
George Bush the elder proclaimed.

Instead, he saw a “clash” between the world’s major
civilizations, mainly between the West and Islam.
Huntington’s notion has such an “us against them”
simplicity, it was bound to be a big hit.

Military historian John Keegan, writing in the Daily
Telegraph, tells us that Huntington’s idea was “widely
discussed, though it was not taken seriously by some.
Since September 11, it has been taken seriously indeed.”

“If I thought Huntington’s view had a defect,” he
continues, aiming to correct it, “it was that he did not
discuss what I think is the crucial ingredient of any
Western-Islamic conflict, their quite distinctively
different ways of making war.”

Westerners fight, he says, “face to face, in stand-up
battle, and go on until one side or the other gives in.
They choose the crudest weapons available, and use them
with appalling violence…

“Orientals, by contrast, shrink from pitched battle,
which they often deride as a sort of game, preferring
ambush, surprise, treachery and deceit as the best way
to overcome an enemy.”

Keegan points to the military traditions of ancient
Greece, where combatants faced off…and marched towards
each other. Compare that, he suggests, to the raiding
horsemen of the Islamic world. Their idea was to strike
suddenly and keep moving. This kind of nomadic warfare
was very difficult for the “settled people” of Europe
and China to resist, says Keegan. And it was only in the
17th century that the Turks, the last of the great
Islamic powers, were finally driven out of Europe; and
then, in 1918, the Ottoman Empire was overthrown. Since
then, Western military force has been unchallenged.

Keegan: “The Oriental tradition, however, had not been
eliminated. It reappeared in a variety of guises,
particularly in the tactics of evasion and retreat
practiced by the Vietcong against the United States in
the Vietnam War. On September 11, 2001 it returned in an
absolutely traditional form. Arabs, appearing suddenly
out of empty space like their desert raider ancestors,
assaulted the heartlands of Western power in a
terrifying surprise raid and did appalling damage.”

Here, again, the “clash of cultures” idea seems
appealing – as long as you don’t ask too many questions.

In what sense was the recent war in Afghanistan a
“stand-up battle?” Who faced whom? What were the
“crudest weapons available?” How come the Japanese
fought like western armies in WWII? If there really is a
clash of civilizations, how come most countries – even
those with predominately Islamic populations – support
the U.S. in Afghanistan? Where does Western Civilization
end…at the Dardenelles…Tel Aviv…or east Baltimore?

But, of course, if you’re going to ask tough questions,
you might as well stay at the dinner table.

Your editor, always asking questions…

Bill Bonner
December 20, 2001

Gold dropped $5 yesterday.

Sooner or later, of course, the 21-year bear
market in gold will come to an end. Of course, so will
the human race. When one finally does turn around…
we’ll be ready.

In the meantime, we are wondering how it could be
that the Fed adds new money and credit at the fastest
pace in it history, but inflation – as measured by
consumer prices – fails to rise.

Gold sees no sign of inflation. And neither does
the bond market. The gap between inflation-indexed bonds
and regular bonds is only 1.48%.

What gives? We don’t have a good answer to that
question for you today, dear reader, so we answer
another familiar one: what good are the Fed’s rate cuts?

“While most economists and analysts have cheered
the Fed’s rapid response,” writes Caroline Baum on
Bloomberg, “the Austrian School of economists thinks
printing money in response to a burst bubble is exactly
the wrong prescription.”

“It was the act of holding interest rates too low
that created a bubble in the first place. The cheap cost
of capital – both equity and debt – produced what the
Austrians call ‘mal-investment,’ wherein capital gets
allocated to projects that wouldn’t be viable except for
cheap financing.

“When the bubble bursts, assets need to re-price.
Holding interest rates too low prevents the necessary
adjustment and delays the cleansing process whereby
certain businesses or industries fail and capital can be
reallocated to more productive ones. Low interest rates
encourage spending at the expense of investment, which
means that the capital stock and economy’s future growth
potential isn’t enhanced.”

“The Fed is encouraging households and businesses
to take on more debt when the economy is already
weakening under an excessive debt burden,” says Paul
Kasriel, director of economic research at the Northern
Trust Corp. in Chicago. “It’s putting off the judgment

In short, if cheap credit caused the problem, how
can cheap credit be the solution? “If printing money
created real wealth, then all the world’s problems would
be answered,” Kasriel says.
(See: The U.S. Economy: Termites In The Foundation

Hmmmn…Let’s see what happened in New York


Eric Fry on the Street…

– Mr. Market has an indomitable spirit, as the CNBC
talking heads never tire of telling us. He’s got
gumption, stick-to-it-iveness and a can-do attitude –
all wrapped into one. And he proved his mettle once
again. Yesterday’s grim news from Motorola and Alcoa
might have halted a lesser market dead in his tracks.

– “After two days of solid gains on hopes that the
darkest hour for the economy and profits had passed, the
market braced for a weak opening Wednesday,” observed
Igor Greenwald of “Motorola and Alcoa
served notice that the longed-for turnaround remains
more of a rumor than a fact in many corporate

– Sure enough, the market opened feebly, with the Dow
falling more than 70 points. But it soon regained its
strength and started chugging higher. By day’s end, the
Dow had gained 72 points to 10,070. The Nasdaq recovered
somewhat from its lows, but still finished 22 points
lower at 1,983.

– Before the market opened for trading on Wednesday,
Motorola, the ever-restructuring maker of cell phones
and microchips, announced that it would slash 9,400 more
jobs from its payroll and that its earnings would fall
well short of the consensus March-quarter estimates.
The main culprit: a 14% sequential drop in revenue.

– Meanwhile, over in Old Economy Land, Alcoa disclosed
that its fourth-quarter earnings would be exactly one-
third of what analysts had forecast.

– If an economic recovery has truly begun, why are so
many blue chip companies “sucking wind”? Alcoa is not
some And yet, it suffers right
along with the corporate riff-raff.

– Continuing the cavalcade of earnings disasters, Gucci
Group NV reported a 51% decline in third-quarter net
income and admitted that it doesn’t expect a recovery in
the luxury-goods market before the second half of 2002.

– Even so, Gucci must feel pretty good about things
compared to its down-market kin, Gap Inc. The retailer,
known for its khaki clothes and too-hip TV ads, issued a
terse press release on Tuesday to try to allay fears
that it faces a growing debt problem. But the release –
a response to the Grant’s Investor report highlighting
Gap’s financial vulnerability – did little to assuage
investor anxieties. All the king’s horses and all the
king’s Wall Street analysts could not restore confidence
in the stock. Gap shares fell another 6% yesterday.

– In response to Gap’s response, Grant’s Investor
maintained, “Gap is flirting with a serious liquidity
problem.” Gap had nothing more to say. But investors

spoke loud and clear…by bailing out of the stock.
– As Gucci’s and Gap’s travails illustrate, the recent
“strong” retail sales might be less than meets the eye.
Moody’s John Lonski points out that retail sales are

fairly lackluster, if one excludes auto sales. Retail
sales “ex-autos” grew only 1% over the three months
ending November. By contrast, during the five years
ending 2000 retail sales growth, ex-autos, was more than

– Perhaps the slowing mortgage refinance activity is
beginning to make its presence felt. The Mortgage
Bankers Association said yesterday that its refinancing
index fell sharply to the lowest level since late

– “What will 2002 be like?” Christopher Byron wonders.
“The upward movement of stocks in December suggests that
many investors believe the economy is now…bottoming
out, and that it is likely to begin a sharp, V-shaped
recovery during the first quarter of 2002.” But Byron
predicts that the current rally “is not likely to
survive the realization…that investors have been far
too optimistic about the strengths and magnitude of the

– Morgan Stanley’s Barton Biggs concurs: “I find the
‘recession is over, love that V, and watch out for Fed
tightening’ to be, shall we say, misguided wishful
thinking…I met with the CEO of one of the premier
industrial companies. He reported that business across a
broad variety of diverse product lines was still
weakening and that pricing power was non-existent.
Margins were being squeezed and profits were under
pressure. He saw no reason as yet to be optimistic about

– Recovery? Yes. Lasting recovery? No. We still favor
the “W-recovery” scenario.


Back to Bill on the rue…

*** Want a high yielding investment? Argentine
government bonds are yielding 41% more than U.S.

*** Lynn Carpenter reports that her investment
recommendations – in the Fleet Street Letter – will be
up 6% this year. Not great. But nearly 20% better than
the S&P.

*** Still, “why should investors risk serious losses for
a measly 6% return,” I asked her.

Her reply: “Why risk the market to make just 6%? Well, I
guess that strikes me like asking why sign up for the
Kentucky Derby if it turns out you’ll run in the mud and
you’ll only win with a slower-than-best time. When you
register for the Derby or the stock market you don’t
know in advance what the weather will be. You don’t know
you’ll only get 6%, and chances are good with value
investing that you’ll get much more.

“Consider 2001: 6% beats all the other choices this
year. Right now you could be buying “safe” 3-month T-
bills for 1.64%. To get better than 5% on U.S.
Treasuries, you have to go out 10 years, and run the
very high risk of losing capital as interest rates go up
again and the resale value of your bond falls. This
year, bond funds averaged 5.4% (Barron’s, Dec. 17, p.
F4)…but only because interest rates fell 11 times, an
unusually good event in the bond world. And remember
that bonds don’t compound. A 6% gain in your stocks
times, say 20% next year, will put you up 27% in two

“A bond that returns 6% a year (probably sub-investment
grade and just as risky or more risky than stocks) would
only return 12% in two years, less than half as much as
you could reasonably expect in value stocks.

“Remember, too, that 6% is about the historic average
after inflation without reinvesting dividends. Even at
that low number, stocks have outperformed bonds
consistently for the last 100 years.

“But as I said, 6% is the bad news, not the usual news
for us. We made a 28% return in FSL for 2000, a year
that was also a bear market. And in 1999, a bull market,
the FSL portfolio had several contributors and styles,
but my value picks returned 44.8%. So…bull or bear,
our value selections have beat the market and bonds
every year.

“Do the math for our results: Gains of 44%, 28% and 5%
in FSL come out to a 93% return in three years. That’s
worth the risk…and it was achievable even when two of
the three years were bad markets. For comparison, in
that period you’d be down about 5% in the Nasdaq and the
S&P 500. So, you’re right…you shouldn’t risk “the
market” for 6% returns…you should invest in carefully
chosen value stocks, not the market, for much better

“Ultimately, my answer is that I think of buying stocks
as owning businesses. You wouldn’t cease to own your
business because the market was down. Not if the future
is a meaningful concept to you. You wouldn’t stop going
to work because the market was down. Instead, you’d try
to be working for the best company or to own and build
the most profitable company. Buying value stocks,
because you emphasize the quality of the underlying
business, and getting it at an attractive price, comes
to the same thing.”