Pearl Harbor

In honor of the national day of remembrance we celebrated this past Saturday, we bring you a DR Classique, originally aired on December 7, 2001.


“We play with fire. We play with war. And then, fire and war blow up on us. America, until now, enjoyed the luxury of watching things from a distance. It offered its advice, lavishly…its homilies…its encouragement to the ‘little people’ of the world. Now, America is ‘in the bath’ along with the rest of the world. Now we will see. We will see if America is really the military, industrial, and social power that it claims to be. We’re going to see if ‘America’ really exists. Because it is no longer a matter of preaching, while taking orders and grabbing market share. It’s no longer a matter of exhorting others to acts of heroism. Now, America must fight. And send Americans to risk their skins. Things have changed. We’re going to see…”

– Marcel Deat, writing in the
collaborationist French
newspaper, “L’Oeuvre”,
9 December 1941

Mr. Deat sounded skeptical.

My father wondered, too. The morning of December 7th, 60 years ago today, was a rude awakening for him. After a late Saturday night on the town…his head must have throbbed early Sunday morning. It was as if there were bombs going off, he must have thought…then, his eyes must have opened with a start; bombs really were exploding!

“All I remember is confusion,” he once told me. “We didn’t know what was going on. All I knew we knew was that we were under attack. We thought the Japs were going to land troops, so we got our rifles and got ready to fight back. Thank God, they didn’t try to take Pearl Harbor. We were so disorganized, it was pathetic.”

Disorganized, unprepared…America put aside its confusion and was soon fighting back. By dumb luck, perhaps, none of America’s 3 Pearl-based aircraft carriers were in the harbor that morning. The Japanese hoped to put the U.S. Pacific fleet out of service for 18 months. But within just 60 days, U.S. forces were back in action. My father and thousands of other Americans had the pleasure of an extended tour of the South Pacific, courtesy of the U.S. Army. Maybe they were not the battle-hardened fighters of the Third Reich – with strong military traditions, iron discipline, and years of painful experience. But when the chips were down in 1941, they did their duty…sometimes well, sometimes not-so-well…

When Pearl Harbor was bombed, Americans knew the “luxury of watching things from a distance” would no longer be possible. Unlike the patriots of 2001, they prepared for sacrifice, not self-indulgence. They braced themselves for hardships and losses. Rather than buy a new Packard, they were likely to put the old one in the garage and walk to work. Gasoline was rationed. So was almost everything else. Stocks fell to a level never seen before – and changed hands for just 6 times earnings. Things had changed; America was “in the bath” with everyone else.

Men do stupid things regularly and mad things occasionally. And sometimes, the impulse to self-destruction is so overwhelming it overtakes an entire nation.

It is almost always madness to buy stocks at the peak of a bull market…or to buy a stock at 50 times earnings. (Note: currently, [in December 2001] , tech stocks in the U.S. are selling at an average P/E of 50 based on next year’s earnings!) Ruin may not come quickly – as stocks may rise further. But it comes eventually.

The best a person can hope for when he goes mad is that he runs into a brick wall quickly…before he has a chance to build up speed. That is why success, in war and investing, is often a greater menace than failure.

My father did not realize it at the time, but he was witness to one of the stupidest, maddest acts in all of history. The Japanese had embarked on a campaign of conquest. Rampaging through China and Indochina, they found success easy. Encouraged, they sought to extend Japanese hegemony, by force of arms, throughout Southeast Asia.

“What was the point of the military expansion?,” you may ask.

“To secure vital resources – oil, rubber, metals,” comes the answer.

“Why did Japan need so many raw materials?”

“To supply its military expansion!”

The Japanese have little in the way of raw materials. They could buy them on the open market. But in the politicized world of the 20th century, markets seemed unreliable. What if producers decided not to sell?

The idea was absurd. Why would producers not sell, when it was in their interest to do so? In fact, the only reason they did not sell was to try to cripple Japanese military expansion! Thus did the Roosevelt Administration, in early 1941, cut off vital supplies – especially oil – to the Japanese war machine.

What were the Japanese to do? For nearly 10 years, they had been “on a roll” of military success. Were they not entitled to believe that their stock would always rise?

“The grandiose mood of the fascist powers in which no conquest seemed impossible, must be taken into account,” writes Barbara Tuchman in her “March of Folly.” “Japan had mobilized a military will of terrible force, which was in fact to accomplish extraordinary triumphs…”

But attacking Pearl Harbor was a big risk. The Japanese knew what they were up against – a country far larger and with far more resources than their own. Admiral Yamamoto had attended Harvard and spent years in Washington as a naval attaché. Even so, he was no fool…he knew that Japan could not endure a long contest with the U.S. “I have utterly no confidence for the second or the year,” he told Premier Konoye.

Why did they do it? Why did they take “a gamble that, in the long run…,” Tuchman asks, “was almost sure to be lost?”

“Fundamentally, the reason Japan took the risk,” Tuchman answers her own question, “was that she had either to go forward or content herself with the status quo, which no one was willing or could politically afford to suggest. Over a generation, pressure from the aggressive army in China and from its partisans at home had fused Japan to the goal of an impossible empire from which she could not now retreat. She had become a prisoner of her oversize ambitions.”

How much better off the Japanese would have been if they had been beaten in China! They could have gone back to their island, renounced the Tripartite Treaty with Germany and Italy…and they could have “taken the orders and grabbed market share” – selling tanks, planes and ships to other combatants. Instead, a long string of battlefield successes led to one of the biggest strategic blunders of all time…and ultimately to complete ruin for Japan and her economy.

Before the attack on Pearl Harbor, Americans were deeply divided on the war. Most wanted nothing to do with it. Congress passed a one-year draft law by a single vote just months before the attack. Japan could have conquered any Dutch, British or French colonial territory in the Far East…without risking war with America. Of all the things Japan might have done, it chose the worst possible course of action. It did the one thing – and probably the only thing – that would bring America into the war as an active, determined combatant.

Admiral Yamamoto recognized his error almost immediately. “I feel that we have awakened a sleeping giant and instilled in him a terrible resolve,” he said. Churchill was ecstatic: “To have the United States at our side was to me the greatest joy. Now at this very moment I knew the United States was in the war, up to the neck and in to the death. So we had won after all! Hitler’s fate was sealed. Mussolini’s fate was sealed. As for the Japanese, they would be ground to powder.”

Twelve days later – on December 17th – Germans proved that they were at least as mad as the Japanese: Hitler declared war on America. He could have left the Japanese to their folly. Instead, in less than two weeks, the Tripartite Powers had managed to turn the war against themselves, by provoking the wrath of the world’s largest economy. America, protected by two oceans, could turn out jeeps, tanks, planes and c-rations faster than anyone. It could put millions of troops in the field, fully equipped, and bring to bear more bombs against a target than any nation ever.

But in 1941, Axis military power had been in a bull market for nearly a decade. People don’t think clearly in a bull market. And their imaginations are dull. They can only see ahead of them what they’ve just experienced. It wasn’t until the battles of Midway and Stalingrad, both in 1942, that Axis power peaked out. Then, the thinking began and imaginations began to work again. But by then, it was too late.

“When we realized what had happened,” said my father many years after the fact, “all I remember thinking was that it would be a long time before I got home…if I got home at all.”

He did get home, of course, three years later…

Your correspondent,

Bill Bonner
December 9, 2002

Whoa, what this?

Instead of dropping, as reported early last week, unemployment actually seems to be going up. (Eric has more details, below…)

Among those losing jobs were the nation’s Treasury Secretary, Paul O’Neil, and economic advisor, Lawrence Lindsay. Here at the Daily Reckoning, we’ll miss both of them…O’Neill because he was such fun to listen to, and Lindsay because…well…it was just fun to look at him.

When he took the job, O’Neill said that he brought to it the same zest for EXCELLENCE that had marked his whole career. We felt sorry for him; he was hopelessly out-of- sync. For, following the great boom and bubble of the late ’90s, what the nation’s economy needed was not excellence, but mediocrity. Things would regress to the mean whether O’Neill wanted them to or not, we guessed…including his own career.

But the process is neither sure nor steady. One day, the excellent trends look eternal: stocks look like they might stay expensive forever…consumers seem willing to continue spending more than they earn…and Treasury Secretaries and central bankers look like geniuses.

But then, the very next day….the millstones of history begin grinding again…reducing everything – reputations, stock P/Es, and consumer balance sheets – to fine powder. ‘Dust to dust’ is the way of the world.

Consumers are still spending – but latest sales figures show they may be hesitating. Even zero-percent financing cannot seem to lure them behind the wheel of a new SUV. But house prices are still rising…and who can blame them for wanting to get in on the action? Household net worth is falling at an annual rate of $1.8 trillion, says the Fed. But mortgage debt is rising at nearly 13% per year – 4 times as fast as the growth of the economy, personal income, and inflation. That too, must sink towards mediocrity…but when?

CNN warns refinancers to watch out for the “dirty secrets” of the mortgage industry. Consumers, so eager to reduce monthly payments, are being seduced into “negative amortization” loans – where their payments don’t even cover the interest. The principal grows even though the homeowner takes out no more cash.

Other dirty secrets will come to light, we suspect, when the refi bubble finally pops. But mostly, people will wonder what they were thinking. Why did they add to their mortgages when they should have been paying them off? Why did they buy stocks when they should have been selling them?

And then, when the secrets are out…when the P/Es have collapsed…when yesterday’s excellent CEOs and maestro central bankers have become scoundrels and incompetents…mediocrity will be popular, once again.

Here at the Daily Reckoning, mediocrity is always in style. While we aim for excellence in cheese and liquor, it is the mean, the normal, the ordinary that we look for in stocks, business and politics. Not that we especially like things mediocre. We don’t like the idea of dying either…but we’ve noticed that that is the way things work.

Eric, over to you…


Eric Fry in Manhattan…

– Wall Street’s winning streak came screeching to a halt last week. The Dow’s eight straight weeks of gains would not become nine…Far from it. Although the blue chips scaled through the 9,000-level on Monday morning, they spent the rest of the week rappelling to lower elevations. By Friday’s close, the Dow had slipped 250 points to 8,645. The Nasdaq fared even worse, dropping nearly 4% to 1,422.

– While stocks tumbled, the unpleasant smell of a struggling economy hung over Wall Street like the stench of two-week old shrimp. The foulest odor of all seemed to issue from Friday’s abysmal employment report. The unemployment rate spiked to 6% from October’s 5.7%, as the economy lost 40,000 jobs.

– Meantime, Challenger, Gray & Christmas reports that in the past three months, America’s employers have announced a whopping 400,000 job cuts, boosting the total for 2002 to 1.3 million announced job losses. Given these shocking employment trends, it should come as no shock at all that a record 1.55 million Americans filed for bankruptcy protection in the 12 months ended Sept. 30 – that’s up 7.7% from the same period a year ago.

– If the economy were recovering as nicely as Wall Street’s fully employed strategists say it is, shouldn’t we expect to see the unemployment rate fall? Something’s wrong with this picture…

– “The wobbly economy and the woeful job picture are two big reasons why we’re convinced that the sharp rise in equity prices these past two months is nothing more than a bear-market rally,” remarks Alan Abelson in today’s Barron’s. “But disturbing fundamentals aside, what bothers us about the market is the incipient return of bubble mentality…the last vestiges of that fantasy era are still to be exorcised, the excesses of the most fervid speculative boom in history are still to be completely purged…

– While The Daily Reckoning weighed in all week with articulate, but irrelevant, opinions about inflation, the gold market weighed in with its inarticulate, but relevant, opinion. The yellow metal isn’t much of a talker, but it can paint some very interesting pictures. And right now, the picture it paints is inflationary. Gold posted gains every day last week, as it climbed more than $9.00 to $327.10 an ounce…Suddenly, things are becoming very interesting in the gold market.

– Let’s bid farewell to Treasury Secretary Paul O’Neill. We will miss his charm, his wit and above all, his poignant macroeconomic insights…like the time he observed, “The best way to alleviate poverty is to increase people’s incomes.”

– During his brief stint at the Treasury Department, O’Neill was not so much ineffectual as he was invisible…except when he opened his mouth. As Jim Grant observed about a year and a half ago, “The secretary has shocked the press with his candor and plain speech. Though harshly criticized for some early indiscretions, he has moderated only a little his propensity to call a spade a spade. However, there is this trouble with O’Neill: He is also prone to call a heart a spade, a club a spade and a diamond a spade.”

– From time to time O’Neill would appear in public to make some sort of lamebrain remark about the dollar. But otherwise, he seemed to do very little of anything. We’d like to refer to his bizarre form of monetary stewardship as “benign neglect.” Unfortunately, the dollar commenced a fairly malign downtrend shortly after O’Neill assumed the top spot at Treasury. It’s probably just a coincidence. After all, whatever the man’s shortcomings, he is certainly not to blame for America’s $1.5 billion-per-day foreign capital habit.

– “Frankly, we’re sorry to see Mr. O’Neill go,” writes Alan Abelson. “About the economy he was rarely right, indeed, he didn’t have a clue; but at least he was never in doubt.”


Back in Paris…

*** There is a “glut” of mature workers, say press reports. A few years ago, people dreamed of early retirement. Now they dream of finding some miserable job that they can do until they drop dead. With more and more baby boomers reaching retirement in the years ahead – and few of them with enough moola to retire on – the glut will probably get worse.

*** “He looked terrible…white as a sheet.” Sunday, after church, we got the latest report on our neighbor, who is dying from prostate cancer.

“He’s in the hospital in Poitiers. But they are just giving him pain killers. There’s nothing left to do.”

“How’s the family holding up?”

“Not so well, they didn’t seem to realize how serious it was. You know, for a long time, he didn’t seem so bad. Then, all of a sudden he went into a steep decline. Now they’re in shock. And it’s just terrible…I don’t think he’ll make it until Christmas…”

*** “I’m so sorry to hear about Mr. Laporte,” said your editor’s 81-year-old mother after lunch. Mother and son were enjoying a weekend together in the country – leaving the rest of the family to fend for themselves in Paris.

“That’s why I hate opening my mail. At my age…all I get is bad news. Most of my friends are dead. And those that are left are in and out of hospitals, with all sorts of problems. “But I got some great news today…I’m going to be a great- grandmother again!”

Money isn’t everything, of course. To your editor’s mother, it is nothing at all.

The Daily Reckoning