Rolling Thunder

“The bastards have never been bombed like they’re going to be bombed this time.”

Richard M. Nixon

Some things just don’t work as well as you think they should. Arguing with your wife, for example. Or diet plans. Or hair growth tonic. The rhythm method. Psychotherapy. Momentum investing. Handouts to poor people. Strategic air power.

From the very beginning of aviation, military authorities have had high hopes for the persuasive power of dropping bombs on people. It was assumed that a few tons of high explosives, loosed from a passing airplane, would improve your enemy’s behavior.

In the first World War, planes were still too callow to allow the weight of serious destruction. But by WWII, planes could get off the ground with enough bombs to really teach someone a lesson…or so it was thought. The Germans thought they could bring about a change of attitude in Britain by sending over the Luftwaffe each night and bombing grocery stores and theatres as well as ammunition dumps. They did change attitudes, but not the way they hoped. Instead of softening up, the Brits turned a hard face…and mobilized for war with greater resolve.

When the tide turned in the air, and the god of war floated over to the other side, the British and Americans saw an opportunity for a little attitude adjustment on the continent. They reduced Dresden, Koln, and other German cities to rubble. But a study done after the war showed that even this intense bombing did little to slow the German war machine. Railroads were patched together. Production was shifted from one facility to another. The wheels still turned.

Faith in air power remained. Besides, by the 1960s, the analogies of WWII didn’t seem to apply – especially to non-industrialized nations with no planes of their own. In the digital mind of U.S. defense secretary McNamara, there was no question about whether or not airpower could do the trick, but what amount of bombing it would take. Robert McNamara made his calculations. He approached the issue as though he were a Fed chief with 650 basis points to work with. How far would he have to go – and at what cost – before the enemy gave up, he wondered?

But many people saw the obvious problem. There were few targets in Vietnam against which bombs might be effective. Averill Harriman, returning from a fact- finding mission, warned Kennedy that “we shall replace the French as the colonial force in the area and bleed as the French did.”

By 1964, Kennedy sensed that the war was a losing proposition. He wanted out…but he also sensed an election coming up. “I can’t do it until 1965 – until after I’m re-elected,” said the president. It was “no profile in courage,” comments Barbara Tuchman in “The March of Folly.”

Lyndon Johnson also sensed a problem, but believed he could not “lose” Vietnam to the communists. That would be a stain on his presidency, he believed – a stain darker than a Texas tort lawyer’s heart. “I am not going to be the first U.S. President to lose a war,” he declared.

Charles De Gaulle offered his views, if not his help. America was being drawn into the war on the same illusions as the French 10 years before, he said. The military superiority of a modern nation was useless in a backwater like Vietnam, he noted. It was a “a hopeless place to fight…”; a ” rotten country” that would likely destroy the U.S. army just as it had the French. Instead of fighting, the only way out was negotiation, he advised.

Johnson would have none of it. Undersecretary of State George Ball explained to de Gaulle that “that the U.S. did not believe in negotiating until our position on the battlefield was so strong that our enemies would make concessions.”

This presumed, of course, that the war would go in their favor.

Alas, it did not.

“Reports from Saigon told of progressive crumbling, riots, corruption, anti-American sentiment, neutralist movement by the Buddhists,” writes Tuchman. “I feel,” declared one American official in Saigon, “as though I were on the deck of the Titanic.”

The Johnson Administration decided to raise the stakes. On March 2nd of 1964, a campaign of bombing named “Rolling Thunder” began. And “by April it was apparent that Rolling Thunder was having no visible effect on the enemy’s will to fight,” Tuchman writes. “Bombing of the supply trails in Laos had not prevented infiltration; Viet Cong raids showed no signs of faltering.”

Like another President 36 years later, Johnson decided to bribe as well as bully. More than $1 billion in aid was offered if only North Vietnam would accept U.S.peace terms.

But having taken to the air, America found nowhere to set down. Attitudes in North Vietnam hardened under the bombing. Hanoi announced that it would not negotiate until the bombing was stopped. The U.S. said it would not stop bombing until the Viet Cong stopped fighting. Still, people were as optimistic as investors in a bull market. McNamara, toting up his bombs and trying to quantify war, saw nothing but good coming out of it. It was the kind of war America had to learn to fight, he said, “a limited war…the kind of war we’ll likely be facing for the next fifty years.” And so it was!

The thunder continued to roll. And McNamara continued adding up his figures. A CIA study revealed that each $1 of damage caused to the enemy cost the U.S. $9.60. (Probably a bargain compared to the rate of return on bombing in Afghanistan.) By the end of 1967, the Pentagon had dropped over 1.5 million tons of bombs – already more than the U.S. had used in Europe in all of WWII – and the bombing had scarcely begun.

McNamara was growing uneasy. He didn’t like the numbers. Asked to determine how much damage would have to be inflicted upon Ho Chi Minh’s forces to bring him to stop the war, the CIA came up with an alarming answer: There was no level of bombing or naval action that would be “so intolerable that the war had to be stopped.”

McNamara was a fool. But he was a smart fool. Soon, he had moved on…he resigned from the Pentagon and took his talent for doing dumb things brilliantly to the World Bank.

His replacement, Clark Clifford, quickly came to the same conclusion. He saw that “the course we were pursuing was not only endless but hopeless.” Johnson, realizing that he had been trapped, withdrew from the race for another term. Vietnam had ruined him. But the bombing continued. Richard Nixon took up the illusion – that increasing the pressure on Ho Chi Minh…with more bombs…would cause the old man to give up.

He intensified the bombing attacks and expanded them into Cambodia. Each bomb dropped may be a losing proposition, perhaps he reasoned, but we can make it up on volume!

The French continued to offer the same opinion. It was a “hopeless enterprise,” said Jean Sainteny to Henry Kissinger. That opinion had spread far and wide. The New York Times labeled Nixon’s campaign in Cambodia a “Military Hallucination.” In a rare occurrence, the Times was right.

Widening the war was an act of folly, opines Barbara Tuchman, “designed to bring down trouble upon the perpetrator…the kind of folly to which governments seem irresistibly drawn as if pulled by a mischievous fate to make the gods laugh.”

Nixon knew the war was a hopeless cause. He just wanted to bring the North Vietnamese to the bargaining table in order to win a “peace with honor.” How could he do it? He stepped up the bombing with his “Christmas bombing” campaign – the heaviest of the entire war.

Did Hanoi finally give up? No, Hanoi persevered. Nixon and Kissinger gave up, signing the Geneva Peace Accords on the 27th of January 1973.

The U.S. stock market hit a high on almost that very day…and then fell for the next 21 months, losing half its value. As a percentage of GDP, stocks registered a high of about 90% of GDP in 1968. They did not reach that level again until nearly 30 years later.

Your editor,

Bill Bonner
November 9, 2001

P.S. Writing about the folly of others gives no immunity from foolishness – neither in your editor, nor in Barbara Tuchman.

Your editor’s foolishness is on display regularly, his wife assures him.

Tuchman’s can be found in the second paragraph of the first page of her book. Wondering why people do obviously stupid things she becomes delusional: “Why does American business insist on ‘growth’ when it is demonstrably using up the three basics of life on our planet – land, water and unpolluted air?” Using up the planet’s land and water? She almost makes McNamara and Johnson look sensible.

I just arrived in Paris…overnight from Baltimore. Here’s Eric’s report from New York…


Eric Fry in New York:

– The Fed’s efforts to reflate our sagging economy has, so far, succeeded only in reflating the stock market a bit. That’s not necessarily a bad thing, but the economy itself is still a sick pup. And unless it starts to get well in a hurry, our richly valued stock market might be in for a world of hurt.

– Not to worry though, the Chairman has 200 basis points of magic left with which to work his miracle economic cure. Say, “I believe!”

– Yesterday, the Dow closed up 33 to 9587…the Nasdaq dropped a half percent to 1827.

– Just how feeble is the economic performance that bullish investors are choosing to overlook? Moody’s Investor Service provides a partial response: “In October 2001, the U.S. labor market incurred its worst performance since the 1990-1991 recession. Non-farm payrolls lost 415,000 jobs.” Furthermore, the number of people collecting state unemployment benefits has jumped about 65% from October 2000.

– Obviously, rate cuts don’t buy cars or shoes for the baby, consumers do. Consumers without jobs buy fewer cars and shoes than consumers with jobs. So while we think it’s swell that Intel shares have soared more then 50% in less than two months, we’d sleep a little easier if the unemployment rate stopped climbing like a red-hot tech stock.

– But as Moody’s points out, what we are now witnessing first hand, a sagging labor market, does not automatically prevent a rising stock market. “During the 12 months following July 1982’s wretched showing by the U.S. labor market, the broadest of all stock priceindices surged higher by 39%.”

– Of course, stocks sold for about 8 times earnings back then. But let’s not let that difference get in the way of any bullish inclinations.

– Investors may well be right to load up on stocks well in advance of any visible recovery. I simply question the wisdom of loading up on expensive stocks, even if there is a recovery. [if? How about when.]

– It’s one thing to pay a rich valuation when profits are growing. To pay a rich valuation when they are shrinking, as the are currently, is a strategy best suited for the intrepid or delusional. [how about when profits have all but disappeared?]

– Many investors are returning to the speculations of old like an alcoholic who falls off the wagon returns to a gin and tonic – ravenously. You’d think it was March 2000 all over again. The best performing stocks these days are often the worst performing companies. Investors are so busy rushing to “buy the bottom” that they don’t care how awful the bottom is. [good]

– Greed is back and it’s as popular as ever. Do people want to compound profits slowly but surely? No way. The greedy may be misguided. When it comes to investing, the tortoise often beats the hare. [in a choppy still bottoming market it always does]

– To make the point, Barron’s Andrew Bary asks, “What’s a better investment over the long haul, electric utilities or the Nasdaq? The surprising conclusion is the utility sector; according to Merrill Lynch chief quantitative strategist Richard Bernstein.” Bary explains that Merrill Lynch compared the performance of the S&P utility sector and the Nasdaq over the past 30 years and found utilities beat the Nasdaq based on total returns – that’s the number that includes both dividends and price appreciation. “From the Nasdaq’s inception in 1971 until the end of September,” Bary writes, “the utilities generated a compound annual return of 12%, ahead of the tech-heavy Nasdaq, which rose 11.2% a year.”

– Investors who are today snapping up shares of “leading” companies whose operations are struggling would do well to consider the lessons imparted by Enron – a “fast-growing” company that grew rapidly until it blew up.

– I’d like to take time out to give a great big Daily Reckoning round of applause to Enron, rated the number one e-commerce vendor by Interactive Week magazine. Yes, it’s true: according to the magazine, Enron racked up an astounding $97.5 billion dollars of online sales for the 12 months ending June 30, 2001 – “three times more online revenue than IBM, its closest competitor in the Interactive 500,” the magazine reports.

– But what does this all this e-selling beget? The short answer is, a collapsing share price.

– “Enron has a Texas-size helping of attitude,” writes Interactive Week’s Robert Bryce. “The Houston energy and trading giant believes it can trade any commodity, any time, and make money doing it.”

– If only attitude were profits! According to the company’s SEC filings, it almost never makes money trading energy or any other commodity…at any time. Despite Enron’s Goliath-sized revenues, it fails to make Interactive Week’s top ten most profitable online companies.

– “The current profit squeeze besetting corporate America is structural – not cyclical,” explains the good Dr. Richebacher. “Misguided financial restructuring and investment spending are backfiring on profit performance. In our view, the obsession with shareholder value in America is the greatest folly in economic thinking and theory in history.” (see: The Shareholder Value Cult)

– Remember when day-trading was a big deal? It seems like only yesterday that half of America’s school children had to start making their own sack lunch in the morning because Mom was busy readying trades for the opening bell. Day-trading is a big deal again – day- trading of houses, says Fred Sheehan of John Hancock Asset Management.

– In yet one more telling sign of our housing bubble, Sheehan points out that existing homes are turning over faster than they ever have before. In most years, 2 existing homes sell for every one brand new home that sells. But this year, existing homes sales are four times more numerous than new home sales. In other words, homeowners are trading in and out of their homes much more frequently than ever before.

– The reason seems obvious enough, according to Sheehan. “The spread between the two [existing homes sales and new home sales],” Sheehan proposes, “constitutes a measure of speculative real estate activity.”

– “Day-trading of houses,” he calls it.

The Daily Reckoning