Societal Implications

The Daily Reckoning Presents: Doug Casey speculating on who the real losers in the War on Terrorism will be.


“The minds of the Romans were very differently prepared for slavery. Oppressed beneath the weight of their own corruption and of military violence, they for a long while preserved the sentiments, or at least the ideas, of their free born ancestors”

Edward Gibbon,

Decline and Fall of the Roman Empire

“The average man doesn’t want to be free. He wants to be

– H.L. Mencken,

Notes on Democracy

In my view, the proper way to deal with the events of September 11th, 2001 would be to treat them as common law crimes, albeit of extraordinary scope and gravity.

Ideally, the criminals who are still alive should be pursued, captured, tried, convicted and made to pay reparations – to the damaged parties, not to “society,” or the government – to the greatest degree possible.

That, however, is unlikely to happen for any number of reasons, including the fact that there’s a real war fever in the land, and Americans don’t appear inclined to take any prisoners at the moment. Entirely apart from the fact the perpetrators aren’t about to allow themselves to be taken prisoner.

That being the case, we’ll just have to do the best we can. Under the circumstances, the best possible outcome would probably be the deaths of perhaps 50 or 100 individuals who are directly involved, using small teams of independent contractors working on a bounty, and letting the matter rest.

But that’s a long shot.

The U.S. has already begun to go wild and use its high tech military to bomb targets. Afghanistan, a country where almost no Americans have been, and which few can even find on a map, is in the crosshairs of many armchair warriors and bellicose pundits.

Afghanistan is one of the fifty countries I haven’t been to, so as with most things where I lack firsthand experience, I hate to make a comment. But if the Soviet experience is any indication, it’s not a good place to fight an offensive war, or even go on a manhunt. The people are xenophobic, inured to battle and discomfort, highly devout and typical of mountain dwellers the world over, extremely tough and independent.

After the Gulf War, Schwarzkopf was quoted, mirroring the wisdom of my cleaning lady with regards to windows, as saying: “We do deserts; we don’t do mountains.”

It’s gratifying that Bush hasn’t flown off the handle so far; whatever his faults, he deserves credit for that. I just hope this doesn’t turn into a major military adventure because, even with the utmost care and precision, there are bound to be tragedies. Many of them will be pointless mistakes, like the aspirin factory in Sudan. Many attacks will kill a bunch of completely innocent civilians, all of whom will have friends and relatives.

The U.S. has begun to deploy highly trained Special Ops forces to mitigate these problems, but it’s still likely to be ugly. They’ll inevitably take serious casualties, and some will be captured. When the captured soldiers are tried and executed, you can bet it will raise the ante significantly.

Whacking a bunch of hornet’s nests with a baseball bat is okay for young boys with time on their hands, but it’s disastrous for a nation state in today’s world.

This is a political matter, and the average American really seems to want blood and vengeance, let the consequences including, possibly, actual justice, be damned. The U.S. will, in other words, react pretty much like the Israelis do. But just because the Israelis are experienced in these matters doesn’t mean they’re drawing the right lessons from their experience.

In any event, to the degree Israel merits support, individuals from around the world will continue to send it billions – as they already do. It’s not an activity that should jeopardize 280 million Americans.

What the US should have done, long ago, is cut off 100% of all foreign aid (+/- $14 billion annually) and military aid (+/- $8 billion annually), while recalling the troops stationed in over 100 countries around the world.

U.S. soldiers in foreign countries act only as tripwires and provocations, which is to say they serve no useful purpose whatsoever. Natives like seeing American soldiers strutting their homelands about as much as Americans would if our streets were filled with Iranian soldiers. Even if they put forward an excellent reason, like defending those practicing their religion in Waco.

If we were to call our boys home foreigners would have no more reason to attack the U.S. or Americans than they do to attack Canadians or New Zealanders.

War is the health of the State, whether it’s the War on Drugs – which, I suspect, has already killed as many Americans and cost as much money as the Vietnam War – or the military type. The military and economic implications of a War on Islam are horrendous. But the societal implications are even worse.

Proposals are already being made for the long-awaited national ID card. How many new Federal agents will be hired with the $20 billion the Congresscritters are setting aside as a reaction to the WTC event?

It certainly isn’t going to warm relations with a billion Muslims and Arabs when they read, as I did, comments in the paper like “I hate Arabs! I’ve always hated Arabs!” from some silly girl who doesn’t even have a Jewish surname. These people are going to find it unpleasant to impossible to get visas to visit here. And their friends who live here are already finding it unpleasant to dangerous – as might almost anyone who looks “foreign.”

If it gets really serious, some might recall the concentration camps set up for scores of thousands of Japanese Americans during World War II as a precedent.

Freedom has been rapidly diminishing in America for manyyears, but this will put a near-final nail in itscoffin. The hunt for the perpetrators, sympathizers, oreven potential sympathizers has the potential to turn into a witch hunt unlike anything we’ve seen in either

World War or the Cold War.You can already read and hear plenty of arguments about how we’re going to have to give up some freedoms to counter this new threat. Privacy of any type will become suspect.

What’s more, membership in “fringe” groups will become suspect. Not being a solid citizen toeing the line will be suspect. And the standard distribution of 2-3% of all people, everywhere, who are sociopaths is going to come out of the woodwork.

Who would have guessed there would have been all the volunteers for the SA, the SS, and the Gestapo in the Germany of the 20s? Who would have guessed that so many Russians would join the NKVD and other secret police in the 30s, and that the average citizen would tacitly or actively support Stalin? Most of them were people who

liked kids and dogs, had hobbies, and respectable jobs.But when the times changed, their true natures came to the fore. If you think we don’t have the same distribution of people here, you’re dreaming. Except it could become a real nightmare.

Doug Casey,
October 24, 2001

for The Daily Reckoning

p.s. Speaking of terror, it’s perhaps a good idea to keep things in perspective. War is pure, unadulterated, compulsory, organized mass terror.

If you think war might be a good idea, itûs worth seeing two movies, both of them superb (and easily available on video): “Stalingrad” and “Enemy at the Gates.” Both tell a story of the battle, one from the German, and the other from the Russian side. If you ever think you’ve got worries, just watch these flicks; they’re a guaranteed attitude adjustment.

For 25 years, “International Speculator” Doug Casey hasbeen scouring unknown regions of the earth forinvestment opportunities. To learn how you can profitfrom Casey’s speculative travels please see his report:Nobody Notices the Good News – Until It’s Too Late

Slash, slash, slash…quarterly reports are coming in and they are almost all bad. Sales down. Earnings down. Operations trimmed back. Jobs cut.

The Conference Board’s Index of Leading Indicators recorded its biggest drop in 5 years. It is the “worst advertising year since the depression,” reports “Battle for jobs intensifies as more are laid off,” adds the LA Times.

But there’s good news too – Planet Hollywood filed for chapter 11.

Still, investors can’t seem to come to terms with current events. They think stocks bottomed out on Sept. 21…and they’re looking for quick and easy victories against terrorism and deflation.

Eric, what’s the latest from Planet Wall Street?


Eric Fry in New York:

– “If ever you wanted to take a cruise, now’s the time to do it,” USA Today suggests helpfully. “Facing a glut of unsold cabins for departures in the next three months, cruise lines began slashing rates to levels not seen since the 1970s.” The paper quotes Mike Driscoll, editor of industry newsletter Cruise Week: “They’re trying to find the price point where people will put their fears away and take a cruise.”

– The stock market is also busy trying to find the price point where people will “put their fears away” and take the plunge. Temporarily, at least, investors found that magical price point on September 21st, when the Dow broke below the 8,000-level. The venerable index has advanced almost 18% since then, despite incessant terrorist attacks and a barrage of bad earnings. The Nasdaq has soared almost 23% over the same time frame.

– It’s nice to see the market rally. But the dramatic advance from the September 21st lows looks less like a new bull market than an old bad habit. What are investors buying exactly? A good story? You know, the one about the economic recovery that’s just a few months away?

– Wall Street is full of storytellers, and who better to tell one than on-line storybook seller: Amazon.

– Yesterday afternoon, the e-commerce pioneer hosted a conference call on which CFO Warren Jenson proclaimed, “While the history of Q4 has yet to be written, we are in great shape.” Later, lapsing into dot-com speak, he assured the listeners, “Reaching pro forma profits does not require heroics, just execution.”

– So just what does this “great shape” look like, according to the Book of Amazon? For starters, the company posted a “pro forma” loss of $58 million for the third quarter. After adding in a couple of “exceptional” items here and there, the true net loss – i.e., the money that used to be in an Amazon bank account but no longer is – expands to $169.8 million.

– Next up, Amazon’s core books, music and video sales operations – which account for more than half of total revenues – fell about 12%. Sales in Amazon’s smallest, but most profitable division, “Services,” also fell 12%. Services include deals such as booking on-line orders for other retailers like Toys R Us and Borders bookstores.

– If you add it all up, you’re looking at a company that will probably burn through about a half-billion dollars over the next nine months. Sounds…well…”great!”

– Blindly paying any price for any stock will accumulate losses more rapidly and assuredly than wealth. Price matters. So do earnings. Right now, the former is too high and the latter is too low.

– Amazon groupies are not the only ones suffering from a “new paradigm” relapse. “The surge in home refinancing is giving a boost to the overall economy,” Fannie Mae CEO, Franklin Raines was heard saying last week. “In fact, a new economic paradigm seems to have taken hold. Traditionally, whenever the economy caught a cold, housing got pneumonia. Now the opposite is occurring – housing tends to do better than the economy.”

– “That the head of a thinly capitalized company – operating with the implied backing of the U.S. taxpayer – having more than $330 billion of short-term debt and $1.5 trillion of mortgage exposure,” comments the Prudent Bear’s Doug Noland, “in what is clearly a hostile economic environment, would make reference to a ‘New Economic Paradigm’ is, in a word, disturbing.”

– Is it possible that the stock market is buoyant once again because it anticipates an economic recovery not yet visible to mere mortals? If so, shouldn’t many commodity markets be rebounding soon as well? What about oil?

– The oil market seems to be in a win-win situation right now, according to Outstanding Investments editorJohn Myers. An economic recovery would boost demand, and therefore prices. On the other hand, instability in theMiddle East could disrupt supplies and therefore boost prices.

– Yesterday, the Wall Street Journal backed up Myers’ assertion that volatile conditions in Saudi Arabia present an ever-present risk of supply disruption. Saudi college students interviewed by the Journal complain that “the U.S. is responsible for the drastic drop in per capita income to just under $8,000 from $28,000 in the 1980s. They also blame it for unemployment estimated to be at least 14%.”

– The U.S. is also to blame – we would imagine – for heat waves in Riyadh and the fact that the Saudi Arabian soccer team has never won the World Cup.

– Examining the demand side of the equation, BCA Research predicts, “Oil drilling stocks are set to rally at first signs of U.S. economic recovery. The number of active drilling rigs in the U.S. has fallen to 1,141 from its peak of nearly 1,300 in July, as weakening energy prices and rising natural gas supplies have reduced exploration efforts…Importantly, the S&P well equipment and services group…is near the lows set in 1999, when oil was close to $10 per barrel.” Watch this space…


Back in the land of wine and cheese…

*** “[T]he current high [price-to-earnings] multiple means that there are still far too many people that think this is the bottom for it to really be the bottom,” J.P. Morgan’s Doug Cliggott explained in a letter to clients. “It’s too early, or too expensive, or both.”

*** The highest P/E multiple at a market bottom in the past 40 years, on trailing net income, was 16.4 in 1960, Mr. Cliggott elaborated. Currently, the S&P 500 has a trailing P/E multiple of 39.2.

*** Mr. Cliggott also guesses that the recession has further to go. The average one since 1945 lasted 11 months. This one probably began in March 2001…giving it about 4 more months before it reaches the average.

*** But here at the Daily Reckoning, we guess differently. We guess that this recession has little in common with the post-1945 recessions and a lot in common with the Great Depression of the ’30s…and the present soft, slow-motion depression in Japan.

*** If we’re right…the slump will last much longer than 4 months.

*** Irma La Douce was staged at the Comedie Populaire theatre, near the Opera. I imagined the Doughboys from the Great Plains on furlough in WWI…how they must have marveled over the delicious extravagance and opulence of these Paris theatres. Hardly a square inch of the place is left unadorned by gold leaf, marble, or figurative painting in the dreamy, romantic style. Clouds, cherubs, and plump, naked women decorate the ceilings. Scenes of ancient Greece…and theatre allegories grace the walls. The theatre alone is worth the price of admission. “How you gonna keep ’em down on the farm after they’ve seen Paree?

*** The play was good, too…an endearing musical in which a man falls in love with a prostitute and then becomes unbearably jealous of her clients. He decides to monopolize her favors by putting on a disguise…but insisting that he be her only customer. Jack Lemmon and Shirley Maclaine played the lead roles when it was made into a movie by the Disney Studios in 1963.

The Daily Reckoning