Sometimes A Great Nation

“For which of you, intending to build a tower, sitteth not down first, and counteth the cost?”

Jesus of Nazareth,
Luke 14:28-32

When terrorists struck on Sept. 11, we had the feeling that the world had crossed an important bridge…and that there was no going back. We sensed the boom world of the late 20th century was finally finished. We wondered what would replace it…

We still don’t know, of course, but as dawn lights up the world of the early 21st century, little by little the hills, trees, houses and factories comes into view…

It is not a pretty picture.

The main feature of the landscape we see is that the comic mania for wealth of the ’90s has been replaced by a tragic passion for revenge and war. The word “tragic” is part description and part anticipation. For we see little good coming from the present enterprise.

The guardians of the nation’s security are bombing one of the poorest, most God-forsaken countries on theplanet. Afghanistan was chosen because its government harbors a man who is wanted for questioning – Osama binLaden. What his role in the terrorists’ attack on the Twin Towers and the Pentagon was, no one seems to know.

But once evidence was shown linking Bin Laden to theattacks, Afghanistan’s ruling Taliban offered tonegotiate. It was too late. America’s military wasalready moving towards war as if it wanted one.

But against whom? For what? Why not negotiate?

“Should the attack be considered an act of war?” asked Doug Casey in this space yesterday. As far as we know, no government was involved in the attacks on the WTC and Pentagon. But instead of merely attempting to bring the guilty parties to justice, the Bush administration has decided to strike back at a foreign country and announce a “war” on terrorism.

It is a war out of “1984” – a war that may never end against an enemy we can never quite identify. But as long as the flags are waving, people seem willing to support any fool project or expense.

“What the American public has not been told,” writes Gary North, “is that our attack on Afghanistan has been in the works throughout 2001. The war in Afghanistan was in the planning stages no later than June.” That is probably why negotiations weren’t undertaken…and why U.S. troops were so quickly allowed into former Soviet republics. There was advance planning – probably contingency planning – already underway. Perhaps Russia and the U.S. were looking for a way to take out the Taliban anyway.

Will the “war” end well? Will it ever end? We have no way of knowing. But we fear that this war against terrorism might actually make Americans less safe. For while the U.S. tries to topple one corrupt, incompetent regime in Afghanistan, it tries to prop up another in Saudi Arabia. The risk is that it will succeed in the first effort…and fail in the second – just as Osama bin Laden seems to want. That is the trap he has set for

America. Luring the U.S. into a war in the Middle East, he hopes that the shaky, irresolute aristocracy ofSaudia Arabia may – like the Romanoffs in Russia in WWI– come crashing down. He may be right. The mistakes ofnearly 100 years ago may be repeated.

“It’s time to start facing the truth,” said a “prominent Middle Eastern oil man who did not wish to cited by name” in the current issue of the New Yorker. “This war was declared by bin Laden, but there are thousands of bin Ladens. They are setting the game – the agenda. It’s a new form of war. This fabulous military machine you have is completely useless.”

The Saudi regime “will explode in time,” he added. If and when it does, oil will probably go to more than $100 a barrel…and the essential ingredient of modern economies could be under the control of a Saudi-style Taliban.

“I think we’re edging closer and closer to a time where global military, political, and economic events spin out of the control of those who think they are in charge,” writes Dan Denning in our “Blue” service. “The assassination of a cabinet minister in Israel could easily be the type of unanticipated event that tips the scales of diplomacy and plunges the entire Middle East into greater chaos. Or it could be the gathering storm of unrest in Saudi Arabia. Each day I read more and more stories about how vulnerable the house of Saud is, and how they have essentially been paying ‘protection’ money to Islamic fundamentalists to prevent a revolution.”

Meanwhile, what actually is going on in Afghanistan is anyone’s guess. There is precious little “news” coming from the news media. The guardians of truth and information have come down with war fever along with everyone else. When bin Laden offered to explain himself on video, for instance, both George Bush and Tony Blair tried to prevent the news media from broadcasting his statement…on the preposterous grounds that the message “might contain coded messages” – an absurdity so transparent that even a TV newsman could see through it. Yet, the western press generally went along

Who knows what the war itself will cost. But “estimatesof the cost of the new Homeland Security Departmentalone,” writes Gary North, “indicate $1.5 trillion overthe next five years.”

That is just the beginning. But in the addled mind of the public and newspaper columnists the more the better. Every dollar spent – no matter how it is spent – is expected to contribute to the “stimulus” that will lift the economy out of its slump, return stocks to their bull market highs, and save America’s spendthrift debtors – private and corporate – from getting what they deserve.

Anything might happen. Osama bin Laden might convert to Catholicism. But it is a bad bet.

“If [investors] are serious,” explains Gary North, “they won’t pay any attention to stock market hypesters who spout some nutty version of “war is good for business.” War is rotten for business. It leads to higher taxes, more government controls, less privacy, more deception by leaders, more inflation and a reallocation of resources from the private sector into battlefields. When steel is used for guns, it is not used for refrigerators and cars.”

And the cost of the war will not just be a lot of money…

“It is possible, if not likely, that we will rely more on international rules of war than on our cherished constitutional standards for criminal prosecutions in responding to threats to our national security,” said Supreme Court Justice Sandra Day O’Connor, speaking of the very thing she has sworn to protect. “As a result, we are likely to experience more restriction on our personal freedom than has ever been the case in our country.”

The guardians of the nation’s liberties have apparently decided to act like the guardians of its money. There is a time, they reason, to protect liberty in America…and a time to destroy it.

“I read the most amazing thing in the Figaro,” said my friend Michel at lunch yesterday. “Apparently, the courts in America wouldn’t allow torture within the U.S., so the FBI is going to send suspected terrorists – or maybe tax evaders – to foreign countries where they will be tortured before returning them to the U.S.”

Meanwhile, the House of Representatives, yesterday, approved a $100 billion stimulus package. What good will it do? Probably none.

But in war, as in love, you do not stop to count the costs. Caught in the collective hysteria of military campaigns…or the private madness of romance…who can take the time to add up the figures? The accounts are pushed off, debts left to pile up. Sooner or later they will be have to settled. But in the heat of passion, any price seems trivial compared to what is at stake.

Your editor, trying to keep his head about him…

Bill Bonner
October 25, 2001

P.S. Here at the Daily Reckoning, we don’t mind taking unpopular positions. When stocks were at record highs in the late ’90s, we warned that they would soon come down. Some readers, who had staked their financial futures on the bubble market, were offended.

Some will, no doubt, be offended by our views on the present war.

But we do not merely honor free speech or celebrate it…we practice it…gulping it down like a man’s first beer after being released from jail. We like the feel of the foam on our upper lip…and let it dribble from our chins. “If the U.S. does not stand for freedom of thought and speech…for diversity and dissent,” writes George Monbiot in the Guardian Unlimited, “than we have been deceived as to the nature of the national project.” – the river of no returns – just keeps rolling along. It announced losses of $169.9 million for the 3rd quarter, down from $240.5 million lost in the same quarter last year. Sales were flat. But the company said it would still produce a breakeven 4th quarter, on a pro-forma basis. That means if it ignores enough expenses, it can show a positive bottom-line number.

But even “pro-forma” couldn’t save a company called 360Networks. Its revenue for the 2nd quarter was neither up, down, flat, nor zero. The company – now enjoying the protection of the bankruptcy courts – had previously reported revenue before it got the cash.

Then, when the contracts were cancelled, it had to subtract huge amounts, leaving it with negative revenue of $63 million. In addition, it lost $5 billion during the quarter. Shareholders are said to be holding “for the long term.”

“Fed Sees U.S. Economy Struggling,” says the BBC. The Fed’s Beige Book of regional reports showed almost no area spared from the slump. But the Fed found no evidence of inflation either. There was “little upward pressure on either wages or prices.”

Prices refuse to rise – despite the best efforts of the Fed and Congress. The House passed a $100 billion stimulus bill yesterday. And the Fed prepares for its 10th rate cut – expected next month, if not sooner. Still, long bonds rose yesterday and gold has been sinking to near 25 lows.

“This is what is so astounding,” writes Gary North. “…there has been no visible increase in long- term rates…The bond market has actually risen, and the stock market has fallen in response to 9 consecutive reductions in the federal funds rate. This runs counter to previous experience, except during the Great Depression.

“Investors have become afflicted with what I call Japan Syndrome,” Gary continues. “The Japanese central bank has lowered short-term interest rates to almost zero, but the Japanese economy remains in recession and the Japanese stock market is in the pits. This is now happening to America.”

But, let’s turn to Eric to find out what happened to Wall Street yesterday:


Mr. Fry in New York:

– Remember when Amazon shares seemed to go up every day? No price was too high to pay for this icon of the new economy…or so it seemed. As it turns out, of course, almost any price was too high to pay, and the stock is falling still. Amazon shares dropped another 20% yesterday, after reporting disappointing earnings.

– Meanwhile, for no apparent reason, the shares of fellow new economy refugee, Cisco Systems, gained 5%. Perhaps Cisco shares rallied on the misguided notion that “things can’t get any worse.” Whatever the reason, the networking company’s shares led the Nasdaq Composite 27 higher to 1731. The Dow gained 5 points to 9,346.

– “Patience,” counsels Barton Biggs, the veteran equity strategist at Morgan Stanley Dean Witter. “There should be a better opportunity to buy.”

– Biggs offers several reasons for caution. “First, the second stage of the war against terrorism almost has to involve Saddam Hussein…Second, the U.S. and world economies are weak and weakening…Third, [my personal favorite] stocks are still not cheap. Fourth, investors’ equity ratios are still too high and cash levels too low. Fifth, the American consumer bubble has still not been burst…”

– The average U.S. corporation is earning less moneythis year than last. These same average U.S.corporations face slackening demand for their products.And now, they face the considerable direct and indirectcosts of operating in an increasingly security-obsessednation. (Wasn’t it so much easier two years ago when wewere simply a securities-obsessed nation – far lessworried about Osama bin Laden than we were about where Cisco bin tradin’).

– Some companies will bear direct costs. For example TrizecHahn, manager of the Sears Tower in Chicago, is spending millions to beef up the skyscraper’s security. “[TrizecHahn] has installed concrete barriers around the perimeter of the tower,” Bloomberg reports, “and hired security firm Kroll Inc. to evaluate security at the tower…Additional security staff alone could represent as much as $1 a square foot in rent.”

– The indirect, or “hidden,” costs that many companies will incur could be even more expensive. For example, some companies are deciding to increase inventories on hand because of the risk that future terrorist acts might disrupt their supply-chains.

– “Holding higher inventories is a cost,” reminds economist Paul Kasriel, of Northern Trust. “You have to finance them or forgo some other use for your funds.”

– “Inventories have fallen from 17 percent of GDP to 11.6 percent of GDP over the last two decades,” according to James Bianco of Bianco Research. By his estimates, it would cost about $600 billion to take inventories back up to 17%. Any move in that direction will cost tens of billions of dollars, at least. Therefore, to the extent companies restock their depleted cupboards, reported earnings will suffer.

– “In 1988, ‘The Just-In-Time Breakthrough,’ by Edward J. Hay, was published, a paean to the management methods pioneered by Toyota and credited with making Japanese manufacturing invincible,” Jim Grant writes. “Strive for ‘absolute minimum resources,’ Hay advises, ‘the smallest possible quantity at the latest possible time in the elimination of inventory.'”

– The pendulum may now be swinging in the opposite direction. Already, Toyota – the company that started it all – has begun “increasing its inventories,” according to Bloomberg, “[because] winter snows in previous years had made it difficult to keep its supply chain going.”

– As Grant notes, “We wonder if, during a wartime recession, business practices won’t veer from just-in- time to just-in-case. Seeking safety in the things they can control, managers may begin to stockpile more inventory…”

– First consumers become savers. Now, just-in-time managers are becoming pack-rats. Woe to us all. The “recovery” that a growing chorus of Wall Street strategists say is now underway looks increasingly like a zero-sum game. Yes, some items are selling better, but only because some items are selling worse.

– Numerous auto industry observers report, for example, that new cars are selling briskly this month, thanks mostly to zero-interest rate financing deals. But used cars aren’t selling at all. Maybe the auto manufacturers are just shifting deck chairs around on a sinking ship – the S.S. American Economy.

– “Automakers’ no-interest financing offers have stimulated new car sales but also have created a glut of used cars,” says USA Today. “Jerry Reynolds, owner of Prestige Ford in Garland, Texas, says his used car inventory has swollen to 600 vehicles instead of the usual 250 on the lot this time last year.”

– Fasten your seat belts, the U.S. economy is in for a bumpy ride.


Back in Paris:

*** This from the Mogambo Guru: “At the beginning of a recession/depression investors are bidding the S&P 55 to record-setting P/Es. Company after company is decimating the ranks of its employees as sales disappear. Company after company is admitting to failed earnings and with no expectations to reverse that sorry state anytime soon. And yet, here are supposedly intelligent people blithely throwing their money at a probably overvalued stock market! My God! What are they thinking about? Can’t they even read a newspaper?”

*** Economist Diane Swonk expects consumers will stay “home for the holidays” this Thanksgiving and Christmas. She believes the terrorist attacks, combined with declining earnings, will produce a “cocooning effect.” Sales will be flat, except for companies selling home improvement products, she predicts.

*** “I had a regular client once – a real sweetheart,” says one of the loveable prostitutes in Irma La Douce. “He was such a good customer. He came to me for consolation. But then, his wife died and he stopped coming,” she continued. “He didn’t need me any more.”

The Daily Reckoning