The Episcopalian's Guide to Airport Security

Early yesterday morning…after his flight was cancelled…your editor had the illusion that comes so readily to him – of profundity.

"Coat…" the security guard had said to him a few minutes earlier.

"Pardon me…?"

"Take off your coat," came the explanation from the factotum.

"What’s the magic word?"

Common civility has given way to security needs, it seems, along with common sense and common convenience.

You have no particular reason to be interested in my travel adventures, dear reader, but in today’s letter I will try to think of one. And if not, well…the Daily Reckoning is, after all, free.

It was 6 a.m. For the second time in less than 12 hours, the passengers on Air France flight 028 had answered the same dopey questions:

"What do you mean, has my bag been in my custody…its been in your custody…I didn’t even have a toothbrush…" answered a grumpy passenger with bulging forearms, after a night in the airport.

Now we were getting another round of unsolicited close inspections. Many travelers were not happy. But few complained. After all, at least they were still alive. Their flight, scheduled for the night before, had been cancelled after the pilot dropped dead of a heart attack.

"Take your shoes off…" the guard continued.

"I guess you have a lot of trouble with people trying to hijack 747’s with penny loafers," I commented.

But the guard was as insensitive to sarcasm as he was to courtesy.

A search of the computer databases at NSA or CIA or FBI would turn up few Episcopalian businessmen on the lists of suspected terrorists. Nor has anyone who voted for Jimmy Carter ever been accused of terrorism. (He may be accused of imbecility…a charge that needs no further proof, but that is another matter.) Still, in the interests of security you can’t be too careful.

"Smile," I tell Jules, "and the world smiles back at you. Common courtesy, like common law, common sense, common decency…and traditional architecture and value investments…have a kind of magic to them. Pay attention to them and good things happen. Ignore them…and you end up with monstrosities."

People gripe about what morons these security guards are. But at least they get paid for their part in the national charade. The rest of us are the real idiots – unpaid extras, standing in line under the pretense that every girl scout who boards a plane menaces the republic.

Your editor was witness to an amazing scene on a previous flight. In addition to the scrutiny given to everyone, airport security now includes deeper checks – in which a few passengers are selected at random. If you are chosen, the guards put on rubber gloves and riffle through your underwear and papers.

In the Saint Louis airport, the fickle finger of fate pointed at – you guessed it, a group of girl scouts. The odds that the girls – on their way to a jamboree – would pull out plastic knives and force their way into the pilot’s cabin were, shall we say, remote. The plane would be struck by a meteor first! Still, the security guards worked their way through the girls’ panties and mosquito repellant with the seriousness of an orangutan defusing a bomb. Even more astounding – other passengers neither laughed nor scoffed.

Often, we noted later, in our reflective mood…common sense finds few buyers…while absurdity is over- subscribed. For there on the table in front of me in the waiting lounge was a copy of Sunday’s Washington Post. A headline tells us that the Bush Administration has just reversed more than 200 years of military policy…and thousands of years worth of accumulated experience.

"U.S. Will Strike First at Enemies," said the headline, describing the president’s new line. "…the United States can no longer deter attacks from other nations by threatening massive retaliation, but instead must strike looming enemies first," explains the Post’s report.

How will the U.S. know who is an enemy and who is not? That was not explained. Generally, a man waits until he is attacked. Then, he knows he has an enemy and has to defend himself. Striking first is considered bad manners. Plus, it seems to lead where good people would rather not go. A man who throws the first punch is sure to get himself into trouble – sooner or later – swinging at enemies real and imagined, until he finally meets his match.

"It is a dangerous situation," commented a friend in Washington. "I mean, the U.S. is the world’s only super- power. Not having any competition makes people arrogant and lazy…"

Success is self-correcting, we noted above. The greater the success…the bigger the correction that follows it.

Napoleon, you may recall, decided to attack Russia because it posed a security risk to his continental empire. Along the Seine, the vapors of arrogance and complacency had gone to the little Corsican’s head. But his campaign against Russia slapped him in the face; it was a total disaster.

Later in the 19th century, Napoleon’s nephew declared war on Prussia for much the same reason: national security. There was no time to wait, he argued. He feared the growing power of a unified Germany and decided to strike first, before the Germans could organize themselves and do real damage. The French army was not exactly prepared for action…but even after Waterloo, the Seine still reeked with the lingering odors of a bull market in French power. Like American investors today, the French believed "we will always manage somehow." A few months later, Parisians still managed…just barely; they were eating rats…as the city was besieged by von Moltke’s army.

"With hindsight," writes Paul B. Hatley, "historians realize that Napoleon III’s decision to go to war with Prussia ranks among the great military blunders in history."

The French learned from this experience. They’ve attacked nobody since. The god of war, they noticed, turns his back on those who strike first.

But the intoxicating stench of mindless pride drifted across the Rhine, where it took up a long residence. Kaiser Wilhelm II decided to take the initiative in 1914 – sending his armies into action against Belgium and France. By 1919 there no longer was a Kaiser.

Then, in the late ’30s Adolph Hitler went on the attack, his nostrils flared with maniacal self-assurance. He struck first to the west…and then to the east. In both directions, he enjoyed great initial success – followed by terrible catastrophes. By 1945, Hitler was no more.

Of course, we do not presume to know whether the Bush Administration’s attacks will be more successful. But there is so much we don’t know. We don’t know if the people we meet are good people or bad…so we smile and say please and thank you, anyway. We don’t know if stocks are going up or down – so we buy only those which represent real value for our money. We don’t know if striking at presumed enemies will make the world a better place or a worse one. But in Dulles Airport Sunday morning…we thought we smelled a strange and unsettling aroma wafting in from the Potomac…

Your correspondent…

Bill Bonner
June 03, 2002 — Paris, France


My grandfather used to tell a story from the Great Depression. A distressed banker decided to end it all by jumping out a window on the 12th story of the old Maryland National Bank building in Baltimore. As he was going by the 5th floor, he was heard to remark – "Well, I’m all right so far."

The dollar drops nearly every day.

Here in Paris, our cost of living goes up every day – as the dollar drops. But being unselfish sorts, we think of you, dear reader, before worrying about our own insignificant lot in life.

We’ve been concerned that the decline of the dollar is too obvious. The newspapers are all talking about it. Every economist seems to expect it. And most welcome it. Morgan Stanley, for example, predicts a 7% decline of the dollar for each of the next two years. And "everyone knows that a soft landing of the dollar is in the world’s best interest."

…Which somehow excites a synapse in our contrarian brains – what if the dollar doesn’t go down as expected? What if, instead of the anticipated ‘soft landing’, the dollar goes down hard? What if today’s ‘it’s all right so far’ turns into tomorrow’s splaaaat? What if the dollar suddenly gave up all of the 40% it has gained since 1995…or more?

In all of life, success is self-correcting, we think we have observed. The dollar has been the most successful paper money in history. Thus, it needs a great correction to bring it back to mediocrity.

Analysts expect a soft landing. But Mr. Market favors surprise. Already, the dollar is down 9% against the euro and the yen. What if it just keeps falling?

"Dollar Approaches Hour of Reckoning," says the FT. If it were to fall…say 20% or more…the entire world economy would be in trouble. And it would have a "devastating impact" on U.S. stocks and bonds, says Stephen Roach.

We wonder what it will do today…and tomorrow…



Eric Fry in New York…

– In what passes for a rally these days, the Dow Jones Industrial Average gained a meager 13.5 points on Friday to 9,925. Sadly, the NASDAQ slid 1% to 1,616. Stocks logged their second straight losing week, with the Dow falling 1.8% and the NASDAQ dropping 2.8%. Gold countered the market sell-off by gaining $5.80 during the week to $326.50 per ounce.

– The latest stock market declines put all the major indices solidly into the red for 2002. The recent declines also mean that the post-9/11 "Patriot Rally" is little more than a memory. From their closing levels on Sept. 10th, the S&P 500 and NASDAQ have dropped 2.3% and 4.7% respectively. Only the Dow still clings to a slim advance.

– As the stock market slides, so does the dollar. The US currency is sprawled out flat on its greenback, having lost another 1% last week. The U.S. dollar, observes Christopher Wood in his provocative "GREED and Fear" column, "is the biggest story in capital markets right now and with good reason…Foreigners are now starting to question their previous long-held assumption that America offers the best investment returns. The consequences of such a sea change are momentous at the margin, given that foreigners have to keep buying $1 billion a day to fund the U.S. current account deficit…America’s current account deficit is at present absorbing about 76% of the world’s current account surplus is. This is, clearly, extraordinary."

– Marc Faber agrees, noting that the U.S. economy is increasingly vulnerable to foreigners’ willingness to finance its huge imbalances.

– Due to these "extraordinary" imbalances, Morgan Stanley’s Stephen Roach worries that the world economy is on "an inherently unstable path that can only end in tears." When the global rebalancing finally gets under way, says Roach, it will be marked by three key features: a slowing of U.S. growth ("unavoidable," he contends), an acceleration of growth elsewhere in the world, and a sharp depreciation of the U.S. dollar.

– Jim Grant concurs: "Federal outlays are soaring, a trade war is brewing, credit quality is fraying and the dirty linen of Corporate America is showing. Is it so far-attached to think that America’s foreign creditors will wake up one morning and decide they own more than enough dollars?"

– One of the best ways to lighten up on dollars, of course, is to lighten up on US financial assets.

– "The vulnerability of U.S. financial assets is clear," says Wood. "Foreigners own 39.5% of the U.S. Treasury bond market and 23.8% of the U.S. corporate bond market. Both levels of ownership are at record highs. Foreigners also still own 12.7% of the U.S. stock market. This level of ownership is also near record levels." So if you own US stocks and bonds, Wood warns, you better "weigh the risk of foreigners deciding to reduce their allocations to U.S. financial assets."

– Wood concludes: "The only American financial asset which GREED & fear would personally contemplate owning is a non-hedged gold-mining company." Is that greed or fear talking?

– "What was the biggest stock market story of the late 1990s?," Fortune columnist Geoffrey Colvin asks rhetorically. It was not Enron, he says. It was the sensational amount of wealth destroyed by the telecom sector. "The $2.5 trillion lost in the telecom meltdown was the largest single loss of wealth ever to occur in the stock market."

– Presumably, we will miss this money. Because of unimaginably large losses like this, David Tice, manager of the Prudent Bear fund and columnist for Strategic Investment, doubts the economy will recover as sprightly as many Wall Street economists anticipate. And the stock market won’t be bouncing back any time soon either, he says.

– "The stock market is still ridiculously expensive today," Tice reminded all those in attendance at the Supper Club gathering in Dallas last Friday. "People seem to believe in the idea ‘Thou shalt only have booms’." But the bust has already started, he says. Tice cited several historical examples to illustrate how the size of stock market busts are directly proportional to the size of the prior booms.

– Or, as he put it, "Super bull markets are followed by super bear markets…I wouldn’t be surprised to see the NASDAQ fall to 500."

– Some investors may find Tice’s apocalyptic outlook to be a little unsettling. Not to worry…Abby Joseph Cohen predicts that the S&P 500 will gain more than 15% between now and year-end!


Back in Paris…

*** Last week, Goldman Sachs told investors to watch out for gold shares. It was unlikely that gold could rally above $324 in the year ahead, said Goldman’s analysts. How could they know what price Mr. Market would put on gold? We can’t imagine. But we can perfectly well imagine that Goldman has reasons for wanting to see the price of gold go lower; we would not be surprised if Goldman had previously advised clients to short the metal…and now finds itself with big clients with big short positions.

*** Of course, Mr. Market paid no attention to Goldman. By Friday, the price of gold was at a 5-year high.

*** And as Addison pointed out over the weekend, the NY Times’ Floyd Norris reports that insiders are still selling more than 4 times as many stocks as they are buying. The insiders cooked the books, commented one analyst. Only they know what’s really in them.

*** I came home last night to an odor of munster…or was it brie? The cheeseman!

*** "Hey, how come your book warehouse burned down?," asked a smart-aleck in the office this morning…"did you stack the Sophists too near the Aristotelians – things get a little too hot…? Heh. Heh."

The Daily Reckoning