The God Of War

“Americans are walking right into a trap,” said a friend at lunch the other day.

“Terrorists don’t expect to defeat the U.S. They know they can’t do that,” he continued. “These people are not dumb…I lived among them for many years. They have a different idea of how the world works.

“They had a reason for striking the U.S.” he explained. “It was very simple. They wanted to show the rest of the radical Muslims that they could reach right into the heart of the ‘Great Satan.’ More importantly, they wanted to provoke a response. As big a response as possible. They don’t care if they live or die. They will measure their success by the extent they set the world on edge and radicalize other Muslims.”

Here at the Daily Reckoning our beat is money. But we look to the rest of life – love, war, poetry – for instruction. A man may be driven wild by love, or by war, or by a bubble market. He may act wisely…or foolishly…depending on the circumstance.

And he may be ruined or saved, often as not, by the grace of the gods as by his own perspicacity.

What turns our attention to war is the fact that we seem to be in one. And what causes us to comment is the fact that the nation’s bellicose spirit seems to have formed a grand alliance with its wishful bullishness…thus are we drawn into the war by alliances…like Germany and Russia into WWI.

That war, too, began with a terrorist incident. Gavrilo Princip, too, wanted to stir things up…to provoke the authorities. He succeeded beyond his wildest dreams. By the time the war was over, the major monarchies of Europe had all fallen – the Hohenzollerns in Germany, the Romanoffs in Russia and the Hapsburgs in Austro- Hungary – and every major government of Europe had been replaced.

Ninety-three years later, Wall Street and the Pentagon march to the same drummer. One of the causes of yesterday’s 169-point increase in the Dow was a rumor – that Osama Bin Laden had been captured or killed. In the group mind, the “war on terrorism” (the war of “infinite justice” has been quietly dropped…) is as certain as a bull market on Wall Street. It may take time. There may be ups and downs…but the inexorable march of history is towards higher prices on Wall Street and an American victory against terrorism.

We do not know better, or worse. But a victory over bear markets and terrorism is so widely anticipated and so little questioned that we cannot help but wonder – in today’s letter – what surprises the gods may have in store.

“Surprise lies at the foundation of all undertakings, [in war] without exception,” wrote Carl von Clausewitz, in his tome “On War” in the early 19th century. Clausewitz, a Prussian soldier, had seen Napoleon’s army sweep through Europe. He, too, wondered who the god of war might favor, and why.

A general who catches his enemy off guard has control of the field, Clausewitz noticed. Not only does he cause confusion and discouragement in the opposing troops, he also determines the place and terms of battle – an immense advantage.

In the present war, such as it is, it was the enemy who made the surprise move. The American response, as far as we can tell, has been as predictable as a teenager’s slouch. It is not only the response the enemy expected…but the one he wanted.

Sometimes you can win by doing what the enemy intends. But few enemies are gracious enough to set traps for themselves. More often, they set traps for their opponents.

That is why it is rarely wise to attack an enemy head- on. Instead, a smart commander, Clausewitz explains, attacks at the unexpected point – on the enemy’s flanks. “By directing a force against the enemy’s flank and rear its efficacy may be much intensified,” the Prussian continues.

Military history – like the history of markets – is a sad chronicle of mob-thinking inspiring people to do moronic things. Among the common stupidities is the direct attack against fortified positions. “The defensive form of war is in itself stronger than the offensive,” Clausewitz believed. Military strategy should be focused not on how to attack the enemy but how to get the enemy to attack you. The enemy then exhausts himself – like the Confederate army at Gettysburg…or the French in the early days of WWI – against the defensive barriers.

This principle is especially relevant in cases of guerilla warfare. The guerilla knows he cannot beat his enemy in a pitched battle, so he hits with limited resources at carefully-selected targets – blowing up trains…shooting archdukes…or driving commercial aircraft into skyscrapers – inviting his opponent to strike back with massed force.

“The immediate object here is neither the conquest of the enemy’s territory nor the defeat of his armed force,” Clausewitz observed, “but merely to do him damage in a general way.” If the god of war smiles on your enterprise, the enemy is provoked to attack in force and then he is worn out by “a gradual exhaustion of the physical powers and of the will by the long continuance of exertion.”

That is what happened to the Soviets in Afghanistan. Could it happen to U.S. forces too?

I don’t know. But, occasionally, the gods go over to the other side.

Your editor, American, and flaunting it…

Bill Bonner
October 12, 2001

P.S. I have nothing against people killing themselves for what they believe in – especially if it is something insane. But, given my preference, I’d rather die of natural causes…and I’m not even very happy with that.

Happy days are here again. Could this be the big bear market rally we’ve been waiting for?

A friend in one of the major brokerage houses called yesterday:

“It’s unbelievable. The big institutions are coming in and buying everything. They’re buying the tech stocks. AOL is going crazy…”

AOL rose 14% yesterday, after posting $24 million loss in the 3rd quarter, and warning that earnings in the 4th quarter would be disappointing too…and that they’d probably have to lay off more people…GE rose 3%…and even Amazon caught a tailwind. Bezos lost $234 million in the first quarter, $168 million in the second quarter…and announced layoffs of another 1300 employees. That’s good news, isn’t it?

Eric, what do you think?


Mr. Fry in the Big Apple…

– Bombs keep falling and the market keeps rallying. This war stuff is getting more bullish by the day. Surely there are other countries we could be bombing right now. Vaporizing the Taliban might get us to 2,000 or so on the Nasdaq. But if we ever expect the index to return to 5,000, we’ll need to find a few more targets.

– Yesterday, the Nasdaq soared 4.6%, to 1,701. The Dow climbed 169 points to 9,410. The S&P 500 index gained over 16 to 1097 – making it the first of the major indices to erase all of its losses since September 11th.

– Helping to power the rally is the notion that Greenspan’s rate cuts are starting to have a positive effect. Or at least the kind of “positive” effect that comes from people borrowing money they may or may not repay in order to buy things they may or may not need.

– The Fed chairman has been slashing rates since January in the hope that somebody – anybody – would borrow money and spend it somewhere in our economy. Perhaps, consumers are taking the bait.

– While true that corporations are mostly cutting back on debt, individuals remain addicted to the stuff and they are borrowing almost as aggressively as ever. Despite terrorist attacks and a slowing economy, consumer lending remains a growth industry.

– I don’t know how we American consumers do it, but somehow, some way, we manage to borrow and spend no matter how much borrowing and spending we’ve been doing already. And we are not borrowing just to buy stocks either.

– Several retail chains have been reporting stronger- than-expected sales. Yesterday Wal-Mart (WMT) reported a surprisingly robust 6.3% rise in same-store sales.

– Earlier this week, the Big Three car companies each announced surprisingly strong sales during the first few days of October. Ford announced sales “way beyond” expectations. Zero-interest rate car loans appear to be driving the demand.

– “We see a direct relationship between more stimulation (zero interest-rate loans) and more spending,” Bridgewater Associates observes, “indicating that consumers are still willing to buy if the financing ischeap and prices are attractive.”

– Mortgage refinancings are soaring as well. Even though Bill is not quite ready to refinance his chateau (maybe he’s just holding out for lower rates), many other American’s are rushing out to join the nationwide refinance-a-thon. “Get new mortgage” is on the national “to do” list, just below “buy flag.”

– Bridgewater notes, “Now we have stimulation from the Fed, stimulation from the government in the form of tax rebates, stimulation from the auto companies in the form of zero interest rate loans and stimulation from the mortgage market in the form of refinancings.” Net-net, Bridgewater anticipates some kind of economic rebound before too long.

– Without job creation, no lasting recovery will materialize – but that’s not true of Mr. Inflation. He shows up wherever easy money invites him.

– “The economy is changing,” observes Outstanding Investments editor John Myers. “Slow growth and rapid inflation are supplanting rapid growth and low inflation. This is the climate that existed in the 1970s when the term ‘stagflation’ was coined. And all the ingredients are present once again: a weakening dollar, easy monetary policies, and geopolitical uncertainty.”

– Maybe we should pity today’s lenders, not the overly indebted borrowers. Inflation, which falls like manna on the borrower, is a plague to the lender.

– “Las Vegas’ booming economy didn’t go bust after the September 11th terrorist attacks scared away many potential airline passengers,” the Las Vegas Review reports. “But it slowed down faster than most US cities.” That’s okay…it just leaves more room for those of us attending the Agora Wealth Symposium, being held this year at the Las Vegas Regent Hotel Oct. 31 through Nov. 3.

– “What better time for a contrarian investment conference,” Lynn Carpenter asks, “than when people are afraid to travel…and many more are afraid to invest.” Bill, Lynn, and I will be speaking…if you’re interested in joining us, there’s still time to register. Call Agora Travel at 1-800-926-6575 or e-mail

– Meanwhile, “when it comes to Japan, a contrarian instinct can quickly lead to financial ruin,” quips Andy Kashdan of “[But] a few hopeful signs are worth watching.” Kashdan says housing starts and vehicle sales are recovering in the land of raw fish, as are corporate earnings, “albeit from depressed levels.”

– “While [the] slow-motion pratfall [over the past 11 years] hardly instills confidence in the Japanese ruling elite,” James chimes in, “it has restored value to sizable segments of a market once devoid of it.”


Back to the City of Lights…

*** “Maybe we should speak French,” I said to Maria last night as we walked along the rue de Buci. Americans are being urged to cower in their hotel rooms and apartments like pathetic imbeciles. I’m not making this up. “Keep a low profile,” warns the International Herald Tribune again…suggesting that we not wear cowboy boots or act in that loud, obnoxious way that identifies us as Americans. Perhaps we should wear false beards or burqahs…and speak in pig latin.

*** “That’s ridiculous, Dad,” my daughter replied. “They can tell you’re an American as soon as you open your mouth. You don’t even have to open your mouth. They can spot you a mile away.”

*** Maria is right. The whole thing is ridiculous. What is the point of going to war…forcing goatherds to crouch in rude shelters amid their rocks…if we can’t stand upright in Paris or Chicago?

*** Maria and I continued down the street – speaking our mother tongue, louder than ever.

A pox on them all!

The Daily Reckoning