Victory Proclaimed

Well, it appears the U.S. invasion of Iraq went about as well as could be expected. It would have been terminally embarrassing if the American military couldn’t crush some half-starved fellahin dragooned into the rag-tag army of a bankrupt Third World dictatorship on the verge of civil war. So those who supported the invasion are, at once, smug and jubilant. And, since most people (understandably) prefer to be on the winning side, those who were fence-sitters, or only opposed for technical reasons, have joined the ranks of Bush supporters.

Personally, I’m happy it turned out to be a relative non- event. But, then, this is only a sideshow in a much larger circus. To mix analogies, I see Bush and his neo-con handlers as being like the man who jumps off a 100-story building and says, as he passes the 90th floor, “So far, so good.” Although most Iraqis appear happy that Saddam is gone, they’re unhappy he’s been replaced by foreign occupiers. Will the American experience in Iraq start to resemble Israel’s in Gaza and the West Bank? So far, not so good.

The most unsavory part of being against the war, for me, is the company one has to keep on the barricades. It’s most uncomfortable being surrounded by Greens, socialists, effete literati, Hollywood bleeding hearts, European politicians, animal rights protesters, and a vast assortment of other whacko leftists whom I’d forgotten were even still alive. Oh well. C’est la guerre. But I can only imagine how embarrassed Osama must be to have been lumped together with Saddam.

America’s Invasion of Iraq: “Re-Deployment”

But the fact that the U.S. Government started the war has drawn the world’s attention to a number of questions. Although it’s true 21st Century Man’s attention span is as short as an MTV video, it may actually last until the next invasion…err, strike that…I mean re-deployment of troops. In the meantime, the adventure does raise a few questions.

Such as…can the U.S. be trusted to obey international law? I’m not a fan of the UN, which is mainly a cushy club for bureaucrats. And “international law” is about as binding and valid between nation-states as the results of a “sit-down” are between gangsters. But, still, it’s notoriously stupid to disrespect one’s peers, even if you’re bigger, stronger, and it’s convenient. It’s wiser to play by the rules, if you want to retain the moral high ground. That’s why, for instance, Roosevelt goaded the Japanese into attacking at Pearl Harbor, rather than launching the first strike himself.

And then, has the U.S. become an unpredictable bully? It’s one thing when the U.S. conducts a lynching in its back yard viz. Panama, Grenada, Cuba, Haiti, Nicaragua, etc., etc. It was certainly pushing the envelope a bit when a Mad Bomber like Clinton struck out in Sudan, Afghanistan, and the former Yugoslavia. But two full-scale foreign wars in as many years is, I think, a bit much. All these adventures, and many others (prominently including Vietnam) were against vastly less powerful opponents, who presented no credible threat. Based on that, a member of an axis of evil might want to get serious about getting nuclear weapons as soon as possible, for the same reason a 98-pound weakling might want to take a Charles Atlas course.

Is U.S. policy in the hands of pro-Israel ideologues? Based on who the U.S. attacks, who it gives money to, and what policymakers say, this is not only a reasonable question. It’s a pointed and disturbing one to Muslims. And where is the truth in all of this…can the U.S. government be trusted to tell it? I know this seems like a stupid question, since no government can be trusted to do so. And it’s become a cliché that, in war, truth is the first casualty. Still, there are limits. The Soviet government was a laughing stock because what it said usually amounted not just to lies, but the perverse opposite of the truth. It doesn’t help the cause of the U.S. when the main reasons given for the invasion were Weapons of Mass Destruction (which clearly didn’t exist), and fronting for Osama (which never made sense). I might add the Creation of Democracy (which seems like a real long shot).

America’s Invasion of Iraq: A Polite Version of Mob Rule

But even if “Democracy” were to be created, would it only be acceptable when it produces a pro-U.S. government? I’m no fan of democracy myself; it usually amounts to no more than a polite version of mob rule. It’s certainly not a positive value, in my view. Since the end of WWII, the U.S. Government has a consistent history supporting the idea of democracy, while attacking its reality, by overthrowing popular regimes that don’t suit it, and supporting dictatorships when the ruler is compliant. I’d say the chances of an Islamic radical becoming the next president of Iraq, even if he’s elected with 100% of the vote, are about zero while the U.S. Army is there.

And what about Americans themselves? Is U.S. public opinion generally uninformed and are Americans insanely patriotic? I’m not convinced that any nationality escapes this indictment. Sure, Americans are jingoistic (e.g., the boycotting of French wines, re-christening of French fries as “Freedom Fries”, and other embarrassing stupidities). But I’ve been to 170 countries, and have to say that things of this nature, like the Salvadorians and the Hondurans starting a war over a soccer match, is par for the course. Americans are actually better informed than the vast majority of the world’s 6 billion people. But that’s not saying much, in that their main sources of information are sound-bite television, and publications written to a sixth- grade comprehension level. The point is that Americans historically were – and should be, in my opinion – held to a much higher standard. It’s not a good thing when “the natives” in all kinds of benighted places mock Americans for being, in effect, even more ignorant and irrational than they themselves.

I don’t know how all this will end, any more than does Bush or Rumsfeld. But my prediction is: badly. Timing is the real question in my mind, although even that is not so terribly critical. The important thing is to be on the right side of the trend. And the trends are quite clear. The trend in the U.S. dollar is decisively down. The bear market in stocks has a long way to run. The trend in interest rates is likely up. And the bull market in gold and gold stocks is still in its early stages.

Stay on the right side of these trends over the next few years, and you’re likely to not only preserve capital, but even make a killing. That’s saying something during the best of times. But, in bad times, when the vast majority of people are suffering real declines in wealth, it makes all the difference in the world. At some point these trends will change, as should your investment posture. But it’s not going to be anytime soon.


Doug Casey
For the Daily Reckoning
May 12, 2003


It is hard to get interested in the stock market. The days of giddy hallucination – when investors thought they were going to get rich on IPOs, techs, and dotcoms – are over.

Now, investors still think they will get rich in stocks; it will just take longer. The Delusion du Jour is that stocks always go up in the long run, which is no less mistaken than the IPO mania…but less fun to watch.

The consensus view on Wall Street is that stocks will go up 7%. Where do they get that number? If only they were in front of us so we could laugh in their faces! They must just make this stuff up…for they have no more idea than anyone else what stocks will do, which is no idea at all.

Here at the Daily Reckoning, we put up our hands and surrendered, unconditionally, to ignorance a long time ago. Mr. Market will do what he damned well wants to do…without consulting us, asking our opinion, or giving advance notice.

Not having any idea what Mr. Market will do, we have developed a philosophy that is ignorance-friendly. As long- time Daily Reckoning sufferers know, we don’t aim to do the smart thing…we just try to do the right thing. Nor do we worry about buying investments that we think will go up in price…we just try to find those that have fallen so much there doesn’t seem much room left.

S&P stocks, at 33 times earnings, still have plenty of space on the downside. And looking at Japan for a role model, we notice that the trip from top to bottom can take a surprisingly long time. Investors began losing money in Japan in 1990 – 13 years ago. But the Japanese government and central bank rigged up so many safety nets, the poor fellows could hardly find a square meter of hard concrete on which to fall.

No one pays much attention to Japan anymore. ‘Tis a pity, since if you wanted to peek into the financial future at any time in the last 10 years, you could have read Japan like tomorrow’s newspaper. And even when people do bother to look across the broad Pacific, they don’t seem to understand what it is they are looking at.

“Trapped like Japan,” begins a CNN/Money article. The trap the piece is talking about is a “liquidity trap,” in which people stop spending or investing money. Money makes the world go ’round, as they say. And when people grow so fearful that they’re no longer willing to part with it, the economic world comes to a halt which, I know I don’t have to tell you, dear reader, is very bad news for central bankers seeking immortality and presidents seeking reelection.

But don’t worry about it, says CNN/Money. It’s an easy problem to fix. “You print money until inflation is introduced to the economy. For savers, inflation means that the money they have in the bank today will be worth less tomorrow – so they spend it. For debtors, today’s debts will not cost them as much tomorrow, so they get less worried about their balance sheets and beginning to spend as well.”

If it were that easy, why didn’t Japan get itself out of the liquidity trap 10 years ago? Why isn’t the inflation rate a positive number in Japan?

We don’t know and don’t mind saying so. But most analysts, kibitzers, and shills still struggle against ignorance like a grown man arguing with his wife; he must know it is hopeless, but he can’t help himself. And who knows, maybe he will get lucky. Maybe stocks really will go up 7% this year. And maybe the very same policies that failed in Japan will work in America.

Then again, maybe not…

And here’s Eric Fry with more details on America’s stock market:


Eric Fry in New York…

– The stock market mustered another winning week…barely. The Dow Jones Industrials inched ahead 21 points to 8,604 and the Nasdaq tacked on 17 to 1,520…Hardly a resounding victory for the bulls, but a gain nonetheless.

– Meanwhile, the dollar continued crumbling while gold soared. In a volatile week for the currency markets, the dollar dropped more than 2% to $114.75 per euro. Meanwhile, gold for June delivery jumped more than six dollars to $348.90 an ounce.

– The dollar’s pronounced weakness may be starting to worry folks. Clearly, stock market investors exhibit much greater optimism than they did just a few weeks ago. “Investor sentiment, as measured by surveys and the pricing of protective options, is suggesting that a large segment of the public has caught a case of the giggles,” Barron’s notes. “There’s a line of thinking that a lot of investment professionals have adopted that goes something like this: First-quarter earnings came in stronger than forecast, and expectations for the current quarter seem undemanding. This, say the optimists, should buoy the market until mid- year, at which point – What do you know? – the Street will start to focus on happy 2004 profit forecasts.”

– But as much as investors would like to maintain a positive outlook, it’s getting harder and harder to block out “bad vibes” like a collapsing U.S. dollar and rising unemployment. Notwithstanding the last Friday’s sparkling rally, investor confidence seems to be waning a bit. Absent for the moment is the bravado that inspired the recent 1,000-point Dow rally.

– Instead, we find most investors warily looking over their shoulder, like a young child in a dark bedroom…Is that shadowy image in the closet really a collapsing dollar? And what’s that’s scary figure over there?…The one that looks like massive job losses? These scary images simply refuse to go away. Almost as frightening is the fact that some of the recent “good news” may not be all that good.

– With nearly 90% of the S&P 500 membership having reported their first-quarter results, ISI Group observes, the year- over-year rise in earnings stands at a hefty 14.7%. Just for kicks, let’s assume that accounting gimmickry is a thing of the past and that the reported earnings are as clean as Martha Stewart’s apron. Even granting that dubious assumption, the 14.7% earnings growth reported by the S&P 500 is far less robust than it would appear.

– For starters, as Barron’s points out, “the overall S&P 500 numbers got a big boost from energy companies, whose profits swelled by more than 200% over the prior year, thanks to the ramps in oil and natural-gas prices, which have already subsided. The second ‘finger on the scale,’ if you will, was the salutary impact of the sinking dollar on the books of multinational companies. By some estimates, the benefit of translating euros and yen into dollars at a favorable exchange rate was responsible for virtually all of the top-line growth evidenced by large companies so far this year.”

– Net-net, the “strong” quarter owes its entire strength to a rising oil price and a falling dollar. Hmmm…that does not exactly seem like a textbook formula for strong earnings growth, much less for sustainable economic growth.


Bill Bonner, back in Paris…

*** We’re still trying to figure out what is going on with the dollar. It is going up against a long list of consumer items…but going down against most currencies and against gold. We guessed that the dollar would fall against foreign currencies. Foreigners already had more than enough dollars, we reasoned. When they wanted to lighten up…to whom would they sell?

Already, the dollar is down about 25% against the euro. Does it have another 25% left to fall? Or 50%? We don’t know.

But as we look around for money that is really cheap, we stumble on gold. Ignorance and modesty prevent us from telling you whether gold will go up. But even at $350 we doubt that it will go down very much. The dollar…and the euro for that matter…have the potential to go down a lot. Sooner or later, all paper currencies seem to go away. Gold remains.

“It’s a superb time to back up the truck – although, naturally everyone felt more like doing so when gold was at $380,” writes my old friend Doug Casey. “The name of the game here is to actively do the opposite of what your emotions tell you. In the Battle for Investment Survival the emotional are the victims the cannon fodder. The victors are the rational, and those who understand the fundamentals driving the markets.”

The fundamentals of today’s currency market are dominated the Federal Reserve – which has promised to print as many dollars as necessary to keep prices rising. We doubt that the Fed can get exactly the rate of inflation that it wants. Perhaps it will get too much, perhaps too little. In either case, the price of a real store of value – such as gold – is likely to rise.

“To put that into, well…emotional terms,” Casey continues: Back up the truck…we’re in the early stages of a gold bull market.”

The Daily Reckoning