-->When Bush Comes To Strike

The Daily Reckoning

Paris, France

Friday, 28 March 2003

-------------------

*** Stocks down a bit...gold down a bit too...the dollar
too...

*** Housing economy? Or credit economy? Home sales
falling...foreclosures rising...bankruptcy lawyers
prospering...

*** Do markets always rally after a war? Worker attendance
improving...Stalingrad...and more!

-------------------

The U.S. is a"housing economy", we are told. What kind of
economy is that, we wonder?

Last year, homeowners took out $130 billion in home equity
loans, up nearly 100% from 2001. What a surprise, now we
find that home equity loan delinquencies are rising...along
with foreclosures!

"We are just buried in foreclosures," said a bankruptcy
lawyer in St. Paul. So many people are losing their equity
lines that they are filling lawyers' waiting rooms.

This is no problem, says the credit industry, because
householders have a lot more equity in their homes that
they haven't spent yet - $6.6 trillion.

But the problem for American consumers is not a lack of
'equity'; it's a lack of cash flow. The more a person
mortgages his house...the more money he has to pay to the
mortgage-lender in order to continue living there.

The Mogambo Guru offers an economist's assessment of the
typical householder's dilemma:"My 401(k) is down over
half, they are re-possessing my car, I'm late with my
mortgage payment again this month, the company is slashing
the payroll, my benefits package has been pared back, my
son thinks he's gay, may daughter is in love with a biker
who is wanted for questioning by the FBI, for crying out
loud...Get away from me!"

Offering the poor man access to more credit is not
necessarily doing him a great favor. You might just as well
offer to introduce a rich, lonely woman to an Argentine
gigolo...or a weightwatcher to a French pastry shop. But
the banks, the Fed, Fannie Mae, Freddie Mac and the sub-
prime lenders are still handing out business cards all over
town.

To their credit, consumers seem to be taking up these
offers a little less eagerly. New home sales, for example,
just saw their biggest drop in 20 years. Savings rates are
creeping up. And sales figures are easing off.

Maybe this is the beginning of a long-term trend. Or maybe
consumers are just experiencing a temporary attack of
prudence.

"They'll get over it soon," say the bulls...just as soon as
this war is over. (More on that below...including the 'real
reason' for the war...)

Eric, your thoughts...please...

-----------

Eric Fry (who, by the way, is also hosting CNNfn's"Market
Call" this morning from 9:00am to 11:00am)...

- Investors ducked for cover again yesterday, as the Dow
dropped 28 points to 8,201 and the Nasdaq slipped 3 to
1,384. Gold investors also kept their heads down as the
yellow metal dipped $1.70 to $328.40 an ounce. Meanwhile,
the energy markets charged ahead. Crude oil for May
delivery busted through the $30 level by gaining $1.74 to
$30.37 a barrel. Unleaded gasoline kept pace by advancing
more than a nickel to 97.5 cents a gallon.

- To judge from today's stock market action, the rising
price of gasoline is taking a big bite out of the household
wine budget. The shares of Robert Mondavi spilled 6% after
the wine maker warned it would post a loss for the quarter.
Mondavi blamed weaker demand for its wines and an
oversupply of grapes, which has led to intense price
competition and a proliferation of new brands. In the post-
bubble economy, it seems, beer and potato chips have
replaced chardonnay and foie gras.

- In response to the falloff in business, Mondavi plans to
follow the well-worn path of firing workers. The company
will slash its payroll by about 10%. And just like that,
one more company contributes to the ranks of the
unemployed. Despite our economy's positive GDP numbers,
unemployment remains stubbornly high. The four-week moving
average of initial unemployment claims still stands at a
hefty 422,500 job claims per week. A recovering economy
should not produce numbers like that.

- But let's not focus entirely on doom and gloom. Let's
look on the bright side. The difficult job market means
that your co-workers may not slough off as much as they
used to. Read on..."The latest casualty of the worst
employment market in a decade is the sick day," the Wall
Street Journal reports."Given the grim job market right
now, looking lazy is a bad idea.

-"The sluggish economy has done wonders for the nation's
attendance record. This year, about 200,000 fewer employees
per week are taking a day off for health, personal or
medical reasons than did in 2000, according to the Bureau
of Labor Statistics...Even managerial-level workers, who
might arguably feel they have more job security than their
minions, aren't playing hooky as often these days...One
telling indicator: It's getting easier to line up tee
times. At the Inverness Golf Club in Denver, rounds played
by guests of members fell 20 percent last year."

- When, if ever, will the gold shares mount another major
rally? Gold stock investors are anxious to know. Despite
massive geopolitical upheaval and a steadily sliding
dollar, most gold shares have LOST ground over the last few
months.

- Maybe gold is a barbarous relic after all. Or maybe the
mega-rally that gold bugs dream about is just a bit slow to
get under way. We have no idea, of course, but the
McClellan Market Report declares,"We expect a major (we
mean major) bottom in gold prices next week." McClellan
bases its observations on a proprietary technical analysis
with a pretty good track record. Past performance does not
guarantee future results, of course. But we thought we'd
pass along the information just the same. Besides, we're
inclined to believe that gold is better bought than sold at
current prices.

-"One way to look at the recent pullbacks is that it is
merely a 'refueling' phase before the next Gold price
push," says Victor Hugo of Hugo Capital."The rocket
beneath the Gold price will be lit when the realization
spreads that the U.S. is in a debt hole and won't grow out
of it quickly...The U.S. Federal Reserve cannot continue to
print trustworthy money whenever it needs to, whether in
the form of uncontrolled government spending and trade
deficits or otherwise."

- While on the air Wednesday at CNNfn, your co-editor
engaged in a panel discussion with Roger Ibbotson, the
well-known and oft-published Finance Professor at Yale
University. Ibbotson arrived on the set armed with the
fruits of his elaborate mathematical equations and his
high-tech data-snooping capabilities. He displayed a chart
showing how stocks"always rally" one year after a war.
It's true; one year after World War II, the stock market
rallied more than 20% and it advanced a similar amount 12
months after the Korean Conflict. Stocks produced somewhat
less spectacular gains one year after Vietnam, but gains
nonetheless.

- You see, war is bullish, Ibbotson proudly demonstrated.
Your co-editor noted one important caveat: a post-war rally
may not commence until we are post-war. During-the-war
markets are not nearly so friendly to investors.

- Off the air, your co-editor questioned the professor:
"Mr. Ibbotson, you realize, of course, that these various
post-war rallies all commenced from very dissimilar
valuation levels, none of which bear any resemblance to
today's valuation levels." He shrugged. Your co-editor
continued,"Stocks were selling for about 14 times earnings
in 1945 and yielded about 4%. So we may not get quite the
same post-war pop this time around, right?" He shrugged
again.

- In fact, dear reader, stocks that are twice as expensive
as they were in 1945 needn't rally at all, no matter what
Professor Ibbotson's charts show.

------------

Back in Paris...

*** If the war is over in a week or two, it could produce a
major 'relief rally' on Wall Street. We don't know; Mr.
Market can do what he wants without asking our 'by your
leave'. But will the war help the economy? Some people
think so. But here, dear reader, we take a categorical
position: no. There is no way under heaven that destroying
property and killing people can be good for an economy. And
even if a boom results, we will still deny it.

*** We are not saying that war is always a bad thing, at
least for the spectators. For example, it is a marvelous
distraction from life's real pains and sorrows! How much
easier it is, for example, to explain to your wife the
latest strategy for taking Baghdad...than it is to explain
why you spent the night in a hotel room with your
secretary, albeit as a war-time, cost-saving gesture...

..and frankly, the war incites our interest in history. We
read history the way we read the newspaper...not to be
informed...but only for prurient interest. The whole
hullabaloo of it is as titillating as a strip show, and
just as rewarding:

Hitler was sure he could conquer the Soviet Union quickly.
He knew the Russians hated Stalin...and thought they would
lay down their arms."The whole structure is rotten," he
remarked,"we have only to kick in the door and it will
fall down."

The campaign went fairly well...until the Wehrmacht reached
Stalingrad. (We bring this up only because Saddam has
threatened to turn Baghdad into a Stalingrad on the
Tigris.)

In 1941, the old Bolshevik brought in Marshal Zhukov to
defend the city that bore his name. Taking charge, Zhukov
immediately lined up the city's defending troops. But
instead of giving them an inspiring speech, he decimated
them. That is, he accused them of cowardice and shot every
10th man - just like the Romans used to do. This brutality
seemed to have the desired effect; the Russians fought for
every inch of ground in Stalingrad as if it were
sacred...and gradually broke the Nazi's war machine.

Now, reports from Baasra tell of Iraqi soldiers shot by
their officers - just like the Russians once were. They
also tell us that the Iraqis are not yet throwing rose
petals in the coalition forces' path; instead, they may put
up the same stubborn resistance to the invader that the
Russians did. And the campaign of Blitzkrieg - oops, we
mean"shock and awe" - seems on the verge of losing its awe
factor altogether.

*** Of course, we have no doubt about whether George Bush
is a geopolitical genius. But we're still not sure how the
war makes the world a safer place. Both friends and enemies
alike are watching the war in Iraq with alarm and great
interest. They're all looking for weaknesses in the U.S.
military machine...calling their arms suppliers...and
laying up provisions.

***"A world order in which the superpower decides on
military strikes based only on its own national interest
simply cannot work," said German foreign minister Joschka
Fischer. News reports tell us that German restaurants are
boycotting certain U.S. products. What's more, the Germans
have declared that they will not contribute to rebuilding
Iraq. The U.S. is destroying the country, they seem to say;
let them pay to rebuild it.

*** Which raises an interesting issue...how will the
world's largest debtor pay up? More below...

The Daily Reckoning PRESENTS: On day 9 of the war, much of
the world is still wondering:"why Iraq, why now?" Bill
Bonner considers a few of the media's more prevalent
answers.


WHEN BUSH COMES TO SHOVE
By Bill Bonner

And freedom? Ahh, freedom...
that's just some people talkin'

"Desperado"
- the Eagles


The world's chattering classes pose themselves a two-part
question: Why Iraq? Why now?

The Bush administration has given its answers. Saddam is a
monster...he may have weapons of mass destruction...he has
links to the Al Qaeda network...America's security is at
stake...it is our duty to bring freedom to the Iraqi
people...and so on.

These explanations were good enough for reporters, members
of Congress, and village idiots...but the skeptics, cynics
and kibitzers needed something more. All that Bush had said
about Saddam might be true, but the same could have been
said of him when America was supplying him with weapons of
mass destruction a few years ago...and now could be said of
many other regimes in the area. Cynics scratched their
heads...and even laughed out loud at the"Liberty for Iraq"
campaign theme. What's the 'real reason' for the war, the
intellectuals continued to wonder? A French journalist,
Francois de Bernard, wrote recently that he was so
perplexed, he decided to study the transcripts of White
House discussions for signs of mental illness!

Here at the Daily Reckoning, the question came up from time
to time. We do not especially like intellectuals...and we
have no faith in thinking, especially our own. But we stoop
to it occasionally, after we've been drinking. We drink so
much, however, that it is hard to find a single idea in our
whole Daily Reckoning oeuvre that doesn't bear the stains
of cheap Bordeaux.

We take it for granted that politicians usually lie and are
often insane. Still, when they do extraordinary things -
such as making war for no apparent reason - we look for
reasons at least as absurd as the events they are meant to
explain.

"It is plain bizarre," wrote Geoffrey Heard, from
Australia, preparing to offer one."Where does this
desperation for war come from?"

"It's oil," is the reason most commonly given.

The insight quickly spread among the Greens and peaceniks,
who didn't care much for oil in the first place. They were
perfectly content to drive an SUV to an anti-war
demonstration, but they never liked the people who produced
oil, and didn't like the idea of other people using so much
of it."No blood for oil," became their slogan.

Blood for oil probably seemed like a fair bargain to many
Americans, so long as it was someone else's blood. But the
'blood for oil' theme was too obvious to elicit much shock
and awe at cocktail parties. And few intellectuals could
imagine that the Bush administration would go to war in
order to give their buddies in the oil industry a few slimy
dollars of profit. 'Even Republicans could not be that
craven,' they said to one another, probably underestimating
them. But the theme had an even graver defect: it sounded
too moralistic, as if someone were wagging a finger and
threatening damnation.

Intellectuals had long since come to see the world in a
different way: it is a mechanistic world, not a moralistic
one, they say. Push lever A and you get result B. Morality
has nothing to do with it; people get the results they
chose, not the results they deserve. All they have to do is
to push the right buttons and pull the right levers.

James Davidson, writing in this space a few weeks ago,
accused us of being"Old School" here at the Daily
Reckoning and derided the whole idea of morality in the
marketplace. Why should investors ever be 'punished' for
excessive gains, he wondered? Why couldn't they just earn
more and more money, forever and ever, amen?

Paul Krugman, too, dismissed the notion that economics has
a moral character."Hangover theory," he called
it...referring to the way a man who enjoys an excess of
alcohol in the evening suffers an excess of regret the
following morning. All that is needed is for government to
make the right 'policy choices', he said, and the hangover
would disappear.

The right policy choices had been described by Lord Keynes
many years before. Analyzing the Great Depression, he came
to the conclusion that it didn't really matter how much you
drank the night before...you just had to find the right
lever in the morning. When an economy fell into a slump,
said he, the lever to pull on was the one marked
"Government Spending". If the private sector was unwilling
to spend, the public sector should pick up the slack; it
was a simple as that. No moral lessons needed.

After mocking morality for the last 100 years, the
intelligentsia could not look at the war from a moral
perspective; instead, intellectuals had to pry open the
hood and see how the machine worked.

Why was Bush pushing so hard on the"I" button? For the
last 6 months, critics have been tracing the wires to try
to figure out where they lead. Only recently, they have
come upon the dollar.

"There are many things driving President Bush and his
administration to invade Iraq, unseat Saddam Hussein and
take over the country," explains Heard."But the biggest
one is hidden and very, very simple. It is about the
currency used to trade oil and consequently, who will
dominate the world economically, in the foreseeable future
- the USA or the European Union.

"Iraq is a European Union beachhead in that confrontation.
America had a monopoly on the oil trade, with the U.S.
dollar being the fiat currency, but Iraq broke ranks in
1999, started to trade oil in the EU's euros, and profited.
If America invades Iraq and takes over, it will hurl the EU
and its euro back into the sea and make America's position
as the dominant economic power in the world all but
impregnable."

"In 1999, Iraq, with the world's second-largest oil
reserves, switched to trading its oil in euros. American
analysts fell about laughing; Iraq had just made a mistake
that was going to beggar the nation. But two years on,
alarm bells were sounding; the euro was rising against the
dollar, and Iraq had given itself a huge economic free kick
by switching.

"Iran started thinking about switching too; Venezuela, the
4th largest oil producer, began looking at it and has been
cutting out the dollar by bartering oil with several
nations including America's bête noir, Cuba. Russia is
seeking to ramp up oil production with Europe (trading in
euros), an obvious market.

"The greenback's grip on oil trading, and consequently on
world trade in general, was under serious threat. If
America did not stamp on this immediately, this economic
brushfire could rapidly be fanned into a wildfire capable
of consuming the U.S.'s economy and its dominance of world
trade."

Mr. Heard has a point. The U.S., its dollar, its consumers,
its government and its central bank have an enormous
advantage. But it is an advantage like an unlimited bar
tab; it can get a man into trouble.

The U.S. issues dollars to pay for the things it wants.
Many of the dollars are then used to buy oil. As long as
oil accounts are settled in dollars, there will be a demand
for them. But the demand is not infinite. More dollars are
needed only insofar as the world's use of oil
increases...not necessarily as America's need for foreign
credit increases.

The wiring of the world financial system is more
complicated than Mr. Heard thinks. The U.S. may seize the
oil fields. It may reinstall the dollar as the designated
currency. But it cannot make its financial situation
"impregnable". It can control the value of its currency, or
its quantity, but not both. If it increases the supply of
dollars, it risks setting off a panic out of dollars -
whether oil is priced in dollars or not.

The U.S. may control Iraq's oil fields, but it cannot
control oil's price...nor its reciprocal, the price of the
dollar. In the end, these will be determined not just by
how the oil market is wired, but also by how human beings
are wired. When they grow fearful of the dollar...not even
the 3rd Infantry will be able to stop them from dumping it.

Then, there will be hell to pay...no matter what lever
authorities choose to yank.


Bill Bonner,
writing from a little outpost of the Old School, in a
small, old corner of an old city in old Europe...