-->Lethal, But Not Serious

The Daily Reckoning

London, England

Wednesday, 9 April 2003

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*** Expectations...and more expectations...

*** America's biggest and best businesses are profit
disasters...collateral damage on the home front...

*** Audit committees...Ceaucescu?...British
casualties...how much gold to own...and more!

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Expectations.

That is what moves markets. Not what is going on
today...but what investors fear or hope for tomorrow.

Expectations move mass politics, too. People become fearful
about what the future holds and want to 'do something about
it'. But the currents of expectation are often so deep that
people are unaware of them. They think they are buying
stocks, for example, because they have made some rational
analysis of the stock market...but, in fact, some hidden
fear is driving them to it, such as the fear of missing out
and feeling like a schmuck when everybody else is getting
rich.

Whatever investors say to pollsters, the deep current of
expectation in America today is still very warm towards
stocks....and war. You have only to check the P/E
ratios...and the headlines.

Fortune Magazine reports that profits of the Fortune 500
dropped 66% last year - to levels not seen since 10 years
ago. And for only the 6th time since 1955, revenues for the
group fell too. An investor who bought the whole group of
America's largest and finest companies would have earned
only a 1% return on his money!

It is mad, of course...and only explained, not by logic or
reason, but by the persistence of bullish expectations...

Meanwhile, retail sales continue to decline...even as
consumer credit climbs. Non-mortgage credit rose $1.5
billion in February, while mortgage debt reached 74% of
aggregate disposable income...compared to only 59% 10 years
ago.

Americans have deep and inexplicable expectations about the
war, too. Militarily, there was never any doubt that they
could kick the butts of their one-legged opponents. As we
see now, Saddam's power had reached bubble proportions in
the public's mind...Once pricked by American tanks, it
deflated faster than the Nasdaq (more below).

But the deep currents of expectation run far beneath the
obvious. Americans seem to feel that the war is more than a
military adventure...that somehow, it represents America's
ability to control events...and to not only see into the
future, but to improve upon it. And if the commander in
chief could do for our safety...could he not also do it for
our prosperity? Again, there was nothing logical or
reasonable about it...but the deep currents of mass
sentiments need no proof, no justification; they are
expressions of hopes and fears that do not go away, but
drag the public along, submerged and unconscious...

So now what? Will the stock market rally sharply...and a
new economic boom begin...now that the war is over? Or is
the future unknowable and uncontrollable, after all?

We will see...

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

Eric Fry, with more thoughts from New York:

- Is he dead or is he alive?...We are referring, of course,
to Mr. Market. Although he showed tentative signs of life
yesterday, many investors may have felt the urge to hold a
mirror to his nostrils. The Dow Jones Industrial Average
slipped one point to 8,299 and the Nasdaq nodded 7 points
lower to 1,393.

- Yesterday's stock market inaction suggests that investors
are starting to"come down" from their"Baghdad buzz". Now
that the high produced by exhilarating battlefield
headlines is fading, investors must resume looking at the
somewhat less thrilling economic headlines crossing the
newswires each day.

- The economy wasn't terrific before the war. And we doubt
that the expensive and distracting Iraqi campaign has done
anything to enhance America's economic prospects."With our
troops facing their final challenge in Iraq - trying to get
past security at the newly upgraded Baghdad International
Airport - we are soon to discover whether the mushroom
cloud of war will lift to reveal an economic spring in full
bloom underneath, as universally expected," writes
Stephanie Pomboy of Macro Mavens."Any recollection that we
were in recession before [the war] has been wiped from the
general consciousness. Perhaps this simply reflects the
advances in stealth weaponry which can now accomplish swift
military victory while simultaneously repairing all woes
economic."

- Pomboy is dubious, and so are we. American consumers and
corporations have been sitting on their hands for so many
months now that they've probably gotten used to that
posture. Savings rates continue to climb, as business
investment continues to slide. The conquest of Baghdad is
unlikely to reverse these trends.

-"The economic damage on the home front may only be
beginning," CBS Marketwatch reports,"American businesses
and workers are already paying the price through mounting
job losses, slumping travel and a parade of companies
warning of lower profits. Jittery investors, executives,
and customers are only part of the problem. The invasion of
Iraq has set off a wave of anti-American sentiment around
the world that might well wash on to the balance sheets of
U.S.-based multinationals. Well-publicized boycotts of
American consumer brands have been called for, or are
underway, in the Middle East and Europe."

- In short, the occupation of Iraq - like moving in with a
girlfriend - may create greater difficulties than the ones
it promises to solve.

- This just in from the Closed-Door-After-Horse-Already-
Out-Of-Stable Department: Audit committees met nearly 50
percent more often last year, according to a Financial
Times analysis of regulatory filings by the 30 companies
that make up the Dow Jones Industrial Average."The 24 Dow
companies that have already filed their reports on board
activity held 177 audit committee meetings last year," the
FT determined,"compared with 119 at the same companies in
2001, an increase of 48 percent.

-"The same analysis of the proxy filings shows most Dow
components that did not have a corporate governance
committee in 2001 added one last year, or gave that
responsibility to an existing committee of directors.
At Intel, directors held 10 audit committee meetings last
year, compared with three in 2001...The number of audit
committee meetings at Boeing, the aircraft manufacturer,
doubled to 12 in 2002. The two big U.S. banks - JP Morgan
Chase and Citigroup - held 11 audit committee meetings, up
from seven and eight meetings respectively in 2001."

- We suppose that corporate America's post-facto vigilance
is better than none at all. But an ounce of prevention
would have been better than a barrage of audit committee
meetings AFTER American shareholders have already been
fleeced by unscrupulous managements. Furthermore, a
'meeting' does not necessarily equate to vigilant
oversight. Aren't most meetings simply cosmetic affairs
that permit all the participants to imagine that they are
doing something useful, even when they aren't? After all,
after comparing golf scores, how much time actually remains
to perform the tedious task of examining financial
statements?

- We would wager that one uninterrupted hour spent
examining a company's financials is worth about 10 audit
committee meetings. Unfortunately, no amount of time spent
auditing financials will make them show the sort of
earnings growth required to justify a stock market selling
for 30 times earnings.

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

Bill Bonner, back in London...

***"More like Ceaucescu than Stalin."

Lord Rees-Mogg was describing the regime that is just now
being changed.

America's military machine seems to have performed more or
less as expected. What is unexpected was the incompetence
of the enemy. Saddam, it turns out, posed little threat to
anyone - except his own people. His army failed to blow up
the oil fields...failed to take out the key bridges leading
to the capitol...and then failed to mount the house-to-
house resistance that was expected of it. From the roofs of
apartment buildings, instead of placing snipers with
telescopic lenses, he allowed journalists with telescopic
lenses.

Saddam was overbought...like Ken Lay or Osama bin
Laden...he enjoyed a period of exaggerated fame and
fortune...but now the bubble has popped. And now,
gradually, the country can slink off of the world's
newspaper headlines and go back to its usual mismanagement,
vice and insignificance.

"It looks as though he was greatly over-rated..." Lord
Rees-Mogg continued, speaking of Saddam."He was merely
another crackpot dictator with gold taps in the bathroom...

"I have been in favor of the war...I just thought he was so
awful to his own citizens that he should be eliminated.
But, of course, if you apply that rule to foreign policy
generally, I guess we'll have to attack Zimbabwe next."

*** Retail sales are still slipping, the Fed reports. Chain
store sales are down.

Little surprise! Americans have less to spend. They're
losing jobs...while their fixed costs continue to rise. The
cost of operating an automobile, for example, rose 1.5
cents last year - to 51.7 cents.

*** Gold rose slightly yesterday; the dollar fell. If the
Bush administration can control the world and its
future...it certainly can control the world's money, right?
The dollar had been rising on that expectation. We don't
know, of course...but we would buy some gold now - at
today's low prices - just in case.

Gold is insurance against what you cannot control. For long
periods, it is unnecessary. But then, as people begin to
believe they have everything under control...something goes
wrong and they wish they were insured. How much gold should
you own? Richard Russell says 7% to 10% of your assets
should be in gold. If things go really wrong...you'll wish
you had more.

***"More British soldiers have been killed by Americans
than by Iraqis," said a twitty presenter on British TV this
morning, challenging a military expert.

"Well, with all these high tech weapons, and so many
coalition troops on the ground and in the air, I'm afraid
mistakes will be inevitable," came the incomprehensible
reply.

The Daily Reckoning PRESENTS: A DR Classique, in which Bill
Bonner ponders war and peace. This essay was first
broadcast on April 8, 2002.


LETHAL, BUT NOT SERIOUS
by Bill Bonner

"The heart has reasons reason cannot reach."

- Sylvie, quoting sommeil


Man is badly designed. Not in every particular, but in a
few.

That insight comes not as a theoretical point, but as a bit
of practical information. Sketching out a man's internal
plumbing on a piece of prescription paper, Dr. Moreau of
the staff of the American Hospital's emergency room
revealed a design flaw:

"As you can see," he explained, with the impatience of a
nuclear physicist explaining photons to an orangutan,"it's
bound to cause trouble, sooner or later."

What a strange thing. The same God or Mother Evolution that
built such an exquisite universe seemed to have lost
interest when he got to man's entrails. For there, on the
left side of the intestinal tract is a little appendix -
with no role except to create problems. And then, down
below are various tubes and passages. Had one of them been
made just a little more commodious...I would have been
spared a visit to the American hospital.

"And look at that," said Dr. Moreau, holding up an x-ray as
if it were an aerial photo of the Hindu Kush,"you're going
to have trouble here." He was pointing to the range of
lower vertebra. After years of heavy lifting, the cushions
between the bones have been worn down.

"You must have lower back pain from time to time," the
doctor noted.

It is not our place to carp and criticize. But, it would
have been nice if the manufacturer had installed more
durable cartilage in the 1948 models. And more flexible
tubing."But that is the problem," said my French tutor.
"Men are not as you want them to be; they are as they are."

What had set Sylvie off was neither my plumbing nor my
neglect of the subjunctive, but my thoughts on war and
peace.

"Almost every war Americans have ever fought has turned out
to be a mistake," I had told her. I had taken her on a
brief tour of American military history. Every war had its
"reasons", but they were all absurd. What good did the
American Revolution accomplish, I wondered aloud, when all
of Britain's other colonies negotiated their way to
independence and were no worse off for it? What about the
War Between the States? If it was fought to get rid of
slavery, it was a poor way to do it. Slavery disappeared
from the rest of the world with hardly a single fatality.
Or, if it was fought to"Preserve the Union", it was a
fraud; the union was founded on the principle that people
could decide for themselves what government they wanted to
plunder them.

"As for the Spanish American war, who knows why it was
fought...and who cares?

"And the first World War...

"Well, at least you had a good reason for that one..."
Sylvie interrupted,"to come to our aid..."

"Yes, but what was the point? If America hadn't pumped in
so much money and war material and then soldiers, the war
probably would have ended sooner. And much better. Both
sides were nearly exhausted. They would have had to
negotiate an end to the war. But America's entry gave the
Allies ammunition and the Germans targets. America
encouraged the British and French to believe they could win
the war, so they wouldn't have to accept a negotiated
settlement. So, the war continued until Germany finally
capitulated. But it was Germany's defeat...and the terms
imposed on her by the allies...that led to hyperinflation
in Germany, the rise of the Nazis, World War II and the
Holocaust...

"The average American could not have cared less about the
Archduke Ferdinand. He had no idea who Ferdinand was...or
where he stood in the pecking order of European politics.
He was as ignorant of the Austro-Hungarian Empire as he was
of the contents of Austrian sausages. An American of sound
mind and decent judgment would have just as soon seen the
Archduke stuffed and used as a parlor ornament as revenged.

"But once stirred up by the press - and the big idea of
'making the world safe for democracy' - he was ready to
enlist and get himself blown up believing that he was
protecting Western civilization from the invading Huns.

"World War II was an exception, from a U.S. point of view,"
I continued."America was actually attacked. Both Japan and
Germany declared war on the U.S. It made sense to fight
back. But for the people who started the war - the Germans
and Japanese - it was a complete disaster. It would be hard
to imagine a more foolish course of action. Both the
nations who caused the war were completely ruined by it."

Sylvie had sat quietly through this rant - merely
correcting my grammar as necessary. But now she calmly
replied:

"You're right, of course. War doesn't make much sense. But
so what? Who ever said it had to?"

Meanwhile, Philippe Simonnot explains the failure of
economists' logic as a series of"errors". In previous
letters, we've described the first major error of the 20th
century: in 1910, Norman Angell, who later won a Nobel
Peace Prize, had convinced many of the world's leading
intellectuals that war was a thing of the past. His
argument was reasonable, logical...and of course,
ridiculous.

But you, dear reader, are already in on the secret - reason
is no rampart against imbecility. Man, with his power of
reason, is badly designed. Since he is able to reason, he
imagines that the world - and he himself - acts the way he
thinks reasonable. As often as not, reason merely leads him
into absurdity.

Simonnot is working his way through economists' major
errors, and has a long way to go. The second one of the
century came just 4 years after the first:"War is costly,
therefore it will be short."

"The Germans want to crush the French as quickly as
possible," he writes,"so they can turn their attentions to
the Russians. The Austrians want to get rid of the Serbians
as fast as they can so they can turn to face the Cossacks.
The Russians must get to the front as soon as possible so
they can relieve France. And the French prepare to launch
their offensive in Lorraine at the first opportunity.
Everyone believes that speed is the key to success."

"Our soldiers leave and leave gaily," reported the Figaro
of August 2nd, 1914."They know where they're going."

"We'll be back...it will be over quickly," the Poilus told
a reporter from Le Temps.

It was widely believed that, like a barroom brawl, the war
would be quick and violent. There was no time to wait...no
time to think...no time to second-guess. It was time to
throw a punch.

The French commander Joffre believed in"the offensive at
all costs". Why not? The war would be over quickly; why
hold back? Colonel Grandmaison explained that"in the
offensive, imprudence is the greatest safeguard".

The logic was impeccable. If the war was to be swiftly
decided, the winner would be the one who brought to bear
the greatest force of arms the most quickly. Holding back
could be fatal.

Colonel Grandmaison was a real thinker. But his thinking
couldn't make the world behave as he thought it should. The
war continued for 4 long years, with the outcome finally
determined not by the initial attacks, but by what was held
in reserve: manpower, material, and money.

Grandmaison's brain had a design flaw - like all human
brains. In his case, it may have been a fatal defect. He
was killed in one of the first battles of the war, at
Reims.

Surely, on some forgotten monument in some forgotten burg
somewhere in France, you will find Grandmaison's name among
the"A Nos Héros...Mort Pour La France".

Perhaps someone has inscribed a parenthetic remark: Colonel
Grandmaison: An imbecile...but a smart one...faithfully
imprudent to the very end.


Bill Bonner