-->The Reality Of War
The Daily Reckoning
Rome, Italy
Thursday, 10 April 2003
---------------------
*** Subjugating the desert tribes - will it bring
prosperity? The stock market doesn't seem to think so...
*** Gold up...the dollar down...
*** Bond bubble, close to toppling...
The modern-day Parthians, Medes, Seleucians and other rag-
tag tribes of Mesopotamia have been nearly subdued. Today's
imperial army is master of Baghdad, just as Emperor Trajan
was 1900 years ago, and Alexander the Great several hundred
years earlier.
Mommsen's history tells us that Trajan, like Bush, faced
resistance that was incompetent and disorganized.
But the Parthians were treacherous and untrustworthy - even
in their enslaved state. Just when the future seemed to be
going as planned...and Trajan's expectations were at their
bubble peak...the gods had plans of their own...
"This moment, when Trajan seemed to have achieved all he
had set out to do and stood at the peak of his power,"
Mommsen explains,"was seized on by all the recently
subjugated nations to throw off their allegiance..."
Trajan himself was almost killed...and died not long
after...
"...leaving his plans cut off in mid-execution," Mommsen
continues."Nevertheless, they cannot be accorded much
chance of survival; there was a great deal of vain glory in
them, and the entire enterprise is not to be taken
seriously."
We have come to Rome...and are sinking deep into the ruins
of it. Our apartment overlooks the Capitoline on one side
and unidentified old stones and bricks on the other. No
empire was ever as long-lived...as grandiose...or as
absurdly extravagant as the Roman example. None ever took
on so many potential terrorists in so many different
areas...and brought most of them to heel.
What can be learned from her? Probably nothing. But here we
give readers fair warning: that won't stop us from reciting
various passages as if they were important.
And now what? Have the problems that bedeviled the U.S.
economy been blown away by the same Abrams tanks and B1
bombers that liberated Baghdad? Do consumers now have less
debt...or more money to spend? Will corporate profits
rise...and businesses begin hiring again?
Investors had great expectations. But yesterday's market
suggested that the victory on the Tigris may be a bit of a
let-down. Stocks fell, the dollar fell, while gold rose
$3.30. Gold is what people buy when their expectations turn
a little less great. Over the next few years - as we keep
saying - it would not surprise us if they bought even more
of it.
Over to Eric in New York:
-----------
Eric Fry, reporting from Wall Street...
- The stock market keeled over yesterday like a Saddam
Hussein statue. The Dow toppled 101 points to 8,198 and the
Nasdaq collapsed 26 to 1,357. Meanwhile, caution re-
emerged, as bonds, gold and oil all rallied.
-"Traders are hoping that as the statue of Saddam Hussein
comes down, the green arrows will go up," yelped a hyper-
excited Maria Bartiromo yesterday on CNBC's morning
broadcast. Maria was referring to a live TV shot of a
couple hundred"Baghdadians" toppling one of the couple
thousand statues of Saddam Hussein that dot the Iraqi
landscape. The statue's collapse triggered a brisk 90-point
Dow rally. But the exuberance quickly faded, and the green
arrows that Bartiromo had breathlessly anticipated turned a
brilliant shade of red.
-"At some point, and this moment may already be upon us,"
Ken Brown wrote prophetically in Wednesday morning's Wall
Street Journal,"a TV image of soldiers blowing up a statue
of Saddam Hussein will no longer set off a 100-point stock-
market rally. Instead those annoying little details such as
corporate earnings, growth prospects and valuation will
reclaim their hold on the market." That dreaded moment
seems to have arrived, as the growth-challenged US economy
regains its stranglehold around the throat of the stock
market, finger by finger.
- Now that the"shock and awe" phase of the Iraqi war is
drawing to a close, investors must acclimate themselves to
the somewhat less exhilarating"occupy and reconstruct"
phase. We doubt that this latter phase will get the bullish
juices flowing on Wall Street. Nor can investors expect too
many thrills back on the home front, as the post-bubble
economy continues muddling through its"scrimp and save"
phase.
- But what about all of the"sideline" cash that has been
piling up in money market funds for the last few months?
Won't that rescue the stock market? According to the
Investment Company Institute, fund managers have access to
some $110 billion of cash sitting in stock mutual funds,
and are ready to marshal these reserves at a moment's
notice and charge into the stock market to secure the Dow
Jones Industrial Average for the bulls. Furthermore, some
$2.2 trillion is parked in money market funds.
- Some market observers point to these billions (and
trillions) of dollars sitting in bond funds and money
market funds and say,"Aha! Look at all that cash that
could storm into the stock market!" We look at that same
pile of cash sitting in bond funds and say,"Wow! Look at
all the cash that could flee the bond market!" Sure, the
money MIGHT go into the stock market. But first, it would
DEFINITELY come out of the bond market. In other words, not
every bond fund seller will rush to buy 100 shares of Cisco
Systems. Some might, instead, pay their taxes or buy
groceries.
- Who knows? Some bond fund sellers might even use the
proceeds to make a down payment on a house...thereby
swapping out of the bond bubble and into the housing
bubble, if we may label either market a"bubble". Let's
consult the experts: Alan Greenspan is no help whatsoever.
By his own admission, the Chairman could not spot a bubble,
even if it landed on his morning newspaper. By contrast,
the International Monetary Fund claims a sort of
clairvoyant vision. The august global financial body
believes it sees a housing bubble in the making, and isn't
afraid to say so.
-"Housing booms such as those in the US and the UK over
the past decade are frequently followed by crashes," the
Financial Times reports."Ken Rogoff, the [IMF's] chief
economist, warned that the long boom in house prices - up
28 percent in the US since 1996, and 70 per cent in the UK
since 1994, adjusted for inflation - put them in danger
territory. 'Forty percent of all housing booms are followed
by busts, with housing price drops that typically average
25-30 per cent,' Mr. Rogoff said."
- Why worry? According to Rogoff's statistics, 60% of
housing booms are NOT followed by busts...Sleep tight!
-----------
Bill Bonner, back in Rome...
*** Our old friend, Rick Ackerman, shares a letter from a
reader:
"There may be deflation in hard assets, but my auto
insurance just went up 20%, my medical insurance just went
up 18%, my homeowners insurance just went up 20%. Gasoline
in my area is selling at $2.20 to $2.75 per gallon. The
price of food items appears to be coming down in price -
until you start to read the per ounce or other unit prices
and find that actually, prices are rising. Yes, the price
of computers is falling. There is the fool's belief that
there is zero financing for autos, but in fact you are
prepaying the interest if you take the deal. Cash or other
financing gives you thousands off of the sticker price.
Nobody is giving anything away. You may claim deflation, I
claim a rising cost of living. What interests me is not
what the numbers are manipulated to imply, but what it
actually costs me to live from day to day. That is what I
call inflation."
Yes, Rick comments, but what is really happening is that
the consumers' cost-of-living is rising at a time when he
can least afford it - when he is carrying more debt than
ever before. When he gets a $30,000 college tuition bill,
he can't pay it without either refinancing his house -
which increases his debt load - or selling assets. Or going
broke. Either way, the effect might be a debt implosion,
not inflation:
"For example, take college tuitions and healthcare costs,
which have been rising so steeply that, for most
households, these necessities have recently come to exceed
the limit of affordability. How could we not view surging
healthcare bills and tuition costs as inflationary? Well,
for those who remember the 1970s, the salient
characteristic of inflation was that rising costs could be
- and mostly were - readily passed through the system. This
is no longer true, however, nor has it been true for more
than a decade. For many businesses in the U.S., especially
those involved in manufacturing, rising costs cannot be
passed so easily on to the consumer; instead, they are
ultimately charged against profits. As should be clear in
this still-deepening recession, falling profits are
deflationary to the extent they lead to lower employment as
well as to lower stock market valuations."
[Editor's Note: For more on the inflation/deflation debate,
see Dr. Hans Sennholz' article:"The Perils of Deflation"]
http://www.dailyreckoning.com/body_headline.cfm?id=3084
*** Standing in line in the Rome airport, we got our first
look at the SARS epidemic. A planeload of Chinese tourists
waited at the passport control counter - many of them
wearing face masks. Immigration officials must have had to
think twice before letting them through.
---------------------
The Daily Reckoning PRESENTS: As the international
geopolitical scene grows ever more tense, what are the
foreseeable long-term repercussions? Taking a peek at
tomorrow's headlines, Dr. Marc Faber admits that"the
financial markets and financial intermediaries seem to me
to be particularly vulnerable"...
THE REALITY OF WAR
by Marc Faber
There is an important point investors should be aware of,
which may have been overlooked during the peaceful and
financial bubble years of the 1990s: wartimes are common in
the history of the world; it is times of peace that are the
exception. According to the historian Will Durant, war is
one of the constants of history, and has not diminished
with civilization or democracy. In the last 3,421 years of
recorded history, only 268 have seen no war.
Just look at the period between 1895 and 1918. During this
brief span of years, there were continuous conflicts around
the world, including the Russo-Japanese War (1895), the war
between Turkey and Greece over Crete (1897), the Spanish-
American War of 1898, the Anglo-Boer War of 1899-1902, the
military expeditions of the great powers in China in 1900,
the Russo-Japanese War (1904-1905), the Russian Revolution
of 1905, the Turkish Revolution of 1908, the French
military expedition in Morocco (1907), the military
conflict between Italy and Turkey over Tripoli (1911), the
First Balkan War (1912), the Second Balkan War (1913), the
Chinese Revolution of 1911, the First World War (1914-
1918), the February Revolution in Russia (1917), the
October Revolution and the Russian Civil War (1917-1921).
According to Durant, the causes of war are the same as the
causes of competition among individuals: acquisitiveness,
pugnacity, and pride; the desire for food, land, materials,
fuels, and mastery. The state has our instincts without our
restraints. The individual submits to restraints laid upon
him by morals and laws, and agrees to replace combat with
conference, because the state guarantees him basic
protection in his life, property, and legal rights. The
state itself acknowledges no substantial restraints, either
because it is strong enough to defy any interference with
its will, or because there is no super-state to offer basic
protection, and no international law or moral code wielding
effective force.
As to the causes of the Iraq war, I leave them to the
reader to ponder.
I am not necessarily suggesting that the next 20 years will
be as turbulent as the first 20 years of the 20th century.
But we must realize that the late 1980s and 1990s were
extremely unusual from a historical point of view, since,
aside from some minor conflicts, there were no major wars
or revolutions. So, purely from a probability point of
view, investors should not expect the relatively peaceful
time that has followed the Korean War, and especially the
peace dividend we have enjoyed over the last 15 years or
so, to continue forever.
The peace dividend that followed the end of the cold war
was certainly a contributing factor to higher stock
valuations around the world (declining interest rates and
rising profits aside). If the world is now moving into an
era of increased tensions, then this will be an additional
negative factor for equity valuations. Moreover, during the
relatively peaceful 50 years that followed the Second World
War, trade as a percentage of GDP increased rapidly and
peace allowed a truly global capital market to be created,
both of which factors were favorable for economic
development around the world. As a percentage of the
world's GDP, trade increased from around 5% in the 1950s to
over 20% at present.
Moreover, since the creation of a truly global capital
market in the late 1980s, international capital flows
financed the investment boom in the emerging economies in
the early 1990s, and have in the last few years financed
the excessive consumption in the U.S., which is reflected
by the growing American current account deficit.
If we assume, therefore, that rising global trade and an
increase in global financial flows had something to do with
peace around the world in the 1990s, we should also assume
that in the case of increased geopolitical tensions and,
especially, a major conflict, there could be some
interruption in these favorable trade and financial trends.
In the worst case, severe geopolitical tensions could lead
to an interruption of free trade or of international
financial flows and bring about supply shortages, trade
embargos or outright trade wars, the imposition of foreign
exchange controls, and even the freezing of assets held by
foreigners or, in an extreme case, their outright
expropriation.
In short, the financial markets and financial
intermediaries seem to me to be particularly vulnerable,
since they have become so disproportionately large in
comparison to the real economy. One point is clear to me.
In the next major conflict in the world, the derivatives
market is most likely to cease to exist, since financial
institutions throughout the world hold derivative
positions. Therefore, if one major player somewhere in the
world doesn't settle or fails altogether, a vicious chain
reaction could follow, with the result that the markets
will be closed.
It is not my intention to sound alarmist, but I think that
investors who grew up during the last 50 years have no idea
of what unpleasant financial and economic consequences
might result from a major conflict. Throughout history,
asset freezes, the imposition of foreign exchange controls,
and expropriations have been very common, and I have no
doubt that sometime in the future we shall experience such
emergency measures once again. Therefore, investors should
seriously consider diversifying not only their assets, but
also how they hold those assets.
To hold all of one's assets in one country with just one
financial institution may be imprudent in an age of rising
risks of international conflicts. Consequently, an investor
may want to hold some of his assets in the U.S., but also
consider the ownership of assets through a foreign bank or
the holding of real estate in a foreign country.
Such diversified allocation is an important - if not
essential - safeguard against the negative consequences of
major conflict.
Regards,
Marc Faber,
for The Daily Reckoning
|
Thread-Ansicht
Mix-Ansicht
Reihenfolge
Thread gesperrt
