Pearl Harbor / The Daily Reckoning

verfasst von - ELLI -, 10.12.2002, 13:47

-->Pearl Harbor

The Daily Reckoning

Paris, France

Monday, 9 December 2002

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

*** Joblessness - up, not down...O'Neill and Lindsay among
the unemployed...adieu, adieu!

*** Gold up...aiming for mediocrity

***"Glut" of mature workers...but, at least they die...

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

Whoa, what this?

Instead of dropping, as reported early last week,
unemployment actually seems to be going up. (Eric has more
details, below...)

Among those losing jobs were the nation's Treasury
Secretary, Paul O'Neil, and economic advisor, Lawrence
Lindsay. Here at the Daily Reckoning, we'll miss both of
them...O'Neill because he was such fun to listen to, and
Lindsay because...well...it was just fun to look at him.

When he took the job, O'Neill said that he brought to it
the same zest for EXCELLENCE that had marked his whole
career. We felt sorry for him; he was hopelessly out-of-
sync. For, following the great boom and bubble of the late
'90s, what the nation's economy needed was not excellence,
but mediocrity. Things would regress to the mean whether
O'Neill wanted them to or not, we guessed...including his
own career.

But the process is neither sure nor steady. One day, the
excellent trends look eternal: stocks look like they might
stay expensive forever...consumers seem willing to continue
spending more than they earn...and Treasury Secretaries and
central bankers look like geniuses.

But then, the very next day....the millstones of history
begin grinding again...reducing everything - reputations,
stock P/Es, and consumer balance sheets - to fine powder.
'Dust to dust' is the way of the world.

Consumers are still spending - but latest sales figures
show they may be hesitating. Even zero-percent financing
cannot seem to lure them behind the wheel of a new SUV. But
house prices are still rising...and who can blame them for
wanting to get in on the action? Household net worth is
falling at an annual rate of $1.8 trillion, says the Fed.
But mortgage debt is rising at nearly 13% per year - 4
times as fast as the growth of the economy, personal
income, and inflation. That too, must sink towards
mediocrity...but when?

CNN warns refinancers to watch out for the"dirty secrets"
of the mortgage industry. Consumers, so eager to reduce
monthly payments, are being seduced into"negative
amortization" loans - where their payments don't even cover
the interest. The principal grows even though the homeowner
takes out no more cash.

Other dirty secrets will come to light, we suspect, when
the refi bubble finally pops. But mostly, people will
wonder what they were thinking. Why did they add to their
mortgages when they should have been paying them off? Why
did they buy stocks when they should have been selling
them?

And then, when the secrets are out...when the P/Es have
collapsed...when yesterday's excellent CEOs and maestro
central bankers have become scoundrels and
incompetents...mediocrity will be popular, once again.

Here at the Daily Reckoning, mediocrity is always in style.
While we aim for excellence in cheese and liquor, it is the
mean, the normal, the ordinary that we look for in stocks,
business and politics. Not that we especially like things
mediocre. We don't like the idea of dying either...but
we've noticed that that is the way things work.

Eric, over to you...

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

Eric Fry in Manhattan...

- Wall Street's winning streak came screeching to a halt
last week. The Dow's eight straight weeks of gains would
not become nine...Far from it. Although the blue chips
scaled through the 9,000-level on Monday morning, they
spent the rest of the week rappelling to lower elevations.
By Friday's close, the Dow had slipped 250 points to 8,645.
The Nasdaq fared even worse, dropping nearly 4% to 1,422.

- While stocks tumbled, the unpleasant smell of a
struggling economy hung over Wall Street like the stench of
two-week old shrimp. The foulest odor of all seemed to
issue from Friday's abysmal employment report. The
unemployment rate spiked to 6% from October's 5.7%, as the
economy lost 40,000 jobs.

- Meantime, Challenger, Gray & Christmas reports that in
the past three months, America's employers have announced a
whopping 400,000 job cuts, boosting the total for 2002 to
1.3 million announced job losses. Given these shocking
employment trends, it should come as no shock at all that a
record 1.55 million Americans filed for bankruptcy
protection in the 12 months ended Sept. 30 - that's up 7.7%
from the same period a year ago.

- If the economy were recovering as nicely as Wall Street's
fully employed strategists say it is, shouldn't we expect
to see the unemployment rate fall? Something's wrong with
this picture...

-"The wobbly economy and the woeful job picture are two
big reasons why we're convinced that the sharp rise in
equity prices these past two months is nothing more than a
bear-market rally," remarks Alan Abelson in today's
Barron's."But disturbing fundamentals aside, what bothers
us about the market is the incipient return of bubble
mentality...the last vestiges of that fantasy era are still
to be exorcised, the excesses of the most fervid
speculative boom in history are still to be completely
purged...

- While The Daily Reckoning weighed in all week with
articulate, but irrelevant, opinions about inflation, the
gold market weighed in with its inarticulate, but relevant,
opinion. The yellow metal isn't much of a talker, but it
can paint some very interesting pictures. And right now,
the picture it paints is inflationary. Gold posted gains
every day last week, as it climbed more than $9.00 to
$327.10 an ounce...Suddenly, things are becoming very
interesting in the gold market.

- Let's bid farewell to Treasury Secretary Paul O'Neill. We
will miss his charm, his wit and above all, his poignant
macroeconomic insights...like the time he observed,"The
best way to alleviate poverty is to increase people's
incomes."

- During his brief stint at the Treasury Department,
O'Neill was not so much ineffectual as he was
invisible...except when he opened his mouth. As Jim Grant
observed about a year and a half ago,"The secretary has
shocked the press with his candor and plain speech. Though
harshly criticized for some early indiscretions, he has
moderated only a little his propensity to call a spade a
spade. However, there is this trouble with O'Neill: He is
also prone to call a heart a spade, a club a spade and a
diamond a spade."

- From time to time O'Neill would appear in public to make
some sort of lamebrain remark about the dollar. But
otherwise, he seemed to do very little of anything. We'd
like to refer to his bizarre form of monetary stewardship
as"benign neglect." Unfortunately, the dollar commenced a
fairly malign downtrend shortly after O'Neill assumed the
top spot at Treasury. It's probably just a coincidence.
After all, whatever the man's shortcomings, he is certainly
not to blame for America's $1.5 billion-per-day foreign
capital habit.

-"Frankly, we're sorry to see Mr. O'Neill go," writes Alan
Abelson."About the economy he was rarely right, indeed, he
didn't have a clue; but at least he was never in doubt."

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

Back in Paris...

*** There is a"glut" of mature workers, say press reports.
A few years ago, people dreamed of early retirement. Now
they dream of finding some miserable job that they can do
until they drop dead. With more and more baby boomers
reaching retirement in the years ahead - and few of them
with enough moola to retire on - the glut will probably get
worse.

***"He looked terrible...white as a sheet."
Sunday, after church, we got the latest report on our
neighbor, who is dying from prostate cancer.

"He's in the hospital in Poitiers. But they are just giving
him pain killers. There's nothing left to do."

"How's the family holding up?"

"Not so well, they didn't seem to realize how serious it
was. You know, for a long time, he didn't seem so bad.
Then, all of a sudden he went into a steep decline. Now
they're in shock. And it's just terrible...I don't think
he'll make it until Christmas..."

***"I'm so sorry to hear about Mr. Laporte," said your
editor's 81-year-old mother after lunch. Mother and son
were enjoying a weekend together in the country - leaving
the rest of the family to fend for themselves in Paris.

"That's why I hate opening my mail. At my age...all I get
is bad news. Most of my friends are dead. And those that
are left are in and out of hospitals, with all sorts of
problems.
"But I got some great news today...I'm going to be a great-
grandmother again!"

Money isn't everything, of course. To your editor's mother,
it is nothing at all.

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

The Daily Reckoning PRESENTS: In honor of the national day
of remembrance we celebrated this past Saturday, we bring
you a DR Classique, originally aired on December 7, 2001.


PEARL HARBOR
by Bill Bonner

"We play with fire. We play with war. And then, fire and
war blow up on us. America, until now, enjoyed the luxury
of watching things from a distance. It offered its advice,
lavishly...its homilies...its encouragement to the 'little
people' of the world. Now, America is 'in the bath' along
with the rest of the world. Now we will see. We will see if
America is really the military, industrial, and social
power that it claims to be. We're going to see if 'America'
really exists. Because it is no longer a matter of
preaching, while taking orders and grabbing market share.
It's no longer a matter of exhorting others to acts of
heroism. Now, America must fight. And send Americans to
risk their skins. Things have changed. We're going to
see..."

- Marcel Deat, writing in the collaborationist French
newspaper"L'Oeuvre", 9 December 1941

Mr. Deat sounded skeptical.

My father wondered, too. The morning of December 7th, 60
years ago today, was a rude awakening for him. After a late
Saturday night on the town...his head must have throbbed
early Sunday morning. It was as if there were bombs going
off, he must have thought...then, his eyes must have opened
with a start; bombs really were exploding!

"All I remember is confusion," he once told me."We didn't
know what was going on. All I knew we knew was that we were
under attack. We thought the Japs were going to land
troops, so we got our rifles and got ready to fight back.
Thank God, they didn't try to take Pearl Harbor. We were so
disorganized, it was pathetic."

Disorganized, unprepared...America put aside its confusion
and was soon fighting back. By dumb luck, perhaps, none of
America's 3 Pearl-based aircraft carriers were in the
harbor that morning. The Japanese hoped to put the U.S.
Pacific fleet out of service for 18 months. But within just
60 days, U.S. forces were back in action. My father and
thousands of other Americans had the pleasure of an
extended tour of the South Pacific, courtesy of the U.S.
Army. Maybe they were not the battle-hardened fighters of
the Third Reich - with strong military traditions, iron
discipline, and years of painful experience. But when the
chips were down in 1941, they did their duty...sometimes
well, sometimes not-so-well...

When Pearl Harbor was bombed, Americans knew the"luxury of
watching things from a distance" would no longer be
possible. Unlike the patriots of 2001, they prepared for
sacrifice, not self-indulgence. They braced themselves for
hardships and losses. Rather than buy a new Packard, they
were likely to put the old one in the garage and walk to
work. Gasoline was rationed. So was almost everything else.
Stocks fell to a level never seen before - and changed
hands for just 6 times earnings. Things had changed;
America was"in the bath" with everyone else.

Men do stupid things regularly and mad things occasionally.
And sometimes, the impulse to self-destruction is so
overwhelming it overtakes an entire nation.

It is almost always madness to buy stocks at the peak of a
bull market...or to buy a stock at 50 times earnings.
(Note: currently, [in December 2001], tech stocks in the
U.S. are selling at an average P/E of 50 based on next
year's earnings!) Ruin may not come quickly - as stocks may
rise further. But it comes eventually.

The best a person can hope for when he goes mad is that he
runs into a brick wall quickly...before he has a chance to
build up speed. That is why success, in war and investing,
is often a greater menace than failure.

My father did not realize it at the time, but he was
witness to one of the stupidest, maddest acts in all of
history. The Japanese had embarked on a campaign of
conquest. Rampaging through China and Indochina, they found
success easy. Encouraged, they sought to extend Japanese
hegemony, by force of arms, throughout Southeast Asia.

"What was the point of the military expansion?," you may
ask.

"To secure vital resources - oil, rubber, metals," comes
the answer.

"Why did Japan need so many raw materials?"

"To supply its military expansion!"

The Japanese have little in the way of raw materials. They
could buy them on the open market. But in the politicized
world of the 20th century, markets seemed unreliable. What
if producers decided not to sell?

The idea was absurd. Why would producers not sell, when it
was in their interest to do so? In fact, the only reason
they did not sell was to try to cripple Japanese military
expansion! Thus did the Roosevelt Administration, in early
1941, cut off vital supplies - especially oil - to the
Japanese war machine.

What were the Japanese to do? For nearly 10 years, they had
been"on a roll" of military success. Were they not
entitled to believe that their stock would always rise?

"The grandiose mood of the fascist powers in which no
conquest seemed impossible, must be taken into account,"
writes Barbara Tuchman in her"March of Folly.""Japan had
mobilized a military will of terrible force, which was in
fact to accomplish extraordinary triumphs..."

But attacking Pearl Harbor was a big risk. The Japanese
knew what they were up against - a country far larger and
with far more resources than their own. Admiral Yamamoto
had attended Harvard and spent years in Washington as a
naval attaché. Even so, he was no fool...he knew that Japan
could not endure a long contest with the U.S."I have
utterly no confidence for the second or the year," he told
Premier Konoye.

Why did they do it? Why did they take"a gamble that, in
the long run...," Tuchman asks,"was almost sure to be
lost?"

"Fundamentally, the reason Japan took the risk," Tuchman
answers her own question,"was that she had either to go
forward or content herself with the status quo, which no
one was willing or could politically afford to suggest.
Over a generation, pressure from the aggressive army in
China and from its partisans at home had fused Japan to the
goal of an impossible empire from which she could not now
retreat. She had become a prisoner of her oversize
ambitions."

How much better off the Japanese would have been if they
had been beaten in China! They could have gone back to
their island, renounced the Tripartite Treaty with Germany
and Italy...and they could have"taken the orders and
grabbed market share" - selling tanks, planes and ships to
other combatants. Instead, a long string of battlefield
successes led to one of the biggest strategic blunders of
all time...and ultimately to complete ruin for Japan and
her economy.

Before the attack on Pearl Harbor, Americans were deeply
divided on the war. Most wanted nothing to do with it.
Congress passed a one-year draft law by a single vote just
months before the attack. Japan could have conquered any
Dutch, British or French colonial territory in the Far
East...without risking war with America. Of all the things
Japan might have done, it chose the worst possible course
of action. It did the one thing - and probably the only
thing - that would bring America into the war as an active,
determined combatant.

Admiral Yamamoto recognized his error almost immediately.
"I feel that we have awakened a sleeping giant and
instilled in him a terrible resolve," he said. Churchill
was ecstatic:"To have the United States at our side was to
me the greatest joy. Now at this very moment I knew the
United States was in the war, up to the neck and in to the
death. So we had won after all! Hitler's fate was sealed.
Mussolini's fate was sealed. As for the Japanese, they
would be ground to powder."

Twelve days later - on December 17th - Germans proved that
they were at least as mad as the Japanese: Hitler declared
war on America. He could have left the Japanese to their
folly. Instead, in less than two weeks, the Tripartite
Powers had managed to turn the war against themselves, by
provoking the wrath of the world's largest economy.
America, protected by two oceans, could turn out jeeps,
tanks, planes and c-rations faster than anyone. It could
put millions of troops in the field, fully equipped, and
bring to bear more bombs against a target than any nation
ever.

But in 1941, Axis military power had been in a bull market
for nearly a decade. People don't think clearly in a bull
market. And their imaginations are dull. They can only see
ahead of them what they've just experienced. It wasn't
until the battles of Midway and Stalingrad, both in 1942,
that Axis power peaked out. Then, the thinking began and
imaginations began to work again. But by then, it was too
late.

"When we realized what had happened," said my father many
years after the fact,"all I remember thinking was that it
would be a long time before I got home...if I got home at
all."

He did get home, of course, three years later...

Your correspondent,

Bill Bonner

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• Pearl Harbor / The Daily Reckoning - - ELLI -, 10.12.2002, 13:47