Kicking The Dog / The Daily Reckoning

verfasst von - ELLI -, 04.03.2003, 19:52

-->Kicking The Dog

The Daily Reckoning

Paris, France

Tuesday, 4 March 2003

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

*** Nothing but good news today...war...mega-
catastrophes...and so on...

*** Consumer spending falls...savings rise...bad guy caught
in Pakistan...

*** Gold sinks...financial weapons of mass
destruction...and more!


"I know you have been right," a former Daily Reckoning
sufferer admitted recently,"but I can't bear to read your
letters. You're just too depressing..."

Okay...point taken. So, today, nothing but good news. Let's
begin:

March 12th. Mark your calendar. That's the day the killing
is scheduled to begin, says our resident geo-political
strategist, Dan Denning.

Key figures in the Bush administration are said to be
canceling trips for March 12, Dan tells us. And now, a
report in the French press says that President Chirac has
cancelled a mid-month jaunt, too.

Now that's good news, isn't it? The world will be such a
better place after all this loose talk of 'regime change'
and 'democracy' stops and the bombs start to fall.

Everybody knows the war will be short and sweet...and
everybody knows the economy and the stock market will boom
after the war is over - just like they did after the last
war against Saddam.

Of course, everybody loves the beginning of a war...but not
as much as they love the end of it. Because, between
beginning and end, things tend to go wrong. But in this
case, the arsenal on the one side is so magnificent and on
the other so puny that people expect nothing but good luck.

Ah...that is where the gods of War and Fortune play their
tricks. With a little luck, things go wrong enough that
people come to their senses, go home and mind their own
business. If you're really unlucky, on the other hand, the
war is a smashing success...and the stock market rises
sharply. Then, the warmongers think they are geniuses and
begin looking for the next target...and keep at it until
you are all roasting in hell.

Hell is on our minds this morning, here at the Daily
Reckoning office. Not that we've done anything wrong,
personally, in the last 24-hours. We don't even know if
hell exists (though we've seen some pretty bad
neighborhoods in Northwest Baltimore). But there are some
things you are better off believing - even if you have no
evidence. Who knows...maybe you could murder someone and
get away with it. Maybe the world would be a better place
if you did. But it is probably the fear of retribution,
either in this life or the next, which keeps most people
honest.

Maybe the war will go well. Maybe Saddam will get struck by
a bomb so smart it doesn't even smudge his uniform. And
maybe, Iraq will immediately transform itself; McDonalds
will open franchises in Baghdad...people will open
brokerage accounts...SUVs will fill the streets. Maybe
Iraqis will even begin lending the U.S. money so Americans
can continue living beyond their means....

...but maybe not.

And maybe America will muddle through its economic slump
without a calamity. Warren Buffett warns in FORTUNE
magazine that derivatives are"financial weapons of mass
destruction" that could cause a"mega-catastrophe". But
maybe it won't come to that. And maybe the dollar won't
crash. And maybe stocks won't go down. And maybe the
consumer will continue spending more and more forever.

Still, it's probably best to think that what might go wrong
will go wrong. Then, you can be pleasantly surprised when
things turn out better than you expected.

Our long-held view is that the American economy is going to
hell in a shopping cart. The comic delusion - that you can
spend your way to prosperity - must be approaching its
punch line. If not, well...so much the better.

But even America's trade deficit is good news today - for
Asian stocks.

"While U.S. economic policy makers will continue to
stimulate credit growth and consumption in the U.S by
increasing the indebtedness of households," Marc Faber
explains,"the wealth transfer to Asia via the U.S. trade
and current account deficit will continue to stimulate
industrial production in Asia and other emerging
economies...

"To an unbiased observer, it would seem almost that U.S.
economic policies are designed to impoverish the United
States and to enrich Asia..."

Faber recommends a few funds that could benefit: the MSDW
Asia Pacific Fund, the India Fund, the China Fund, the
Apollo Asia Fund, and the Thai Focused Equity Fund.

And now over to Eric Fry, our man in Manhattan:

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

Eric Fry, reporting from New York...

- Mr. Market can't seem to shake his"ennui". It's not that
anything troubles him so much, it's just that nothing
excites him either, not even the arrest of al-Qaeda bad
guy, Khalid Shaikh Mohammed (whose mugshot, by the way,
looks eerily like John Belushi in Animal House). News of the
"alleged" terrorist's arrest sparked stock market rallies
in Asia and Europe prior to the start of New York trading
yesterday. The Dow followed along by rallying about 75
points in the early going. But by day's end, the Dow's
advance withered to become a 54-point loss. The Nasdaq
skidded 1.3% to 1,320. Gold for April delivery also drifted
lower, losing $1.00 to $349.30 an ounce.

- Mr. Market's ennui is hardly surprising, given the
perfectly bland macroeconomic reports that have been
crossing the newswires lately. Yesterday, the Institute for
Supply Management's index of manufacturing activity posted
an inoffensive reading of 50.5 for February. In theory, a
number above 50 signals economic expansion. Even so, the
latest reading is somewhat less expansionary than January's
reading of 53.9.

- Meanwhile, consumer spending dipped 0.3 percent in
January...and that's not very exciting either. For the
second time in the past 14 months, consumers cut back on
spending. Suddenly saving has become the socio-economic
fashion of the day. What could be more boring than that?

- The national savings rate continues to climb, according
to the Bureau of Economic Analysis. Savings as a percentage
of disposable personal income jumped to 4.3% last month
from 3.9% in December."The pickup in savings reflects
households trying to compensate for three consecutive
annual declines in net worth," says Northern Trust
economist, Asha Bangalore. American households have their
work cut out for them, as $8 trillion of stock market
wealth has vanished over the last three years.

- One big reason savings jumped in January was that
consumers curtailed spending on durable goods, especially
autos. Purchases of durable goods tumbled 5.7% in January,
the biggest drop in 13 years. Apparently, the heavy sales
incentives offered by car manufacturers did not
sufficiently incentivize tapped-out consumers to go even
further into debt. Despite offering average rebates of
$3,000 per vehicle, U.S. car sales dropped 1.9% in January.
The trend continues...GM admitted yesterday that its U.S.
vehicle sales fell 19% in February from year-ago levels.

- Most of the big automakers are bracing for another rugged
year."General Motors Corp., Renault SA and DaimlerChrysler
AG executives all expect the European and North American
markets to shrink for a second year," Bloomberg reports.
Ford expects industry-wide demand in the U.S. this year to
fall 2% to 16.5 million vehicles.

- Ford's estimate may prove to be wildly optimistic if
personal income trends don't improve soon. It's worth
noting that January's 0.3% increase in personal income was
not nearly as impressive as the headline number might
suggest. That's because most of the increase derived from a
big boost in government wages. Meanwhile, out in the
private sector,"private wage and salary disbursements"
actually FELL $0.8 billion in January, compared to an
increase of $9.9 billion in December. That's not an
encouraging trend.

- Saving money is not only boring; it's also hard work.
Suing is a much easier way to build up a nest egg, which
partly explains the current bull market in securities
litigation.

- Dow Jones News reports:"Investors filed a record number
of arbitration requests seeking damages from Wall Street in
2002, according to statistics released by the National
Association of Securities Dealers Dispute Resolution. It
was the second consecutive year that the number of cases
hit a record...A total of 7,704 new arbitration cases were
filed with the organization in 2002 - 11 percent higher
than 2001 and 39 percent higher than in 2000."

- The wages of successful litigation also continue to
increase."In 2002, damages were awarded totaling $139
million, $23 million of which was for punitive damages. In
2001, the figures were $97 million and $15 million,
respectively."

- Remember, however, that not just anyone can successfully
sue a brokerage firm. You need to have a poor-to-mediocre
case and an excellent attorney.

-----------

Back in Paris...

*** Warren Buffett describes the problem with derivatives:

"I believe...that the macro picture is dangerous and
getting more so. Large amounts of risk, particularly credit
risk, have become concentrated in the hands of relatively
few derivatives dealers, who in addition trade extensively
with one another. The troubles of one could quickly infect
the others. On top of that, these dealers are owed huge
amounts by non-dealer counterparties. Some of these
counterparties, as I've mentioned, are linked in ways that
could cause them to contemporaneously run into a problem
because of a single event (such as the implosion of the
telecom industry or the precipitous decline in the value of
merchant power projects). Linkage, when it suddenly
surfaces, can trigger serious systemic problems."

*** The number of investment clubs is down from the peak -
but not much. There were 37,129 registered clubs in 1998.
Now there are 13.5% fewer. Hardly enough of a decline to
signal the bottom of a bear market. Stocks have a long way
to go - down.

*** Long-term Treasury bonds hit an all-time high
yesterday. Bond investors are less worried about inflation
than they are about a deflationary slump.

*** More good news: Gold sank below $350 yesterday. Buy.

The Daily Reckoning PRESENTS: Bush, like every president
since Carter, has declared"war on terrorism". But where
does an invasion of Iraq fit in? James Davidson suggests
attacking Iraq is a little like kicking a dog - because you
can.


KICKING THE DOG
By James Dale Davidson

It is interesting to contemplate how far U.S. foreign
policy has evolved in the few years since President Clinton
appeared to engage in parodies of the movie Wag the Dog. In
the Clinton era, gestures of force abroad seemed to be
geared more to news management than event management. In
fact, I did an informal study that showed an extraordinary
correlation between the employment of force abroad and
various red-letter days in Clinton's numerous legal
embarrassments. The more embarrassing the situation Clinton
faced, the more likely he was to unleash an attack.

Military action, epitomized by Clinton's semi-comic cruise
missile bombardment of the Sudanese aspirin factory, seemed
designed more to distract U.S. public attention from
Clinton's various legal scuffles than to achieve a coherent
policy objective. Bush seems to have a different approach.
Instead of"wagging the dog", he is"kicking the dog".

Let me explain."Kicking the dog" also has a cinematic
origin. It refers to a practice, immortalized in a Monty
Python movie, of communicating unhappiness by punishing a
weaker party rather than one who might be more objectively
at fault. In the movie in question, members of an English
household gather for meals and other family occasions only
to find the matron of the family, an old dowager, loudly
passing gas. As it is socially impossible to upbraid her,
they respond in another way. Each time she passes gas,
other family members kick the dog.

Bear this analogy in mind when you are trying to sort out
the pending war to oust Saddam Hussein. Saddam is the dog.
While Saddam is surely guilty of innumerable crimes, which
make it desirable that he be removed as Iraqi head of
state, there is scant evidence of Iraq backing terrorism.
Part of the reason that Bush's many bellicose statements
about ousting Saddam have not gained wider acceptance is
the fact that it is impossible for him to articulate the
actual good that his war would achieve if successful.
Therefore, the real logic of Bush's belligerence against
Saddam has been little understood. Bush may be attacking
Iraq, but the real target is Saudi Arabia.

Think about it: Saddam may have welcomed an al Qaeda
operative or two in Baghdad. But the main reservoir of
fanaticism that gave rise to and sustains al Qaeda is Saudi
Arabia. The chief patron of the al Qaeda terrorist network
is Osama bin Laden, a wealthy Saudi fanatic. The great
preponderance of suicide bombers (15 of 19) who attacked
the United States on Sept. 11 were Saudi nationals. And the
major financial support for the terrorist networks, in
addition to the millions lavished on terrorism by bin Laden
himself, comes from six other wealthy Saudis.

If stopping terrorism were your objective, and you really
meant it, as Bush seems to do, it might be important to cut
off the supply of weapons of mass destruction accumulating
in unstable hands in Iraq. But it could be equally
important to turn off the incubator that is breeding more
terrorists, as well as to cut off the flow of funds that
sustains terrorist enterprises. This is where Bush is way
ahead of his critics.

When you start thinking in those terms, your attention
automatically gravitates south of the Iraqi border to Saudi
Arabia, which is the main incubator of terrorists. It is
the vast Saudi oil wealth, concentrated in the hands of
often-pious devotees of the intolerant Wahhabi sect of
Sunni Muslims, which repeatedly leaks into the hands of
terrorists, many of whom are themselves Saudis. And it is
not to be forgotten that official Saudi support for
fundamentalist schools in Pakistan and elsewhere in the
Muslim world has done much to stoke the fires of religious
fanaticism.

Indeed, as The Wall Street Journal reported, the Saudis
have financed efforts to spread radical Islam through
prison ministries in the United States. (See:"Captive
Audience: How a Chaplain Spread Extremism to an Inmate
Flock";"Radical New York Imam Chose Clerics for State
Prisons";"Praise for 9/11 'Martyrs' Saudi Arabia's Helping
Hand" by Paul M. Barrett, Feb. 5, 2003.) The story details
how the Saudi government financially backed efforts led by
Warith Umar, formerly known as Wallace 10X, formerly known
as Wallace Gene Marks, to turn imprisoned black Americans
into Islamic terrorists.

The major factor that contributes to the cauldron of
steaming lunacy in which characters like Osama bin Laden
bubble to the surface is the almost uniformly backward
nature of Arab society. Throughout the Middle East, most
Arab cultures are essentially medieval in their
orientation. Indeed, in many cases, they are more backward
than they were in medieval times, when Arab scientists were
at the forefront of developments in astronomy, mathematics,
chemistry and technology.

At that time, Arab thinkers like Ibn Khaldun (1332-1406)
were centuries ahead of their counterparts in the West.
Indeed, many modern scholars consider al Mugaddimah,
Khaldun's prologue to history, to be a more sophisticated
and modern treatment of the issues raised in Niccolo
Machiavelli's The Prince, written a century later. Unlike
Machiavelli, or almost any other thinker in early modern
Christendom, Khaldun based his analysis of power politics
on cultural, sociological, economic and psychological
factors, and not just the moral character of the ruler.

I don't know whether Bush has read Ibn Khaldun. I rather
doubt it. He may have read Machiavelli. As for Saddam, he
certainly acts as though he were a student of Machiavelli.
Be that as it may, it appears to me that Bush is basing his
campaign against terrorism, not just on the effort to turf
out one corrupt prince, Saddam Hussein. Rather, Bush
appears to be seeking to undermine the whole cultural,
sociological, economic and psychological foundation of
terrorism.

Ironically, while Saddam postures, lies and maneuvers with
the alacrity of Machiavelli's Prince, Bush seems intent
upon striking at the deeper roots of terrorism, as Ibn
Khaldun would have advised.


Regards,

James Davidson
For the Daily Reckoning

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• Kicking The Dog / The Daily Reckoning - - ELLI -, 04.03.2003, 19:52