- A Grand Illusion / The Daily Reckoning - - Elli -, 26.03.2003, 16:49
A Grand Illusion / The Daily Reckoning
-->A Grand Illusion
The Daily Reckoning
London, United Kingdom
Wednesday, 26 March 2003
--------------------
*** Victory"certain"...but when?
*** Prosperity cometh before a downfall...confidence,
too...
*** Sushi economics...war and economics...towards peace
and prosperity?...and more!
--------------------
There is no set"timetable" for the war.
A confident American soldier was shown on the BBC this
morning in London suggesting that military operations
don't operate on pre-determined time schedules. The only
thing"certain" about this conflict, they say, is victory.
It's war after all, and it will take some time to rout the
Fedayeen...
Fair enough. In the short term, however, the lack of a
defined time frame has confounded investors and analysts
alike.
"War in Iraq Could Bring U.S. Recession, or Economic
Growth" the NYTimes stated boldly this morning - a
prediction even your editors at the Daily Reckoning would
be proud of.
Trouble is, it's not likely the war - whatever its
managers' timetable - is the draining force beneath the
sagging markets or the drooping economy."The truth about
the three-year decline in stock prices and the hot-and-
cold-running economy," says Jim Grant in an editorial,
also published by the NYTimes,"is that they have their
roots in prosperity, not in war."
"The paradox is easily explained," Grant explains."High
stock prices invite capital investment. Ultrahigh stock
prices invite redundant capital investment. Stock prices
higher even than those on the eve of the 1929 crash invite
titanically redundant capital investment.
"In the manic phase of the bull market, capital was
essentially free. The frittering away of American savings
wasn't intentional. It happened inadvertently, through
investing: in telecommunications equipment, semiconductor
manufacturing plants, computer servers, power generators,
office furniture, Internet initiatives, etc. We invested
more than we should have - in fact, more than we had. We
borrowed to invest, from creditors both domestic and
foreign."
Despite having seen their savings swallowed up by the
stock market...their 401k's shriveling...and their credit
card balances causing alarm, investors have continued to
rely on the one really big purchase of their lifetimes to
prop up their spending habits. Home equity borrowing,
reports the Federal Reserve, is not slowing. Homeowners
raised $130 billion in 2002 through home equity loans and
lines of credit - nearly double the 2001 total.
As long as home prices continue to rise...it's not likely
to cause a problem. But fissures are appearing in the
foundation. According to the American Mortgage
Association, home foreclosures reached a record high in
the 4th quarter of 2002.
"The war," Grant reminds us,"is not to blame for this
sequence of events, which was set in motion years before
9/11. But the cost of the war (and future wars,
pacifications and occupations) may prove burdensome in
ways that Americans have been privileged not to have to
worry about."
But that's just the thing with a bear market. Mr. Market's
'victory' over excess debt is, at least historically
speaking, all but certain. It's the fact that there is no
set"timetable" that is so confounding.
Eric, how did investors fare yesterday?
--------------
Eric Fry, reporting from Wall Street...(you can catch
Eric, by the way, on the TV this week. He's hosting
CNNfn's morning show today, Thursday and Friday, from 9:30
to 11:30 AM Eastern Standard time.)
- The stock market took flight again yesterday...like a
damaged Apache helicopter. The market managed to gain and
sustain altitude, but it seemed to lack the menacing power
it displayed last week. The Dow climbed 66 points to 8,280
and the Nasdaq rose 1.5% to 1,391. Meanwhile, the dollar
remained grounded on the tarmac all day, falling slightly
against the euro. Gold and government bonds also dipped
slightly.
- The Pentagon continues to assure the nation that the
campaign to liberate Iraq is proceeding about as well as
planned...and who are we to doubt the expert opinion of
America's top brass? But the battle for economic recovery
on the home front is encountering fierce resistance. The
casualties are numerous, and the obstacles to victory well
entrenched.
- This battle seems likely to rage for a while longer.
Our employment roles, for example, are sustaining heavy
casualties. The Conference Board's Consumer Confidence
Index dropped to 62.5 in March from 64.8 in February, as
pessimism about job opportunities continued to climb. The
percentage of consumers reporting that jobs are hard to
get rose to 32.3 percent from 30.0 percent.
-"The end of the Gulf War in 1991 produced a surge in
confidence, but labor market conditions quickly diminished
the spark," remarked Lynn Franco, Director of The
Conference Board's Consumer Research Center."So if
history repeats itself, the current job scenario will do
little to maintain any post-war surge in confidence."
- The fact remains that most companies are still far more
interested in trimming expenses than they are in taking on
the cost of new hires. Illustrative of the new corporate
austerity, joblessness continues to soar at the epicenter
of the bubble economy - Silicon Valley.
-"Michael Rolle, a veteran of Oracle Corp. and Cisco
Systems Inc., who trained at the Massachusetts Institute
of Technology and Stanford, has started a new job:
umpiring junior varsity high school softball for $20 a
game," the Los Angeles Times reports."As the Silicon
Valley cave-in enters its third year, thousands of Michael
Rolles are emerging, pinching pennies instead of
responding to every Internet job posting. Thousands more
keep slogging away, attending workshops on resume writing
and interviewing skills."
- Santa Clara County, which includes Silicon Valley, has
lost a stunning 175,000 jobs since 2000 - or 16% of all
jobs in the county outside of farming."Silicon Valley's
fall is unmatched in California history since the Great
Depression," the Times notes."What's more, the new
statistics show that the number of people working in
Silicon Valley has fallen back to the level of 1996, when
the dot-com boom was new. The scale of the disaster
foretells a longer road to recovery."
- Unfortunately, the sluggish tech sector continues to
shed jobs from coast to coast."Last week," CNN/Money
reports,"the AeA, an industry trade group formerly known
as the American Electronics Association, released a study
that showed that there were 560,000 fewer high-tech jobs
at the end of 2002 than at the beginning of 2001."
(Optimists may take comfort in the fact that the RATE of
job losses seems to be slowing. Challenger, Gray &
Christmas, an employee outplacement firm, says that the
number of layoffs in the telecom industry during the first
two months of 2003 dropped 78% from a year ago).
- Despite the abundant signs of a tech non-recovery,
investors seem to be banking on a brisk revival. The
Nasdaq has bounced about 25% from its early October lows,
and trades for about 30 times optimistic earnings
estimates for 2003.
-"To be sure," CNN/Money continues,"analysts are
predicting 28 percent earnings growth for the S&P
technology sector in 2003. But revenues for the S&P tech
sector are only expected to increase 2 percent this year.
So the strong earnings outlook for tech is predicated more
on lower expenses, not an increase in demand. And many
techs are running out of room on the cost-cutting side."
- 30 times earnings is a pricey PE multiple under the best
of circumstances. But when the earnings growth relies on
cost-cutting moves rather than revenue growth, 30 times
earnings seems pricier still...
- One thing of which we're reasonably certain: it's pretty
tough to grow by shrinking.
--------------
Back in London...
*** More evidence yesterday suggests that the timetable
for post-bubble debt burn-off is anything but predictable.
The Japanese, (who, by the way, amended their laws to
allow a small expeditionary force to set sail for Iraq
this week) have been battling their own gulf of debt...
for over a decade.
Land prices in Japan have dropped for the 12th straight
year. And the Bank of Japan announced yesterday it plans
to triple its budget for outright buying of bank stocks.
In an effort to"make the financial institutions less
vulnerable to falls in stock prices and prevent a possible
sizable sell-off of bank shareholdings from weakening
equities markets", the BoJ now plans to spend up to 3
trillion yen.
*** The U.S. Congress, practicing a stylized version of
Sushi economics all its own, has suggested they may
include a 'bail out' package for U.S. airlines with
yesterday's $75 billion war budget proposal. The theory
being, we presume, that the U.S. taxpayers are responsible
for lackluster airline profits, since they refuse to book
travel in the face of the increased terrorist threats
caused by the Iraqi invasion. Hmmmnn...
We're inclined to agree Lynn Carpenter, who, on Monday,
suggested with respect to failing airlines:"let 'em go".
*** Seeing clearly in the dusts of America's deserts,
Nevada senators are reported to have suggested that taxes
on precious metals, such as gold, be reclassified as
investments, rather than collectibles. The
reclassification would lower taxes on sales of these
assets significantly. No word on what Senators from
Massachusetts, New York or Maryland have to say.
Addison Wiggin
The Daily Reckoning PRESENTS: A DR Classique, first
broadcast on April 4, 2002.
A GRAND ILLUSION
By Bill Bonner
"It turns out that the self-interest that Vauban has
called the 'father of war' becomes, according to Wayne
Angell, the principal rampart of peace."
- John U. Nef
"In 1910, a book that had already had great success in
England was translated and distributed in 11 different
countries," writes a French economist, Philippe Simonnot.
The author was Norman Angell, an economist with a
worldwide reputation and a hot idea.
War, wrote Angell, was nothing more than a"great
illusion." The illusion, according to Angell, was the
"belief that steel and firepower alone protect people,
whereas it is the force of Universal Credit that really
muzzles the canon."
Much good has been attributed to credit. Recently, it is
said to have saved the republic...indeed the entire world
economy...from getting what it deserved. But nearly a
century ago, Angell believed it could do what no balance
of power, technology, nor treaty had ever been able to do
- maintain peace.
Angell had a bestseller. He was, as subsequent events were
to show, either at least 100 years ahead of his time...or
out to lunch forever.
His argument was logical, reasonable...and preposterous.
People made war, he thought, for economic reasons. They
sought to get richer by taking something away from
somebody else. But modern economies had become too complex
and interdependent, he said; that strategy would no longer
pay off.
"Wealth in the civilized world," he wrote,"rests on a
base of credit and commercial contracts." If these are
confiscated by a victor, the wealth, which depends on
credit, not merely evaporates, leaving the victor nothing
in exchange for his efforts, but it also pulls him down.
"It is impossible for a nation to enrich itself by
subjugating another country," Angell explained. In fact,
the only way he could avoid being dragged into an economic
decline along with his defeated enemy would be"by
scrupulously respecting the enemy's property". Why then
risk war?
Mr. Angell was an exception - even for an economist; he
was such a good thinker he was dangerous.
Peek into the average brain and what you find is a
collection of empty phrases and hollow ideas - strung
together as though they were Christmas
lights...illuminating about as much. A man may say that he
is"for free trade", or that he is"against political
correctness", or that he believes in democracy or value
investing.
Polls show, for example, that nearly 100% of the
population favors"education" and almost as many want to
see more money spent on it. But few people actually take
the time to learn anything. Instead, given a choice
between watching television and studying...99.9% of the
American population will choose TV.
Nobody believes that you can get rich by borrowing
money...but almost everyone with an opinion on the subject
seems to agree that low interest rates from the Fed boost
the national economy and make people wealthier. And even
staunch supporters of"free trade" can find dozens of
reasons to make an exception - when the loot finds its way
to their own pockets.
Put a man behind the wheel of an automobile - even a
Democrat or a Gypsy - and you can usually trust his
judgment. His miscalculations are few...and self-limiting.
On the A-10 headed out of Paris on Friday night, for
example - where the average speed is probably about 90
miles an hour in bumper-to-bumper traffic - drivers never
make the same mistake twice.
But pluck him from his auto, put him in the State
Department, on the Editorial Page desk or an Internet
chat-line, or at the Fed, and he is almost immediately
transformed into a menacing idiot. He can go on for many,
many years...rising in prestige and rank...based on the
silliest and most puerile claptrap.
Which doesn't mean he stops thinking. But it's a different
kind of thinking...about things he knows nothing about.
Instead of thinking about how he's going to get to work,
how he's going to balance his checkbook, or what he's
going to have for lunch...he begins to gab about foreign
policy, credit patterns, military strategy, housing
bubbles and the designated hitter rule...
Of course, that's what we do here everyday, too - kibitz
about things we cannot see and cannot really know. At
least we learned a long time ago that we do so with modest
expectations. We cannot command, nor even predict, future
events. But we must admit that it is fun to try.
Surely it was fun for Mr. Angell too. He gained an
international reputation for providing a valuable service
- he gave people a reason to believe what they wanted to
believe. According to his logic, there was no further
reason to spend money on national defense."Modern wealth
has no need to be defended," he wrote,"since it can't be
confiscated."
He pointed out that even if Germany took over Holland
intact,"not a single German citizen - except for the
bureaucrats - would be enriched by a single pfennig." In
fact, they'd be worse off, since they'd then have to
compete with the Dutch merchants!
And what about getting tribute from the vanquished nation?
Angell recalled that after the war of 1870, France had to
pay huge penalties to Germany. What was the effect? The
money could practically only be used to buy goods from
France. So,"the war indemnities permitted the French to
increase her exports to Germany...to the detriment of
German industries," Simonnot elaborates."Bismarck himself
had commented on it and was publicly mortified."
What was the root cause of this astounding transformation?
People had always made war; what was new?"The incredible
progress of communications," Angell answered. And
globalization! Only very recently, he explained, rapid
mail delivery, as well as the instantaneous diffusion of
financial and commercial information by telegraph, had
changed the world. All of a sudden, people were
manufacturing, buying and selling all over the
world...with all sorts of different people. From the
Hottentots of the Cape to the far away tribes in Borneo.
Tea, tobacco, textiles, railroads - products were coming
from nearly everywhere and nearly everybody seemed to be
getting richer.
Who would want to disturb this peace and prosperity?
The German general, Bernhardi, complained about it.
Pacifism was growing. People seemed unwilling to go to
war...or even to think of it."Growing wealth," he wrote,
"causes us to live in the present; we no longer have the
courage to sacrifice our pleasure for the realization of
grand ideas."
Angell predicted peace. There was no longer any reason for
war, he noted. But war, like love and markets, has a logic
of its own."War needs no particular motive," wrote Kant
on the subject."It seems to have its roots deep in human
nature, appearing as a noble undertaking which brings both
love and glory, but without any special benefit for
anyone."
Four years after Angell's book appeared, the worst war in
human history began.
Your editor,
Bill Bonner
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