-->The Daily Reckoning

Baltimore, Maryland

Friday, 12 December 2003

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*** Is it wrong, dear reader... to take advantage of the
lumps? To attack their exposed flank?

*** Dow 10,000! What's next? Dow 5,000!

*** Not a nincompoop... Pittsburgh is broke... and more!

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"Gentlemen, they offer us their flank."

The statement came from the mouth of General Galieni... and
changed the course of history.

The Germans attacked France in August of 1914. They moved
swiftly and drove the French out of their defenses and back
towards Paris. But instead of concentrating their forces on
an attack on the city, the German general von Kluck decided
to chase the French down along the Marne river, hoping to
destroy them. Doing so, he exposed his troops to a
counter-attack from Paris.

The old Galieni knew a short sale opportunity when he saw
one. He urged the French to go on the offense. Paris
taxicabs were lined up - thousands of them - to drive the
troops East of the city, where they could assault the
Germans. The result was the Battle of the Marne, which was
probably the single-most important battle of the 20th century.

The Germans lost the initiative. The war went bad in a way
no one expected. A few months later, millions of soldiers
were stuck in the trench mud of Northern France and Belgium
- bleeding away the best of Western civilization.
Late in the war, American troops arrived - fresh and
foolish. The Europeans might have settled... and learned a
lesson. But now the Americans tipped the scales against the
Germans. Europe became unbalanced and, ultimately,
unhinged. Reparations, resentment, hyper-inflation,
depression - all the pent-up frustration and rage of the
war years and its resolution then pushed the Europeans to
even more frightful madness - the arditi, the black-
shirts... fascism, communism... orphism, purism, and
precisionism. Wilson's war to make the world safe for
democracy backfired; moderate democracy was practically
exterminated by his victory.

So what?

"Is it wrong to make money off of the lemming-like rush to
debt in America?" asks a friend by email.
Do they not offer us their flank, dear reader? Have not the
dumb Klucks made appalling mistakes - buying stocks at
outrageous prices... lending at Eisenhower-era rates in a
Bush world... borrowing when they have no means of paying
back...

My friend John Mauldin sends this scary peek through the
perpetual fog inside investors' cloudy crania:
"15% of investors thought that if you bought a share of
stock you would get your money back with interest or had
lent the company money. Only 40% knew that if interest
rates drop, then bond values will go up. 25% thought it
meant bond values would go down and 12% said it does not
affect the price.

"A total of 60% of investors did not understand the
relationship between interest rates and bonds. Given that
interest rates are likely to rise over this decade, that
lack of understanding does not bode well for investors.

"Only 21% could correctly identify a no-load mutual fund,
and 31% thought it meant a fund with no fees. Maybe it was
just a poorly worded question, but a staggering 46%
believed that they were insured against stock market losses
by (choose one): the SEC (16%), FDIC (14%), SIPC (12%) or
the NASD (4%).

"The survey revealed that despite the recent bear markets,
we are still optimistic about future market returns. 40% of
us believe that a reasonable average long-term return from
a broadly diversified mutual fund will be 10%. That, by the
way, is the survey answer that was considered 'correct.'

"6% of those surveyed thought that 20% or more was a
reasonable expectation, and 15% thought that 15% was
reasonable. That adds up to 61% who think the markets will
give them 10% or more over the long term.

"They are likely to be disappointed over the next 10 years.

Starting from today's high P/E ratios, Yale Professor
Robert Shiller clearly shows there has never been a time in
which investors saw returns that were better than that of
simply parking their cash in a money market fund. The
studies of Arnott, Bernstein, Grantham, Alexander, Dreman,
Stein, Buffett, Montier, Easterling and many others (along
with the work of your humble analyst), all show the
likelihood of meager returns over the next decade."

Is it wrong to take the other side of these investors'
trades? Are their flanks not completely exposed?

Dow 10,000 is a fact. Dow 5,000 is just a prediction...

Over to you, Addison... with more news:

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Addison Wiggin with the latest in the markets...

- The"recession-that-wasn't" became even less so,
yesterday.

- After moving the base year for its"various price
indexes" from 1996 to 2000, the Bureau of Economic Analysis
announced that the 4th-quarter GDP for 2001 shrank less
than previously thought. That quarter was the last of the
quarters to undergo shrinkage in what can only be described
as the most ineffective recession to ever grace the history
of the American economy.

- Along with the revising away of the recession-that-
wasn't, the BEA also revealed that personal incomes during
2001 fell further than was previously reported... and
personal spending rose! Saving, too, was revised down at
the national level."The shortfall in national savings,"
chimes the Washington Post,"is now equal to about 5
percent of GDP.

-"The recession," writes Richard Duncan in his book, The
Dollar Crisis,"is the period during which equilibrium is
restored to the economy after a long period of over-
stimulation due to excessive monetary stimulation through
credit expansion." Does rising consumer spending on the
back of falling personal income sound like the hallmark of
an economy restoring its way to equilibrium? The work of
putting things back into whack hasn't even begun yet. And
yet, government quants are busy revising the effects away
(by moving the base year to the peak of the asset bubble,
no less!).

- In his book, Duncan forecasts a New Paradigm
Recession... one that will be global in scope, given the
world's dependency on the U.S. dollar."The New Paradigm
Recession," writes Robert Blumen on the Mises.org site in
an excellent review of Duncan's book,"will emerge out of
the continuing (sic!) U.S. downturn (which Duncan views as
only a warm-up for the real thing) as the U.S. economy can
no longer service the massive debt load that exists in the
consumer, corporate and government sectors. The recession,
when it comes, will be global in scope. It must come,
Duncan argues, because of the unsustainability of current
trading patterns and exchange rates."

- These currently unsustainable trading patterns, in fact,
drove the Dow past the 10,000 mark yesterday for the first
time since May 2002. The Nasdaq and S&P 500 caught the
fever themselves, closing up 37 points to 1,942 and 12 to
1,071 respectively. Gold fell to $1.60 to $405... while the
dollar hesitated on its trip South, resting for the evening
at $1.22.

-"At the start of 2002, the financial news was full of
stories about how much stock market investors had 'learned'
during the bear market, and how much wiser they would be
from now on," writes Elliott Wave's Robert Folsom on
CBSMarketWatch.com."You haven't seen many of those stories
lately, because the market rally since March has shown all
the symptoms of the late 1990s mania: Specualation in
unproven companies, historically unsafe P/E ratios, share
prices utterly detached from the companies value."

-"And it hasn't been that long," Folsom points out,"since
politicians in Washington told voters how much they had
learned about tax and spending: Leaders of both major
parties claimed to understand the wisdom of balanced
budgets and 'pay as you go.' Remember?"

- You may recall that Folsom penned an essay a few weeks
back that we featured here in the Daily Reckoning. He,
along with co-author Wendy Raffel, suggested that"The
public's willingness to submit to the servitude of credit
is a direct measure of their optimism - or pessimism -
about the future, and a reflection of mass psychology and
social mood." Given the general acceptance of the title of
our book,"Financial Reckoning Day" by the mainstream
media, we'd have to say: The social mood is bullish. Only
during a mania such as this can the government get away
with its behaviour of late.

-"My nominees for the 2003 Spend-Like-Drunken-Sailors
Award," writes Folsom"are the legislative and executive
branches of the Federal Government, a.k.a. the 108th
Congress and Bush administration." Rightly defending the
nomination as"non-partisan," Folsom offers up"An itemized
short list of the nominees' accomplishments [which]
includes:

** The"Supplemental Budget Request" to rebuild & secure
Iraq and Afghanistan, which will spend $87 billion, but was

not part of...

** The"National Defense Authorization Act," which at $401
billion is the largest-ever defense budget.

** The"Medicare Prescription Drug, Improvement, and
Modernization Act of 2003," to the tune of $400 billion,
the largest-ever increase for a single Medicare benefit.

** The"Consolidated Appropriations Bill," expected to
require spending the modest sum of $820 billion.

** The largest-ever budget deficit, projected at $500
billion in fiscal year 2004, due in part to this year's $1
trillion tax cut. The deficit is smaller than it would
otherwise be, of course, if it weren't for annual Social
Security taxes exceeding spending by $160 billion, an
over-taxation that Congress promptly spends as general revenue.

"Please note that I used 'short' to describe the list
above," Folsom explains,"because a fully itemized list
would likely demand months of your life, both in reading
time and due to the potential traumatic shock... Reckless
budgeting on this scale reflects something beyond the dumb
stuff that Congress typically does with the Federal Balance
sheet.

"This is not bullish behavior," Folsom concludes,"this is
recklessly bullish behavior."

- For his part, Greenspan jumped on the Chinese bashing
bandwagon yesterday. He called for the Chinese to de-peg
the yuan from the dollar. But not for the usual glad-
handing reasons that have led to a host of ridiculous
tariffs and"trade war" initiatives. In fact, Greenspan
said he thought that"a rise in value of the renminbi would
be unlikely to have much, if any, effect on aggregate
employment in the United States." Any decrease in Chinese
imports resulting from a rising yuan would quickly be
replaced by cheap imports from other low-wage
countries... likewise, American jobs.

- Yesterday, the Labor Department reported initial jobless
claims rose last week at the highest rate since the end of
October. But in keeping with the"bullish social mood," a
slew of analysts interviewed by Bloomberg were more than
willing to brush the numbers off."We've seen four straight
months of solid job gains," Greg Mankiw, chairman of the
President's Council of Economic Advisers, remarked."We're
going to see more." From whence, he did not say.

- Meanwhile, the pao mo bubble got another puff of air. We
told you about the IPO of the Chinese Internet travel
company, Ctrip.com, which more than doubled on Tuesday.
Yesterday, China Life, the country's largest insurance
company, raised $3 billion in the largest global IPO of the
2003. The stock will begin trading in New York on
Wednesday, December 17th.

- And, according to the International Energy Agency,
Chinese demand for crude oil jumped by 11.5 in October;
expanding"at breakneck speed." The global appetite for
crude is expected to grow by 1.4 million barrels a day in
2003, and 1.2 million barrels in 2004. In a move that's
likely to make Wang Jian just a little bit more nervous,
OPEC announced it will look into pricing oil in euros to
offset losses incurred from a falling dollar.

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Bill Bonner, Back in Baltimore...

***"He's not a nincompoop," said a friend of our
president."But he tends to listen to whomever he talks to,
unless it's an issue he really understands or feels
strongly about."

We were visiting an old friend from Washington - someone
now well-placed in conservative Republican circles, whose
name we cannot reveal, except maybe under torture... or the
offer of a drink.

We had asked what he really thought of George W. Bush.
"What happened was that after the Sept. 11th attacks... the
Bush administration had to react in some forceful way.
Afghanistan hadn't done the job. Blowing up caves wasn't
enough. And the only people who had a ready plan were the
pro-Israeli neo-cons. They put the plan in front of
Bush... they mentioned weapons of mass destruction and
terrorists... and Bush was off. Then, the dope Saddam stuck
out his chin and practically dared Bush to take a swing at
it. And now, we've got to find a way to get out of
Iraq... or to control the costs of it...

"It's all very unfortunate because it distracts everybody
from the very good work we're doing in other areas. Bush is
very solid on issues such as education, Social Security and
taxes. On taxes, for example, he saw what happened to his
father when he broke the pledge. He's not about to raise
taxes."

But what about spending... we asked... isn't it increasing
at twice the rate as it did under Clinton? Isn't this going to
bankrupt the country long before you get a chance to reform
Social Security?

"Well, we have to get spending under control. No doubt
about that. But Social Security is going bankrupt no matter
what. So the real issue is what takes its place and how.
That's what we're working on."

*** Another friend, Byron King, sends this little reminder
of how politics works:

"I used to live across the street from Joe Barr, former
Mayor of Pittsburgh (1959-1969). Joe was a protégé of Dave
Lawrence (b.1889-d.1966), also a former Mayor of Pittsburgh
(1946-1958), Penna Governor (1959-1963) and a political
powerhouse within the Democratic Party, counselor to
presidents (FDR, HST, JFK, LBJ) and maybe some kings, for
all I know.

"Back to Mayor Barr. One night, I was over at Mayor Barr's
house, hanging out with his son, who was about my age and a
good pal of mine.

"I asked hizzoner, 'Mayor, what is it that you have to know
to be the Mayor?' He looked at me. I continued, 'If you
want to be a doctor, you have to go to medical school. If
you want to be an engineer, you have to go to engineering
college. To be a lawyer, you need to go to law school. But
what is it that qualifies somebody to be mayor?'

"Old Joe Barr leaned back in his chair and smiled his Irish
smile, and he said these words of wisdom, these eternal
verities that still echo in my eardrums to this day: 'When
you hold political power, you have control over so much
money and so many jobs. You have to know and understand who
ought to get the money, and who gets the jobs. If you can
figure that out, you can succeed in politics.'

"And then this homme d'affaires went on: 'It has been true
since about forever. Back in the days of ancient Egypt,
what do you think Pharaoh spent most of his time doing?
I'll bet that every night, Pharaoh and his chamberlains sat
around at some table in the great hall, looking over the
contracts they were letting out to build the Pyramids. Who
gets the contract for limestone? Who builds the barges to
haul the granite from Aswan? Who supplies the bread for the
workers? It's all about who gets the money and who gets the
jobs. Think of ancient Rome and the Caesars, building roads
and monuments. Think of China and her Emperors, building
the dikes and the Great Wall. It hasn't changed in
thousands of years.'

"Bill, I remember the conversation from thirty-five years
ago like it was this morning. And politicians and
governments are still building pyramids and monuments and
Great Walls, except today we call them something else:
'public works,' 'great society,' 'medicare,' 'social
security,' 'national defense,' or just plain
'authorizations' and 'entitlements.' It's all about taking
wealth, in the form of the nation's currency, from people
who produce it and earn it, and handing it out to other
people. It is all about using the fruit of one person's
effort, and passing it out as a 'job' to some even more
deserving fellow citizen.

"Sure, it can work for a while. After all, somebody built
the Pyramids, the Coliseum, the Great Wall. Fine
structures, all of them. And how long can it all last? How
long is it before politicians anywhere and everywhere stop
understanding the nature of money, and the underlying
wealth that it represents and reflects? How long before
they pull down the walls of their own house upon their
heads?

"Today, as I write to you, the City of Pittsburgh is
attempting to invoke 'Act 47' under Pennsylvania law. That
is, the City is broke, and attempting to file a state-law
version of municipal bankruptcy. This is Pittsburgh, the
Silicon Valley of the last century, where people made money
by the long yard. Andrew Mellon made so much money in
Western Pennsylvania that he had to spend it buying Old
Masters in Europe, giving them 'to the people of the United
States of America,' and building the National Gallery in
Washington DC as a place in which to house them.
Pittsburgh, the home of Big Bucks, Bill. We are talking
about THAT kind of money.

"And today the City is broke. Unlike in the days of Joe
Barr and Dave Lawrence, the 'hizzoners' of recent vintage
did not really understand who ought to get the money and
the jobs. They handed out money and jobs until the city was
broke, and now the Grim Reaper stands at the doors of the
City-County Building. Sadly, Pittsburgh is reflective of
what is going on in the rest of the country as well.
Welcome to the future of America."

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The Daily Reckoning PRESENTS: Those who believe in the
unstoppable march of progress have a lot of explaining to
do... as this DR Classique, originally broadcast on 13
December, 1999, makes abundantly clear.


THE RAPE OF NANKING
By Bill Bonner

The storm that knocked out our power also blew apart many
of the decorations for year 2000 in little Lathus. Even in
their prime, they looked rather feeble. Now they are pathetic.

As we drove up to the church at Bourg Archambault, we found
that the wind had also knocked over the cross in front of
the church. There was the Nazarine, still nailed to the
cross. But the cross was lying on the ground. Father
Marchand took it as a good sign. But everything is a good
sign to him. Every storm portends fair weather.

He is a stopped clock. A perpetual optimist. A perma-bull
on the perfectibility of man and the triumph of good over
evil.

But, beginning in December 1937... only 65 years ago... the
world was reminded of what evil was all about. Previous
records in political depravity were broken when the devil
worked overtime for a six-week period. When it was over, an
estimated 377,000 people had been slaughtered.

These people, by the way, were not soldiers of the Reich
nor draftees of the Kremlin. They were men, women and
children of all ages and party affiliations. Democrats.
Catholics. Confucians. Bricklayers. They shared one common
mistake - they were in the wrong place at the wrong time.

These people were not obliterated in an impersonal air-
raid... such as the 60,000 thought to have been killed at
Dresden or the 200,000 killed at Nagasaki and Hiroshima.

Nor were they killed methodically and systematically as the
Nazis and Bolsheviks usually did with their victims.

Instead, they were put to death one by one... or in small
groups. They were often tortured... degraded... and made to
suffer as much as the killers' imagination made possible.
Nothing personal... of course.

Butchery. Barbarity. Bestiality. It is hard to describe
what happened in words that do it justice.

When the Roman legions destroyed Carthage, they took the
lives of about 150,000. Timur Lenk killed 100,000 prisoners
at Delhi in 1398. He built towers of skulls in Syria in 1400.

But no cameras recorded the spectacles. The photos in Iris
Chang's book provide evidence against those who believe in
the perfectibility of man. The event in question occurred
more than 100 years after the Rights of Man had been
declared. And nearly two millennia after the birth of the
Prince of Peace. The prohibition against murder was well-
established in all major religions. Of course, the victims
would have welcomed murder - it would have been a comfort,
like a stop loss in a bear market.

Some of the photos in Iris Chang's book are so revolting
that I wish I had not seen them. Once seen... they could
not be ignored. I could barely go on with my work. One of the
photos in The Big Black Book of Communism had the same
effect... I could not look at it again... but it was hard
not to recall it.

You might be tempted to say of the perpetrators of these
crimes that they were"animals." Such a comment libels the
animal kingdom. No beast of burden or leisure would do such
a thing...

I am talking about the"Rape of Nanking," revealed to us in
gruesome detail by Iris Chang's book of the same name. The
term"Rape" fails to convey the extent of the misery
visited on the hapless citizens of Nanking, China in 1937.

"Rape" is not a nice thing... but it hardly describes what
the Japanese Imperial Army under Gen. Iwane Matsui did to
the Chinese who fell into their hands after they took the
city of Nanking in 1937.

Though reported in the international press at the time, it
was practically ignored by everyone and quickly forgotten.
It was the Nobody of mass slaughters.A shame. It might have
alerted the world to what was to come.

If Mr. Bewitt were right about being no more than the sum
of his experiences... it is no mystery why the Japanese
behaved as they did. Japan's dominant caste was
military... had been for centuries. It sought to create a
race of superior soldiers... with complete confidence in
themselves... and total contempt for the rest of the world.

The whole society had been politicized.

Iris Chang recounts the story of one schoolboy who quivered
at dissecting a frog. Struck by his teacher, he is asked,
"Why are you crying about one lousy frog? When you grow up
you'll have to kill one hundred, two hundred chinks!"
The Chinese were deconstructed into"chinks"... pigs...
animals... subhumans. And enemies of the Imperial Army.

Here's what happened. Just as things couldn't be better for
Wall Street today ['today' being back in December 1999],
they couldn't have been worse for Nanking in 1937. Or so it
seemed. And just as everyone is long on the future of NYC,
and America, on the eve of this Christmas season...
everyone was short Nanking back then. Nanking was near a bottom -
its quality of life, its morale, its capital values, even
its population... were all sinking fast.

The Chinese army was overtaken by despair. Nothing partakes
in group-think so much as an army. That's why morale is so
important to a fighting force. At Nanking, the Chinese army
so oversold itself that it became, literally, worthless.
Soldiers laid down their weapons without a fight. This
confirmed the Japanese contempt for the Chinese. The
prisoners were taken away... and killed.

This left the whole city at the mercy of the Japanese."On
December 13, 1937, Japanese soldiers began an orgy of
cruelty seldom if ever matched in world history," says
Chang."... Young men were mowed down by machine guns, used
for bayonet practice, or soaked with gasoline and burned
alive."

.. but the soldiers were just getting started.

"Not only did live burials, castration, the carving of
organs and the roasting of people become routine, but more
diabolical tortures were practiced, such as hanging people
by the tongues on iron hooks or burying people to their
waists and watching them get torn apart by German
shepherds... even the Nazis in the city were horrified..."

To his credit, General Matsui was horrified, too. He had
been sick and away from the city. Upon returning, he was
shocked to see how his troops had been turned into a mob
from hell.

Curiously, one of the heroes of Nanking was, in fact, a
Nazi. John Rabe was a member of the Nazi party. But he was
also a representative of the Siemens company and felt a
personal responsibility to protect his Chinese workers.

Once started on this course, his courage and energy were
exemplary. He led an entire community of missionaries -
many of them American - and other foreigners, as well as
thousands of Chinese in the foreigners' compound, through
the experience.

Rabe took it personally. He risked his life daily,
confronting the Japanese military authorities and butting
in to save individual Chinese from Japanese soldiers
whenever he could.

Only his Nazi armband protected him... but he could never
be sure how far that would take him.

(After the war, Rabe, returned to Germany, was disgraced as
a Nazi... and impoverished. The citizens of Nanking took up
a collection on his behalf.)

Japan is the world's most law-abiding and polite society.
But storms of evil blow up from time to time. No race or
nation is beyond their reach. (I got a message from a Daily
Reckoning reader describing how American soldiers shot
Cheyenne children for sport.)

Give the devil his due - the events described above
occurred during the lifetimes of many people reading this
message. In our century. Our time. Our world.

Many of the killers are still alive, too... enjoying their
comfortable retirements... and looking forward, no doubt,
to the new millennium.


Bill Bonner