4/25 Kelly Letter Topics
Weekly market review
SEC GS politics
Fin reform toothless
Money always talks
Greece still sinking
Japan's sliding credit
AAPL > MSFT
Grant on fin reform
Who will buy JGBs?
Of snow and stocks
Much has changed; good investing has not
The Neatest Little Guide to Stock Market Investing, 2010 Edition
I continue to feel that the biggest threat to the market now is the Iran situation. I wrote about this on May 21 and June 25.
The chances of an air strike keep growing. Iran is almost begging to be attacked, and it may get the holy war it wants.
It would not take more than a few nuclear missiles to destroy all of Israel or finally give Islamic terrorists the weapon they've always wanted to use against the U.S.
The mere threat of those capabilities by a nuclear Iran would change the dynamic of Western relations with the Middle East. One gleaming nuclear missile aimed at Jerusalem would embolden terrorists because their nations would own the oil we need and be able to trump the military edge we currently have.
Negotiations are taking place, but how many hundreds of times have you heard that in regards to the Middle East? Look how they went last week. Iran said it was ready to play nice and then launched missile tests -- in the same week!
The repercussions of a strike on Iran would be huge. Iran already said it would seal off the Strait of Hormuz, through which 40% of the world's oil passes. That would bring the U.S. Navy onto the scene in a matter of hours if not minutes. When a missile test can add $9 to the price of a barrel of oil as it did last week, just imagine what a full-scale naval battle off the coast of Dubai would do.
That's just in the sea. Iran's military would attack Israeli cities, and so would Iran-sponsored terrorist groups. The resistance against U.S. forces in Iraq would intensify, too.
As far as the stock market goes, the oil price spike would be paramount. It could chop 10% off the broad indexes, making all of the technical analysis and timing thoughts moot.
This is one of the areas of stock analysis that's so hard, because it has nothing to do with analyzing anything. What do Iranian nuclear ambitions and Israeli strike plans have to do with the iPhone, Crocs shoes, or Starbucks coffee? Not a darned thing, but the way the situation goes could affect the prices of all stocks.
Do you know if and when Israel and the U.S. will bomb Iran? I don't. Do you know how quickly the U.S. could re-open the Strait of Hormuz if it's closed? I don't. Do you know whether Iran would retaliate with such abandon as to destroy crucial oil reserves? I don't.
What we do know is that this stand-off is five years old, and there's been no war yet. Also:
The Iranian missile test was lame, using old equipment and possibly NOT including the long range missile claimed. ArmsControlWonk.com ran a blog post titled "Same old Boring Shahab 3" in which it compared the diameter of the missiles to their length and found them to be identical to the ones shown in 1998, which have a known range of 746 miles. In sum, there was nothing in the missile tests to alter current U.S. policy.
Diplomacy is still the official strategy. U.S. Defense Secretary Robert Gates said the U.S. is "working hard to make sure that the diplomatic and economic approach to dealing with Iran, and trying to get the Iranian government to change its policies, is the strategy and is the approach that continues to dominate."
Israel bombed an Iraqi nuclear facility in 1981 and the stock market held up fine. (Although oil was cheaper then.)
Thomas Fingar, director of the National Intelligence Council, identified what makes this situation difficult when he explained Wednesday that "Iran has real security needs" and that "we are part of the reason Iran feels insecure."
The Boston Globe noted "President George W. Bush's failure to place a senior U.S. official at the negotiating table and to offer Iran the sort of comprehensive security agreements Iranian officials have hinted they require." It suggested that "until a U.S. president makes an offer that truly tests Iranian intentions, there will be more chest-thumping in the world's most volatile region."
Which doesn't make our job any easier.
In the end, all we can do is base our decisions on what we know. What we know is that oil prices are already high, they've taken a toll on the stock market, good companies are on sale, and MACD and RSI are right where they were before previous market recoveries.
If the talks go south, the bombs start falling, the price of oil spikes, and the stock market tanks, remember that you had no way of knowing ahead of time it was going to happen.
About a month ago you wrote an article looking at geopolitical risks, and identified a strike on Iran as the most pressing current situation. Any updated thoughts on that?
Yes, I wrote to subscribers last weekend about what an Israeli strike on Iran could mean to oil prices. I concluded that it would probably bring a spike higher, but that such a spike might finally be the blow-off top needed to get the price moving lower again "once everybody sees that no barrel of oil was harmed in the making of this movie."
Also over the weekend, Barron's agreed with the general idea that the price of oil is near a top. In his article "Bye, Bubble? The Price of Oil May Be Peaking," Andrew Bary wrote:
In the next decade, oil indeed may hit $200 a barrel. But prices could fall to $100 a barrel by the end of this year if Saudi Arabia makes good on its pledge to increase production; global demand eases; the Federal Reserve begins lifting short-term interest rates; the dollar rallies, and investors stop pouring money into the oil market. China raised prices on retail gasoline and diesel fuel by 18% Thursday, in a move that is expected to curb demand.
Keep in mind that neither Mr. Bary nor I were discussing the longer-term trend in oil prices, which is higher for the simple reason that rising demand is meeting static or declining supply. We were discussing the potential for medium-term price relief.
Others are not nearly as sanguine. The BERR Assessment made clear to The Oil Drum Europe that current high energy prices and associated inflation are not "a transient blip when the UK seems to be in a terminal dive towards insolvency" from an accelerating deficit in oil and gas surpluses. Euan Mearns wrote:
We should hopefully by now have reached a point where all stake holders in UK, European and Global energy are able to grasp the simple fact that we are now in the early stages of a full blown global energy crisis. The focus is currently on oil but this will soon turn to concerns over natural gas and coal supplies.
This crisis has been turned into a state of emergency by the indifference of political leaders in the UK (and throughout the world), fluttering in the wind of poorly informed public opinion while they have prevaricated about expanding renewable energy resources and building new nuclear power stations. All warnings of this pending energy crisis have been ignored in favor of pursuing popular policies that created the illusion of prosperity whilst the fundamentals of our nation's security and well being have been draining away.
That's the fragile backdrop against which we need to consider the impact of a strike on Iran.
The worst case scenario is that a strike would finally push the needle firmly to stagflation, the poisonous pairing of stagnant growth with rising inflation.
On that front, perhaps nobody has written more pointedly than Nouriel Roubini:
Stagflation requires a negative supply-side shock that increases prices while simultaneously reducing output. Stagflationary shocks led to global recession three times in the last 35 years: in 1973-1975, when oil prices spiked following the Yom Kippur War and OPEC embargo; in 1979-1980, following the Iranian Revolution; and in 1990-91, following the Iraqi invasion of Kuwait. Even the 2001 recession -- mostly triggered by the bursting high-tech bubble -- was accompanied by a doubling of oil prices, following the start of the second Palestinian intifada against Israel.
Today, a stagflationary shock may result from an Israeli attack against Iran's nuclear facilities. This geopolitical risk mounted in recent weeks as Israel has grown alarmed about Iran's intentions. Such an attack would trigger sharp increases in oil prices -- to well above $200 a barrel. The consequences of such a spike would be a major global recession, such as those of 1973, 1979, and 1990. Indeed, the most recent rise in oil prices is partly due to the increase in this fear premium.
Mr. Roubini concludes that without such a jarring negative supply-side shock, global stagflation is "unlikely" because of robust growth from Chindia and other emerging markets.
That leaves us with speculating on the odds of a strike against Iran.
The Jerusalem Postreported yesterday that former U.S. ambassador to the U.N. John Bolton said that Israel is likely to attack Iran in the time between the November presidential election in the U.S. and the inauguration of the new president. Mr. Bolton also said that he does not believe the U.S. will participate in the attack.
That's not the tone struck by CBS. It reported yesterday:
Israelis are mounting a full court press to get the Bush administration to strike Iran's nuclear complex.
CBS consultant Michael Oren says Israel doesn't want to wait for a new administration.
"The Israelis have been assured by the Bush administration that the Bush administration will not allow Iran to nuclearize," Oren said. "Israelis are uncertain about what would be the policies of the next administration vis-à-vis Iran."
Israel's message is simple: If you don't, we will. Israel held a dress rehearsal for a strike earlier this month, but military analysts say Israel can not do it alone.
"Keep in mind that Israel does not have strategic bombers," Oren said. "The Israeli Air Force is not the American Air Force. Israel can not eliminate Iran's nuclear program."
The U.S. with its stealth bombers and cruise missiles has a much greater capability. Vice President Cheney is said to favor a strike, but both Mullen and Defense Secretary Gates are opposed to an attack which could touch off a third war in the region.
It's easy to see why I still consider the Iran strike issue to be the most pressing geopolitical concern for investors.
This is my last article this week. I'll be away from the free site until next week, but will be sending The Kelly Letter to subscribers this weekend, as usual.
More on our current theme of America's future comes from historian Jonathan, who wrote:
Your reader [Marcel from Monday's article] evidently doesn't understand what became of the Roman Empire. It split in twain, and (excepting my folk hero Julian the Apostate's brief efforts) remained that way.
The western portion could certainly be considered to have fallen in a sense, given that Alaric the Visigoth and his homies sacked Rome (by which time the administration was at Ravenna anyway) when hardly anyone could be bothered to defend it. Later that century it fell to a Scirian barbarian king, then became an Ostrogothic kingdom, and in general we watched the rise of Germanic-speaking people -- Franks, Goths, Vandals, etc.
But an interesting thing happened there. When those successors finally produced a new empire, they called it the Holy Roman Empire. I am not contending that the HRE was any form of direct descendant of the Empire of Vespasian and Diocletian, of course. I am contending that in one form or another, the western Roman Empire hung on quite a long time -- even if only as an idea.
But that was the weak side of the split.
The eastern portion could not be considered fallen at all at the same time as the western. It became the Byzantine Empire, a thriving place, and endured for a millennium after Odovacar the Scirian contemptuously told the last western Emperor: "You can run along now, son."
Of course, it's not good enough to just tell the history; part of the task is to draw lessons and inferences. I think your British example is a reasonable one; I think it's a worthy topic of discussion which former major power we resemble more.
I am greatly fond of pointing out to Americans that our Francophobia is ironic in light of the fact that we so resemble the French. We are unilingual, we overrate ourselves, and we're often insufferable about both facts. We ought to view the French as kindred spirits, because they're the only other people in the world as abrasive and difficult and annoying as we are. (Then there's that little part about us probably losing the Revolution without them, us helping Napoleon, a big statue, then two major wars together. If ever two nations were meant to be friends it is us and France.)
I do not think that the U.S. faces the fate of the western Roman Empire, or even the eastern. I do think that the world contains a finite number of resources, an issue Americans have often been able to ignore for domestic purposes but which was enough of a deal-breaker for Japan to lead her to war against us. The Japanese know (because, so far as I know, they have almost no natural resources).
I also think that the underdeveloped world wants to live like the developed world. Chinese and Indians want to live like Japanese and Americans. So do Bolivians and Botswanans. The rest of the world is hurrying to catch up, and that means significant amounts of infrastructural and consumer spending as homes get their first indoor plumbing, water faucet, phone line, microwave, electric socket to power a microwave, etc. Therefore, we will see them grow at a faster rate for some time -- probably into my retirement years (I'm 44 now).
But that doesn't mean America is in decline. It may mean that America's growth slows; it may mean that other nations grow faster. If someone wants to consider that relative decline, I suppose they can, but they're applying too much spin by putting it that way.
What it does mean is that Americans will have to get over their Suite Madame Blue [lyrics and live performance] delusions and realize that our national military and economic power has limits. What it means for the American investor is that there's profit to be had investing overseas, at least for those few Americans who understand or care what's going on overseas.
The rest are the mullethead in the flag do-rag and shades we've all seen in the pic holding a sign that says, "Get a Brain Morans." They're the same Americans who think that because fuel prices have now finally reached equivalent levels to the early 1970s, death and destruction will rain upon our land. Odd. I was a boy in the early 1970s. I remember long gas lines but I don't remember death and destruction. (Watergate, yes.)
As for those who don't realize that a portion of the Roman Empire survived intact for nearly a millennium after the exile of Romulus Augustulus in the west, it might profit them to check their analogies before using them.
A great history lesson, and consistent with the main message of Fareed Zakaria's new book, The Post-American World: It's not so much that America is declining, but rather that other countries are finally catching up. Zakaria calls it the rise of the rest.
America will remain the sole superpower for a long time yet to come. Will it use that position to its advantage, or get sidetracked and become the buffoon in the room that everybody else is snickering about?
There's been a lot of snickering so far this century. Some fine statesmanship would be a pleasant change of pace.
Yesterday's article on why I think America is not in decline prompted thoughtful replies from readers.
I found your article particularly interesting as I am British, and agree somewhat with your opinion, but remain skeptical about America's future.
One topic you and many others constantly overlook is America's appalling immigration blunder. This is not a minor problem, as it's going to affect the US's future. This nation is where it is thanks to immigrants from western Europe, primarily Germans. In the 18th and 19th centuries, 50 million Germans came to the USA. They were the most industrious, qualified immigrants any nation could have welcomed, and this country should be eternally grateful to that group. It's also interesting to note that it was Wernher von Braun (a German) who was the brains behind the US space programme.
The current crop of immigrants does not come anywhere near the desirability of the people who came here during the period I mention. This is the ultimate reason the US will not compete in this century.
I understand you live in Japan. Have you been here recently to take a close look at the infrastructure? The shocking condition of the road-railway systems is straight out of the 1890s -- worse, in fact. There's no public transportation of any note, a failing school system, and political correctness has been taken to the point of absurdity.
The US enjoyed a power surge after World War II as it was the only industrialised nation standing. I am 73, and lived through the war in the UK, and will be eternally grateful to the US army and the USAF for their tremendous effort -- that's the America I remember and liked.
I felt compelled to write this letter because many Americans are still under a degree of denial about their country. As an ex airline guy who has traveled and lived extensively abroad, I was aware of the decline that was taking place several years ago.
You appear to be an interesting young man, Jason, and are no doubt living in Japan for your own reasons. Whatever they are you must be very aware of what is happening in that part of Asia -- I think we are going to be very surprised at the events that occur in the next 10-20 years.
Discussions with my grandparents and others of their age have instilled in me the respect for the World War II generation that John conveys in his note. There was something almost magical about the greatest generation, and comparing their handling of WWII with nearly every U.S. conflict since then is a sure path to frustration. Who would you rather have in charge, Franklin D. Roosevelt or George W. Bush? It's a rhetorical question.
On that score, I share John's point of view. Ditto the poor quality of the U.S. transportation system, which I wrote about on May 22.
Regarding immigration, however, I don't find the current situation quite as grim as John does. Every country would prefer that most of its immigrants be highly educated geniuses cut from the von Braun cloth. That's not a reasonable preference, though. The current crop of immigrants to the U.S. may not bring the same contributions brought by the Germans and other European immigrants, but it does get America around the declining demographic problem faced by other developed nations.
By 2030, according to Nicholas Eberstadt at the American Enterprise Institute, the U.S. population will grow by 65 million people. Europe's, however, will remain stagnant and end up with twice as many seniors over 65 than children under 15. Developed populations around the world have either already stopped replacing themselves or are near that point, leaving immigration as the primary way of keeping demographic trends healthy. Too few children today means too few workers tomorrow.
The UN reports that a native-born American woman bears 1.9 children, less than the 2.1 rate needed for replacement. Without immigration, the American population would not be growing today.
Also, we should keep in mind that at any point in history the most recent wave of immigrants is viewed with suspicion. The newest newcomers somehow never stack up to our retrospective view of the prior newcomers. Part of that is due to the prior newcomers now considering themselves natives and looking with disdain on the next wave of people doing precisely what they once did.
Recall the "No Irish Need Apply" signs of the 1850s and 1860s in England and America to realize that the impression of European immigrants as being high quality people wasn't always dominant.
From the Opposing Viewpoints book on Immigration, edited by Mary E. Williams: "By high margins, Americans are telling pollsters it was a very good thing that Poles, Italians, and Jews emigrated to America. Once again, it's the newcomers who are viewed with suspicion. This time, it's the Mexicans, the Filipinos, and the people from the Caribbean who make Americans nervous."
That said, I think it's easy to support John if we restrict our dislike to illegal immigration. Nobody opposes immigration when we're talking about Indian software developers, Japanese automotive designers, German rocket scientists, British journalists, French engineers, and Brazilian business leaders. Let's be honest: the problem is illegal aliens who sneak into the country, produce a litter of children supported by social programs, and never generate enough economic value to offset their drain on the country.
John wondered if I've been back to America recently to see its current state. Yes, I get back two or three times a year. One of my most frustrating experiences has been accompanying a group of Japanese visitors to Los Angeles International Airport where they were eager to begin using the English they'd studied so hard, only to find that half of the "Americans" they met didn't speak English. One of them asked me why she couldn't catch any of the words the man on the street was saying to her.
"Is it an English dialect?" she asked.
"No, it's Spanish," I answered.
The image that Japanese people have of Hollywood is left over from the days of Marilyn Monroe and Audrey Hepburn, whose pictures still adorn brand new movie theater walls in Japan. That impression is gone by the time the sun sets on the first day in Los Angeles.
Is it so shocking, though? Look at the name of the city.
Even the hard line against illegal immigration can run up against second thoughts the first time you get to know a good person who came to the U.S. illegally. A friend of mine in Los Angeles owns an office equipment store, is married to a white American woman, has a son in the military, and would do anything in the world to help me. He came illegally to the United States from Honduras, with the help of a "coyote" (smuggler). He spoke no English. To learn, he joined a Toastmasters club. That's where I met him, and I've enjoyed listening to his speeches in perfectly good English.
I know his story is anecdotal to the national discussion, but it's not to me. Even as we form national policy, it wouldn't hurt to keep compassion close at hand.
As a thought on whether the U.S. is in danger of being swamped by immigrants, keep in mind that the foreign-born share of the population in 1900 was 20%, twice as high as the 10% share it sits at today.
I agree with the spirit of John's note. The U.S. needs to get smart about immigration, not to cut it off. The country needs to decide who's going to improve the national situation and who's going to make it worse.
Here in Japan, I have to periodically prove to the country that it's worth letting me stick around a while longer because I'm writing something of value about the culture. I didn't sneak in, nor do I stay surreptitiously. The authorities know where to find me and I have every document required to be here.
Is it too much to ask that immigrants to America show the same respect?
Shame on you for directing your readers toward mostly American stocks. You should be gravely concerned about America's inevitable decline, and attentive to what it means to a portfolio of American stocks. Like Rome before it, the American empire is headed for extinction. The Iraq War will bankrupt the United States and usher in that much more quickly the Chinese century.
This is patently untrue. It shows a lack of historical grounding and ignorance of current facts.
The only reason Rome is cited often by those making predictions of America's demise is that Edward Gibbon's The Decline and Fall of the Roman Empire was so popular. The memorable title became part of the common lexicon so that even those who've never read the book think they know the whole story by just pointing out that the Roman empire declined and fell. There were a few details, however, and those details make the comparison to America's current situation too simplistic.
In short, Gibbon thought Rome fell because its citizens lost their civic virtue, entrusted their empire's protection to barbarian mercenaries who turned on them, and fell so under the trance of Christianity that they cared less about worldly affairs and more about the rewards of the afterlife. There are other theories as well.
To me, the decline of Britain's dominance is a more appropriate focus of study when considering America's situation as other countries rise. The primary reason that Britain declined on the world stage is economic. Its economy could not keep up with the economies of France, Germany, Russia, or the U.S. The British politician Leo Amery said in 1905:
"How can these little islands hold their own in the long run against such great and rich empires as the United States and Germany are rapidly becoming? How can we with forty millions of people compete with states nearly double our size?"
That should seem a familiar sentiment. It's what many people in America say when considering whether the U.S. can compete with a rising China and India. It's why I prefer to consider Britain instead of Rome when looking for precedents to America's situation.
Happily, I find that America is not an economic lightweight, nor anywhere near extinction. The Iraq War, blunder though it's been and critical though I am of it, will not bankrupt the country.
For evidence, let's turn to Fareed Zakaria's new book, The Post-American World. The following appears under the subhead "America's Long Run" on pages 180-182:
First, however, it is essential to note that the central feature of Britain's decline -- irreversible economic deterioration -- does not really apply to the United States today. Britain's unrivaled economic status lasted for a few decades; America's has lasted more than 130 years. The U.S. economy has been the world's largest since the middle of the 1880s, and it remains so today. In fact, America has held a surprisingly constant share of global GDP ever since. With the brief exception of the late 1940s and 1950s -- when the rest of the industrialized world had been destroyed and America's share rose to 50 percent! -- the United States has accounted for roughly a quarter of world output for over a century (32 percent in 1913, 26 percent in 1960, 22 percent in 1980, 27 percent in 2000, and 26 percent in 2007). It is likely to slip but not significantly in the next two decades. In 2025, most estimates suggest that the U.S. economy will still be twice the size of China's in terms of nominal GDP (though in terms of purchasing power, the gap will be smaller).
This difference between America and Britain can be seen in the burden of their military budgets. Britannia ruled the seas but never the land. The British army was sufficiently small that the German chancellor Otto von Bismarck once quipped that, were the British ever to invade Germany, he would simply have the local police force arrest them. Meanwhile, London's advantage over the seas -- it had more tonnage than the next two navies put together -- came at ruinous cost to its treasury. The American military, in contrast, dominates at every level -- land, sea, air, space -- and spends more than the next fourteen countries put together, accounting for almost 50 percent of global defense spending. Some argue that even this understates America's military lead against the rest of the world because it does not take into account the U.S. scientific and technological edge. The United States spends more on defense research and development than the rest of the world put together. And, crucially, it does all this without breaking the bank. Defense expenditure as a percent of GDP is now 4.1 percent, lower than it was for most of the Cold War. (Under Eisenhower, it rose to 10 percent of GDP.) The secret here is the denominator. As U.S. GDP grows larger and larger, expenditures that would have been backbreaking become affordable. The Iraq War may be a tragedy or a noble endeavor, depending on your point of view. Either way, however, it will not bankrupt the United States. The war has been expensive, but the price tag for Iraq and Afghanistan together -- $125 billion a year -- represents less than 1 percent of GDP. Vietnam, by comparison, cost 1.6 percent of American GDP in 1970 and tens of thousands more soldiers' lives.
American military power is not the cause of its strength but the consequence. The fuel is America's economic and technological base, which remains extremely strong. The United States does face larger, deeper, and broader challenges than it has ever faced in its history, and the rise of the rest does mean that it will lose some share of global GDP. But the process will look nothing like Britain's slide in the twentieth century, when the country lost the lead in innovation, energy, and entrepreneurship. America will remain a vital, vibrant economy, at the forefront of the next revolutions in science, technology, and industry -- as long as it can embrace and adjust to the challenges confronting it.
That's the macro picture. The micro picture as it relates to our stock portfolio is that many of the companies we own will thrive no matter which countries dominate the global economy, because they operate everywhere on the globe.
Quick case-in-point: Apple's new iPhone 3G. It's launching on July 11 not just in the United States, but also Australia, Austria, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan, Mexico, the Netherlands, New Zealand, Norway, Portugal, Spain, Switzerland, and the United Kingdom. It will eventually get to more than 70 countries, if not more.
So, for two reasons I feel no shame for holding a stock portfolio dominated by American companies:
America is not in decline.
American companies can thrive regardless of which individual economies dominate.
I've read that the market is at the mercy of geopolitical risks. Do you think so? Also, what do you consider to be the biggest geopolitical risks facing us today?
The market is no more at the mercy of geopolitical risks today than it has been in the past. People suffer from a number of cognitive biases that impair their investment performance. One of them is hindsight bias, which is the tendency to think past events were predictable when they were not. Another, which has no name that I'm aware of, is a tendency to assign a higher perception of risk to future possibilities even when we know how similar events have played out in the past. It's forever worse this time.
For instance, you often hear phrases like "in today's environment" or the "current challenges facing us" or "in light of the current crisis" as if the world is far worse today than it's ever been.
It's not. Some history books will come in handy.
If you think American involvement in the Middle East is new, peculiar to President Bush, and destined to end the moment he leaves the White House, you need to read Power, Faith, and Fantasy by Michael Oren.
The world has been aware of oil's approximate time line for more than three decades now. While most people think governments and oil companies are just stupid, what's actually happening is a fine balancing act between being able to sell as much oil for as much profit as possible before the environmental cost gets too high and/or the social pressures too great.
The annoying secret is that we could survive without oil right now. The technology exists. Ask anybody who's driven a forklift inside a warehouse how often they need to fill up. Never. Those vehicles have been electric for 50 years. We don't wean ourselves from oil because big companies want to sell it, governments want to tax it, and people keep buying it.
If you think recent natural disasters like Cyclone Nargis in Myanmar and the earthquake in China are worse than the world has seen before, you need to read a list of natural disasters. Keep in mind that the global population grows every year, so we should expect death tolls to rise over time simply because there are more of us to die. An earthquake of the same size will kill more people in a crowded area than a non-crowded one.
Even so, Cyclone Nargis and the China earthquake are not even close to being the deadliest natural disasters on record. China is no stranger to nature's wrath. Its floods in 1887 and 1931 killed more than one million people, its Jiajing earthquake in 1556 killed more than 800 thousand people, and its Great Tangshan earthquake in 1976 killed more than 200 thousand people.
Besides, natural disasters have no bearing on financial markets. It's the mark of an amateur to think that Hurricane Katrina will stop the U.S. economy in its tracks, or that China's earthquake will shake its economic foundations. I'm not being callous toward the toll disasters take on humanity, I'm referring only to their non-impact on financial markets.
The U.S. stock market has averaged a little more than 10% per year through World War I, The Great Depression, World War II, the Korean War, the Vietnam War, the Gulf War, the Iraq War, and smaller military excursions scattered between. It's also ignored Jazz, Rock & Roll, Disco, and Hip Hop. It hasn't cared much about changing fashions, either, nor who's in the White House.
The geopolitical risks we face today are no worse than what we've seen in the past.
That being fully grasped, I would say that the one with the highest chance of affecting the market for a short time would be a U.S. attack on Iran because oil prices are already high and that would likely take them higher.
What are the odds of such an attack? Pretty good, apparently:
Israel's Army Radio reported that President Bush plans to strike Iran before the end of his term.
The U.S. Air Force refitted its stealth bombers to carry 30,000-pound "bunker buster" bombs, which would be necessary to destroy Iran's reinforced nuclear facilities.
The Saudi Arabian government began making nuclear fallout preparations against possible contamination from the U.S. destruction of Iran's nuclear facilities a day after Vice President Cheney met with their highest-ranking officials. What do you suppose they discussed?
Israel's getting ready, too. Last month, it ran its largest homeland military exercises ever.
The U.S. now has two aircraft carriers deployed in the Persian Gulf. The USS Abraham Lincoln joined the USS Harry Truman this month, and with more weapons and ammo than on previous deployments.
The Bush administration said that the military option has not been taken off the table, but that it would like to settle worries over Iran's desire for a nuclear weapon "through peaceful diplomatic means."
Should this affect how you manage your portfolio? No. Aside from keeping a wish list of stocks to buy should an amazing sale happen unexpectedly -- which you should always maintain -- there's no point in acting on unsubstantiated claims about an event that would bring only fleeting market consequences anyway.
You can read more on the Iran situation in this morning's Journal.
I suggested in my recent series on the Iraq war (Geopolitics label) that readers pick up a copy of The Ugly American for its insights into why American foreign policy creates anger in so many countries.
Lyn wrote, "A more recent (and excellent) rendering of the Ugly American theme is a book by John Perkins titled Confessions of an Economic Hit Man -- highly suggested reading."
On my way back to Japan, I bought a copy in Los Angeles and read it cover to cover over the Pacific. The subject deserves more than just my general thumbs up or down on the book.
Today, I present excerpts that capture what I consider to be the theme of the book. I will not comment on them yet. Instead, I welcome reader feedback and will compose a discussion article from that feedback along with my own thoughts.
Here are the excerpts I chose from the book:
We are an elite group of men and women who utilize international financial organizations to foment conditions that make other nations subservient to the corporatocracy running our biggest corporations, our government, and our banks. Like our counterparts in the Mafia, EHMs [economic hit men] provide favors. These take the form of loans to develop infrastructure -- electric generating plants, highways, ports, airports, or industrial parks. A condition of such loans is that engineering and construction companies from our own country must build all these projects. In essence, most of the money never leaves the United States; it is simply transferred from banking offices in Washington to engineering offices in New York, Houston, or San Francisco.
Despite the fact that the money is returned almost immediately to corporations that are members of the corporatocracy (the creditor), the recipient country is required to pay it all back, principal plus interest. If an EHM is completely successful, the loans are so large that the debtor is forced to default on its payments after a few years. When this happens, then like the Mafia we demand our pound of flesh. This often includes one or more of the following: control over United Nations votes, the installation of military bases, or access to precious resources such as oil or the Panama Canal. Of course, the debtor still owes us the money -- and another country is added to our global empire.
My job was to forecast the effects of investing billions of dollars in a country. Specifically, I would produce studies that projected economic growth twenty to twenty-five years into the future and that evaluated the impacts of a variety of projects. For example, if a decision was made to lend a country $1 billion to persuade its leaders not to align with the Soviet Union, I would compare the benefits of investing that money in power plants with the benefits of investing in a new national railroad network or a telecommunications system. Or I might be told that the country was being offered the opportunity to receive a modern electric utility system, and it would be up to me to demonstrate that such a system would result in sufficient economic growth to justify the loan. The critical factor, in every case, was gross national product. The project that resulted in the highest average annual growth of GNP won.
The unspoken aspect of every one of these projects was that they were intended to create large profits for the contractors, and to make a handful of wealthy and influential families in the receiving countries very happy, while assuring the long-term financial dependence and therefore the political loyalty of governments around the world. The larger the loan, the better. The fact that the debt burden placed on a country would deprive its poorest citizens of health, education, and other social services for decades to come was not taken into consideration.
[We] openly discussed the deceptive nature of GNP. For instance, the growth of GNP may result even when it profits only one person, such as an individual who owns a utility company, and even if the majority of the population is burdened with debt. The rich get richer and the poor grow poorer. Yet, from a statistical standpoint, this is recorded as economic progress.
...throughout most of history, empires were built largely through military force or the threat of it. But with the end of World War II, the emergence of the Soviet Union, and the specter of nuclear holocaust, the military solution became just too risky.
The decisive moment occurred in 1951, when Iran rebelled against a British oil company that was exploiting Iranian natural resources and its people. The company was the forerunner of British Petroleum, today's BP. In response, the highly popular, democratically elected Iranian prime minister (and TIME magazine's Man of the Year in 1951), Mohammad Mossadegh, nationalized all Iranian petroleum assets. An outraged England sought the help of her World War II ally, the United States. However, both countries feared that military retaliation would provoke the Soviet Union into taking action on behalf of Iran.
Instead of sending in the Marines, therefore, Washington dispatched CIA agent Kermit Roosevelt (Theodore's grandson). He performed brilliantly, winning people over through payoffs and threats. He then enlisted them to organize a series of street riots and violent demonstrations, which created the impression that Mossadegh was both unpopular and inept. In the end, Mossadegh went down, and he spent the rest of his life under house arrest. The pro-American Mohammad Reza Shah became the unchallenged dictator. Kermit Roosevelt had set the stage for a new profession, the one whose ranks I was joining.
"Vietnam is just a holding action," one of the men interjected, "like Holland was for the Nazis. A stepping stone."
"The real target," the woman continued, "is the Muslim world."
I could not let this go unanswered. "Surely," I protested, "you can't believe that the United States is anti-Islamic."
"Oh no?" she asked. "Since when? You need to read one of your own historians -- a Brit named Toynbee. Back in the fifties he predicted that the real war in the next century would not be between Communists and capitalists, but between Christians and Muslims."
"But why should there be such animosity between Muslims and Christians?" I asked.
Looks were exchanged around the table. They appeared to find it hard to believe that I could ask such a foolish question.
"Because," she said slowly, as though addressing someone slow-witted or hard of hearing, "the West -- especially its leader, the U.S. -- is determined to take control of all the world, to become the greatest empire in history. It has already gotten very close to succeeding. The Soviet Union currently stands in its way, but the Soviets will not endure. Toynbee could see that. They have no religion, no faith, no substance behind their ideology. History demonstrates that faith -- soul, a belief in higher powers -- is essential. We Muslims have it. We have it more than anyone else in the world, even more than the Christians. So we wait. We grow strong."
"We will take our time," one of the men chimed in, "and then like a snake we will strike."
"What a horrible thought!" I could barely contain myself. "What can we do to change this?"
The English major looked me directly in the eyes. "Stop being so greedy," she said, "and so selfish. Realize that there is more to the world than your big houses and fancy stores. People are starving and you worry about oil for your cars. Babies are dying of thirst and you search the fashion magazines for the latest styles. Nations like ours are drowning in poverty, but your people don't even hear our cries for help. You shut your ears to the voices of those who try to tell you these things. You label them radicals or Communists. You must open your hearts to the poor and downtrodden, instead of driving them further into poverty and servitude. There's not much time left. If you don't change, you're doomed."
These men and women think of themselves as upright. They return to their homes with photographs of quaint sites and ancient ruins, to show to their children. They attend seminars where they pat each other on the back and exchange tidbits of advice about dealing with the eccentricities of customs in far-off lands. Their bosses hire lawyers who assure them that what they are doing is perfectly legal. They have a cadre of psychotherapists and other human resource experts at their disposal to convince them that they are helping those desperate people.
The old-fashioned slave trader told himself that he was dealing with a species that was not entirely human, and that he was offering them the opportunity to become Christianized. He also understood that slaves were fundamental to the survival of his own society, that they were the foundation of his economy. The modern slave trader assures herself (or himself) that the desperate people are better off earning one dollar a day than no dollars at all, and that they are receiving the opportunity to become integrated into the larger world community. She also understands that these desperate people are fundamental to the survival of her company, that they are the foundation for her own lifestyle. She never stops to think about the larger implications of what she, her lifestyle, and the economic system behind them are doing to the world -- or of how they may ultimately impact her children's future.
I eventually found myself once again looking at that smoldering hole [Ground Zero, where the World Trade Center once stood in New York], the twisted metal, that great scar in the earth. I leaned against a building that had escaped the destruction and stared into the pit. I tried to imagine the people rushing out of the collapsing tower and the firefighters dashing in to help them.
Instead, I saw Osama bin Laden accepting money, and weapons worth millions of dollars, from a man employed by a consulting company under contract to the United States government.
I wondered what the people who walked those streets today thought about all this -- not simply about the destruction of the towers, but also about the ruined pomegranate farms and the twenty-four thousand who starve every single day. I wondered if they thought about such things at all, if they could tear themselves away from their jobs and gas-guzzling cars and their interest payments long enough to consider their own contribution to the world they were passing on to their children.
I forced my attention back to Ground Zero. At the moment, one thing was certain: my country was thinking about revenge, and it was focusing on countries like Afghanistan. But I was thinking about all the other places in the world where people hate our companies, our military, our policies, and our march toward global empire.
I wondered, What about Panama, Ecuador, Indonesia, Iran, Guatemala, most of Africa?
In the final analysis, the global empire depends to a large extent on the fact that the dollar acts as the standard world currency, and that the United States Mint has the right to print those dollars. Thus, we make loans to countries like Ecuador with the full knowledge that they will never repay them; in fact, we do not want them to honor their debts, since the nonpayment is what gives us our leverage, our pound of flesh. Under normal conditions, we would run the risk of eventually decimating our own funds; after all, no creditor can afford too many defaulted loans. However, ours are not normal circumstances. The United States prints currency that is not backed by gold. Indeed, it is not backed by anything other than a general worldwide confidence in our economy and our ability to marshal the forces and resources of the empire we have created to support us.
The ability to print currency gives us immense power. It means, among other things, that we can continue to make loans that will never be repaid -- and that we ourselves can accumulate huge debts. By the beginning of 2003, the United States' national debt exceeded a staggering $6 trillion and was projected to reach $7 trillion before the end of the year -- roughly $24,000 for each U.S. citizen. Much of this debt is owed to Asian countries, particularly to Japan and China, who purchase U.S. Treasury securities (essentially, IOUs) with funds accumulated through sales of consumer goods -- including electronics, computers, automobiles, appliances, and clothing goods -- to the United States and the worldwide market.
As long as the world accepts the dollar as its standard currency, this excessive debt does not pose a serious obstacle to the corporatocracy. However, if another currency should come along to replace the dollar, and if some of the United States' creditors (Japan or China, for example) should decide to call in their debts, the situation would change drastically. The United States would suddenly find itself in a most precarious situation.
In fact, today the existence of such a currency is no longer hypothetical; the euro entered the international financial scene on January 1, 2002 and is growing in prestige and power with every passing month. The euro offers an unusual opportunity for OPEC, if it chooses to retaliate for the Iraq invasion, or if for any other reason it decides to flex its muscles against the United States. A decision by OPEC to substitute the euro for the dollar as its standard currency would shake the empire to its very foundations. If that were to happen, and if one or two major creditors were to demand that we repay our debts in euros, the impact would be enormous.
Please send me your thoughts, knowing that I'll get a lot and will not reply individually to each. I'll read everything I get and assemble a representative sampling along with my take in a future article.
Again, for background, this discussion sprang from the Iraq war articles under my Geopolitics label.
I have a backlog of excellent comments from readers on the Iraq war. I will be posting them from time to time, as I think analysis of geopolitical events is important to successful investing.
Beyond that, the topic warrants attention on its own, apart from any value it may bring to the investment table. Life is not just about profit and loss of money, it's about national character, lives on the line, global reputations, and the spirit of a nation.
What's the spirit of our nation? When we look into our national heart, can we say that we can be counted on to do the right thing in most cases? I was raised to believe so, and in particular our involvement in WWII -- one of the highest points in our history -- led me to think that the world could count on us.
As they say, it ain't your grandfather's government anymore.
Before today's comments, I should point out a couple of errors I made in Monday's article:
I wrote that my grandfather flew B-52s in WWII, which of course should have been B-29s. B-52s didn't fly until 1955.
My edits of Bruce's comments incorrectly described his family. The summary should have read, "I come from a family where my father was drafted into service in WWII, had four children, was wounded in action in France, served willingly, and all four of his sons volunteered for service (two during war and have no regrets and are proud of it). I am one of those four sons."
I corrected both errors in the original article.
Bruce got back to me with a follow-up:
You wrote, "America is the greatest country on Earth, yet it hasn't had a proud military moment in two generations. That stinks."
We don't fight wars today like we did then. Ask the people of Japan about atomic bombs, fire raids, massive destruction, and thousands upon thousands of civilian deaths. Today we play PC and put our soldiers at risk. By the way, how many bases and personnel do we have in Japan, Germany, Korea and elsewhere and how long have we been there?
Unfortunately, we have to be seriously hurt and endangered to fight the kind of war we did then, and we will when the big hurt comes and the people demand that the threat be ended!
I was surprised to read on page 463 of Alan Greenspan's book, The Age of Turbulence that he says the war in Iraq was always about oil, and that everybody knows that.
The TV showers us all with "details at 11" which aren't details at all. They hype news stories as if they had any direct bearing on our lives which, on average, they don't.
I've discovered that with most stuff that happens, it's best to ignore all media reports for six months and after that the truth will start to leak out or there will be enough "facts" around to start to draw some kind of rational conclusion. Took me most of my 62 years to figure that out -- "Too soon old; too late schmart," as the Pennsylvania Dutch saying goes.
Long after the Vietnam war ended, a report crossed my desk pointing out that the continental shelf off Vietnam just might have had a lot of oil under it, as many other continental shelves have proven to have. Funny thing, that; why were we there, again?
Ditto the Falkland Islands War of the early 80s. Why did Argentina attack a small, peaceful, very British bunch of islands like all get-out? Continental shelf connects the Falklands with Argentina, and Argentina, at the time, had virtually no native oil fields.
Why did everyone want a stake in Antarctica? Massive coal deposits, way under the ice. Not economically feasible to recover 25 years ago, or 15 or five, but maybe some day. That's why so many nations have "research stations" on the continent. Not exactly for research, but to put down a footprint. I learned that from the naturalists on a Lindblad cruise to the Falklands and the Antarctic peninsula just after the Falklands war ended.
The Argentineans also carpet-seeded the Falklands's countryside with land mines, most of which, for some peculiar reason, didn't have metal detector rings on them, as the Geneva Conventions mandated. Many farmers were trapped in their homes for days or weeks with nothing to do but listen to their sheep being blown up when they stumbled across mines.
One thing to keep in mind is that fighting a war for oil does not automatically de-legitimize it. Oil is vital to our economy and, indeed, the world economy. People who don't want to fight for oil are often the same people that oppose nuclear power, which is absurd. Nuclear is one of the best clean energy options we have, yet the mere mention of the word "nuclear" brings knee-jerk opposition from the uninformed that has kept nuclear only marginal when it should be the world's main source of power.
What would you rather have, messy wars in oil-rich lands governed by nutcases to get our hands on an inefficient, dirty energy source, or a network of clean nuclear power plants that gets its uranium from stable countries like Canada and Australia? Here's a nice write-up on the benefits of uranium for energy.
The problem with the Iraq war for oil is that it has made access to oil more precarious, not less. Meanwhile, the twin smokescreens of looking for weapons of mass destruction and bringing democracy to the Iraqi people were unnecessary and damaging to the reputation of the U.S. because they're so patently absurd. Democracy to the Iraqi people? Come on.
Gary sent an interesting quote from Dick Cheney, courtesy of Joel Connelly at the Seattle Post-Intelligencer, who wrote, "The words of our future vice president -- defending the decision to end Gulf War I without occupying Iraq -- eerily foretell today's morass. Here is what Cheney said in '92:"
I would guess if we had gone in there, I would still have forces in Baghdad today. We'd be running the country. We would not have been able to get everybody out and bring everybody home.
And the final point that I think needs to be made is this question of casualties. I don't think you could have done all of that without significant additional U.S. casualties. And while everybody was tremendously impressed with the low cost of the (1991) conflict, for the 146 Americans who were killed in action and for their families, it wasn't a cheap war.
And the question in my mind is how many additional American casualties is Saddam (Hussein) worth? And the answer is not that damned many. So, I think we got it right, both when we decided to expel him from Kuwait, but also when the president made the decision that we'd achieved our objectives and we were not going to go get bogged down in the problems of trying to take over and govern Iraq.
Mr. Connelly followed Mr. Cheney's quote with, "How -- given what he said then -- does Cheney get off challenging the judgment and strength of those who argue that we are bogged down and shedding blood today?" Here's the full article.
Rob, whom I quoted in the original post about Iraq on September 11, wrote back:
I only question your patriotism when you suggest that your subscribers read a book with the title, The Ugly American. Isn't it fair to assume that citizens of other nations have numerous reasons to dislike Americans other than legitimate things Americans have done or currently do? Don't you think that certain stereotypes are supported by the foreign media?
The Ugly American is one of the best books ever written about American involvement overseas. It illustrates what other countries did well in Southeast Asia and what America did wrong. The title does not mean that Americans are ugly to others; it refers to a character in the book who really is ugly, is American, and is one of the few Americans to conduct foreign policy correctly by actually helping the locals instead of trying to ramrod expensive, worthless projects through, as most other Americans were doing at the time.
Some of the points made in the book are that most Americans abroad do not speak the local laguage, do not understand the local culture, and are arrogant in assuming that American culture is always the answer for every square mile on Earth. I would say those points are worth keeping in mind as America occupies Iraq with few people on the ground who speak the language or understand the culture.
I stand by that reading recommendation. It's not insulting to Americans. It's educational and consistent with what I've seen among Americans abroad.
Don't take my word for it. Get a copy of the book, read it, and then let me know if you still think it's unpatriotic to recommend such a classic title.
I'll interview Neal Yanofsky, president of Panera this afternoon and have a report to subscribers over the weekend. If you're missing out on the bull market, get onboard the letter now and you'll receive this weekend's note.
Readers have continued providing me with plenty of fine comments on the Iraq war. But before that, let's get to the real reason I live in Japan.
Rob wrote on Sept. 13, "I've always wondered why you choose to live in Japan, and I guess I now understand. You want to live in a country where you can apologize daily for your foolish fellow citizens. Perhaps you and Sean Penn hang out on a regular basis."
Ron clarifies, "I am surprised and disheartened to find that you live in Japan so you can daily apologize for being American, as revealed by Rob. I thought you lived in Japan because you hate whales."
I've been outed!
Now, to the war.
Vinay wrote that "anyone who doesn't think it's going badly is just living in a fool's paradise."
Kartik wrote, "While an attack on Iraq to hunt Saudi terrorists was illogical and uncalled for, the planning of war and resurrection of Iraq went awfully wrong. Certainly you'd expect a lot better from a superpower."
Rhonda, who is married to a Vietnam veteran with two Purple Hearts, wrote on his behalf, "Peace is patriotic. Pro life means no killing by the military. Support our soldiers means bringing them home."
However, Brent wrote:
Has anyone ever stopped to consider that the only reason Saddam Hussein felt emboldened to discard the Gulf War treaty and ignore Security Counsel resolutions was because of the anti-Bush hysteria gripping the Democratic Party and their mainstream media mouthpiece? He had every reason to believe America would not support President Bush's stance that the UN resolutions should be enforced. All the leftwing folks taking to the streets here and abroad protesting the saber rattling are to blame for the war. Mr. Bush pointed a gun at Saddam's head and told him to comply with the UN resolutions, but the Lefties convinced Saddam that the gun was not loaded.
Granted, there have been three follies to Mr. Bush's approach:
1) Islamic societies are incapable of our system of democracy, justice, and civil liberties.
2) If you're going to fight a war, you don't do so by trying not to offend the people you're killing. The only language those people understand is violence, and to speak in any other voice is a waste of time.
3) Iran and Syria should be bombed back to the stone age if there's hard evidence they're involved in the deaths of our soldiers.
The war began on the grounds of WMD. When none were found they shifted to ousting Saddam. When he was found and detained and the violence escalated instead of waning, the war was lost.
Many military people were opposed to the war. Just militarily it was a bad idea. My father is a Navy captain and his best friend is an Army two-star general, neither support the war, both have spent their lives serving the country.
Walt, Bruce, and several others think I'm making a mistake to write about anything non-financial on my site. Walt said that he comes here for financial info only and doesn't want to wade through "all this war crap" when he just wants stock tips. Bruce advises me to stick to my knitting and "stay out of politics and morality" so as not to diminish my business opportunities.
I replied that I don't see anything wrong with taking a moment on the sixth anniversary of 9/11 to look at where we stand today. In fact, this situation took me back to when I posted an article in the week following 9/11 providing stock market guidance for when the markets re-opened, and was lambasted for daring to think of anything related to stocks when clearly something larger should have been on my mind. People threatened to end their subscriptions then, too, and some did.
Now, I'm attacked for daring to take a break from stocks to write about the war and what's happened since 9/11. Again, people have threatened to end their subscriptions and some did last weekend.
That's certainly their right, but I question why a person who has been well-served by the financial advice of a letter would quit that letter because of a difference of opinion with the author on a matter unrelated to finance. Far better, it seems to me, to react by sending a note comparing our difference of opinion and then simply acknowledging that it's a big world and there are lots of ways to think about it.
In fairness to Bruce, cited above, he did take the time to send his differing viewpoint, which I'm pleased to share:
Movies are not where you go to get unblemished and unbiased view of politics, war, etc. -- too many people today have no understanding of our country's history other than badly blemished movies that deride "the greatest country on God's green earth". We are not perfect, but we are damn good, gracious, generous and much admired by many with any knowledge of history -- we are also the object of disdain for our success by those who feel they cannot compete and find it makes them feel better about themselves to do so. I come from a family where my father was drafted into service in WWII, had four children, was wounded in action in France, served willingly, and all four of his sons volunteered for service (two during war and have no regrets and are proud of it). I am one of those four sons.
If you want objectivity you have to read stuff by the respected writers of both sides, understanding where they sit and where they stand and are willing to at least provide a balanced review of what happened and when and what the circumstances were at the time the events occurred. Did the Congress not overwhelmingly support going to war after viewing the same intelligence the president saw -- 9/11 not being the first incident of terrorism but one of many prior? We made some mistakes along the way, so what, anybody that does something makes mistakes. Did the president not do what he thought was the right thing to do at that time which, by the way, was what many had been demanding (Democrat leaders and Republican, I can supply quotes) during the Clinton administration? Does any sensible, knowledgeable person believe the president lied and people died?
There are fanatics on both sides -- most on the Democratic side of the aisle -- who are demagogues who will stop at nothing for power to turn this country into a socialist state.
My grandfather flew B-29s in WWII and I live in the country that benefited most from a U.S. victory and subsequent reconstruction. I hear regularly from the elderly in Japan about how wonderful G.I.s are, how they landed at Yokohama and contrary to fears of raping and pillaging to follow, began handing out chocolate to the children and coffee to the adults. I've had old women come to me and pat my shoulder and thank me for rebuilding their country. This many years later, two generations removed, and that's still what comes to their minds when seeing an American face.
I suppose that's why it's so painful for me to note that the same great country that was able to win WWII and so beautifully repair what had been damaged, has not had a decent follow-up action since. It's hard to understand how anybody can be proud to see the American colors flying next to the names of these military actions:
> Vietnam > Beirut > Gulf War > Somalia > Iraq War
Bruce, I am proud of my country and I respect it to the point that I'm tired of people humiliating it through absurd actions like the ones shown above. Osama bin Laden even said prior to the start of the Iraq war that he was confident that he'd be able to draw America into a losing battle on Arab soil -- and he did it. You and others continually remind everybody that America is the greatest country on Earth, yet it hasn't had a proud military moment in two generations. That stinks.
What's more, we pay through the nose for our military. It's the greatest and most expensive the world has ever seen, but is sent off on goal-less missions regularly that cheapen its prowess and the dedication of the men and women serving in it.
There's a saying in Colorado about guns: if it's important enough to shoot, it's important enough to kill. This idea was drummed into my head as a boy. You do not treat guns casually. You do not point them without meaning. The only time you aim and shoot is when the situation is serious enough to require killing the target.
I wish presidents were taught something similar about our military: if it's important enough to send troops, it's important enough to win. In my lifetime, I've seen only sad news headlines about U.S. troops being sent to faraway lands on a whim, without adequate support, without a clear goal, and on a timeline and scope that creep as the years and months and dollars and lives go by.
Finally, invoking WWII is probably not the best way to defend the Iraq war. Those who successfully planned and executed our involvement in WWII would be shaking their heads and pounding table tops after witnessing the poor showing in both the gulf war and the Iraq war.
"Where was the plan?" Ike would scream.
Ask yourself, "What if D-Day had been as badly planned as the Iraq war?"
MacArthur would say to President Bush, "Let's get these Iraqi people what they need!" When he arrived in Tokyo on August 30, 1945, MacArthur immediately decreed that no allied personnel were to assault Japanese people or eat the scarce Japanese food.
Ask yourself, "What if allies had barricaded themselves behind walls where they lived well while the Japanese starved and descended into civil war on the outskirts of Tokyo?"
No, the proud history of WWII is not the right way to defend the Iraq war. It's a new generation. The brilliance of my grandfather's generation is nowhere to be found.
Psychologists know that regardless of what you say, what you do is who you are. We also know that children learn much more from the example of behavior than from the speeches made to them, and those examples wind up being the major character-forming issues in their lives. Leadership at any level is a role model, and one that affects character and behavior of those who follow them in the same way. When leaders play fast and loose with the rules or by pass them with excuses, they are making unwritten rules that say "you can ignore the established rules and make up your own". This is an example to all who are below that leader; it authorizes and encourages similar abuse on their level. If our CEO (the dubya shrub) can't demonstrate character in his position, given all his power, why should CEOs in industry or leaders in other fields?
The broad presence of character would be the universal antidote for social and political ills. Character is self-regulation to values that can be respected by society as a whole. We need laws only because self-regulation is not an automatic quality of the human species, and because far too many people do not value it in themselves, do not recognize it in others or do not use it as a selective tool in determining who they allow to lead or influence them. A president ignoring law or adjusting it to suit himself is the ultimate bad example of contempt for law and lack of character. When there is a blatant lack of character at the very top, you can expect it to trickle down in all areas, then multiply and become epidemic if it's not stopped cold. That does not appear likely to happen, despite the vast amount of evidence that it should.
I fully expect this to become a greater issue in the market and economy in the near future because of the vacuum of character in current adminsitration that will continue for at least another 15 months.
There's a lot more coming in each day, and I'll post material periodically. I think this is important to all of us.
Yesterday, I asked for reader comments on the Iraq war following the initial reactions I received to my 9/11 article. Responses came in spades. I won't be able to post all of them today, so this has become a multi-part series on the war. To follow the entire thread as it grows, see the Geopolitics label.
Our timing is good. Last night, President Bush spoke on the war. He left his course largely unchanged, but did order gradual reductions in U.S. forces in Iraq. He said he would not end the war. He said Iraq will still need support from the U.S. after his presidency ends.
Remember how Bush strong-armed us into invading Iraq in the first place? It was the "actual satellite photographs" of Saddam's "weapons of mass destruction". Four years have now passed since we learned there were no nukes at all. Since being "found out", Bush has continually tried to control public opinion with scare tactics. According to him, pulling our troops from Iraq would directly allow terrorists to come kill us on our own soil. The price tag? A war bill as high as $1 trillion and, even worse, 3,700 dead young Americans, and counting.
Remember the attempts on the part of Congress to find out more before we invaded? Bush wouldn't take no for an answer. Why? I believe the reason Bush invaded Iraq was that he saw 9/11 as an opportunity to establish strategic control over at least a portion of the oil in the Middle East. I also think that Bush and his closest advisors believe that, down deep inside, the American people are more willing to lose a few young men (from poor families) than deal with the inconvenience of a mandatory rapid conversion to a non oil-dependent lifestyle. It is my opinion that Bush's arrogance caused him to overstep his bounds as president. Now, with public opinion crashing down upon him, he is simply attempting to use smokescreens to politically survive until the election, when he can pass the Chinese finger puzzle he put us in to the next president, and hope he (or she) will be blamed for it.
I've followed this war very closely from the start. The deaths and sacrifices of some of my friends and comrades have affected me deeply. That being said, I would like to share the following thoughts and I ask that whether you consider yourself a liberal or a conservative, you give this little piece of writing a chance and at least read it through to the end.
Whenever we describe something as either liberal or conservative, we often take a situation or idea that is very complex and try to fit it into one or two overly broad categories. This is dangerous when we are trying to understand a situation because terms such as liberal and conservative immediately cause people to involve a flurry of associations and emotions.
The founding fathers of this country were wary of political parties because they saw the divisive effect they had in European countries. True, the Republicans and Democrats are fighting about what we should do in Iraq. Should this change what I believe about the war? No. The stances of the political parties are a secondary issue to me. They should be for you too. After all, that is what they are there for, to represent your beliefs. Don't just adopt the party's position as your own because you consider yourself a Democrat or Republican. I decide what I believe first and then take a look around and see what the official party stance on the matter might be.
I also try to remember that there is no official international stance (hawkish or dovish) associated with the Republican or Democratic party over the long run. Remember, in the most general terms a liberal president took us into Vietnam and a conservative president took us out.
When I see a liberal Congressman say that everything in Iraq is going wrong, I think, "Shame on you, that is not an accurate statement." When I see a conservative Congressman gloss over all the problems we are having, I think, "Shame on you, there are indeed serious problems in Iraq."
Maybe there are some brilliant thoughts emanating from the Democratic party and some brilliant thoughts emanating from the Republican party and the only thing stopping them from coming together in a solid plan is that these ideas each have political stigmas attached to them and would never gain the support of both parties at the same time.
The divisiveness and polarization of the American political parties that has increased over the last few years is probably not helping policy makers have a healthy debate about the best way to proceed in Iraq.
So I try to do my part as an American and keep a cool head and hear out a person's opinion for what is: a summation of a lifetime of experience and thinking and not just conservative or liberal. I write my Congressmen and tell them I prefer to see discussion and debate with the focus on a truly thoughtful outcome. I don't want the Democratic party to win at all costs and I don't want the Republican party to win at all costs.
I am in the military. I get up every day and work extremely hard for this country because I care about it. I sacrifice. When I see people ask thoughtful questions and then get hateful responses, whether they are liberal or conservative, it makes my heart weary. In my head, this isn't America the liberal or America the conservative. This is America your country, America my country, and America our country. I don't care if you think you are a liberal, a conservative, or a Martian, I'll listen to your thoughts because I know you would do the same for me.
Finally, for today, Fred wrote:
I thought your article was dead on, and I look forward to seeing the film. Part of the reason I subscribe to your newsletter and have enjoyed your books is that you offer a perspective quite different from most investment-related writers, most of whom, regardless of merit, I find tedious, politically predictable, and boring. Your theories have consistently made money for me, and I have always enjoyed your writing. I'm surprised that anyone familiar with your writing would be surprised by your comments. I don't know your politics, but your writing has consistently demonstrated open-mindedness on a wide range of topics. Your criticizing the war at this point shouldn't really come as a shock to anyone. I enjoy the opportunity to read someone who's obviously not part of the Republican Wall Street establishment to which so many investment writers seem to belong. Keep up the good work.
Not being a Washington employee or a part of the government community, neither you nor I really know that that thoughtful process didn't occur. Unfortunately, too often many people tend to overlook the good for the bad or "not so good" which resonates an aura of negativity. Fortunately, in spite of all that negative hype, our economy continues to flourish under the Bush Administration, so "they" aren't doing all that bad of a job. If only people could get off their negative soap boxes and develop some objectivity; I wonder if this aura of negativity would shift too.
I'm embarrassed that you took the opportunity of the 9/11 anniversary to spew liberal, left-wing filth on your website. Given your views, I'm ashamed that I give you money for advice of any kind. I've always wondered why you choose to live in Japan, and I guess I now understand. You want to live in a country where you can apologize daily for your foolish fellow citizens. Perhaps you and Sean Penn hang out on a regular basis.
If I'm wrong, please feel free to address any of my points. While I understand it is your website and you control the content, I do not pay for nor appreciate the political op-ed you chose to post. If your stance is as left-wing/socialist as your site posts suggest, why do you write books about entrepreneurship and investing? Shouldn't we wait for the government to plan for our futures?
I replied to both Jan and Rob and considered displaying those replies here. Instead, however, I'd like to know what more readers think. I wrote my piece, you see the two reactions above, and now it's your turn.
For the record, this is neither a liberal nor a conservative site. It's an investment site, and that means objective. I was surprised to find Rob calling my 9/11 article liberal, and suppose he thinks so simply because it looked critically at the war. Regular readers know that I look critically at everything because it's only through brutally honest assessment that we arrive at reasonable conclusions.
The war is not going well. Maybe that observation alone is liberal to some, but it reflects the facts. To have Baghdad under the control of various armed factions this far into our occupation was not the goal of the "shock and awe" rained upon Iraq by the U.S. -- surely we can agree on that.
The film and book that I recommended aim to find out why. How did we get here? What can be done from this point? These are worthwhile questions, neither liberal nor conservative, and I'd like to explore them further.
Send me your thoughts knowing that I may lightly edit and post them later. I look forward to hearing from you.
I wrote yesterday that the sub-prime mess doesn't worry me because it doesn't affect a large enough portion of the economy to bring on disaster.
Stratfor Founder and Chief Executive Officer George Friedman agrees. From his August 13 Geopolitical Intelligence Report:
Stratfor views the world through the prism of geopolitics. Not all events have geopolitical significance. To rise to a level of significance, an event -- economic, political or military -- must result in a decisive change in the international system, or at least a fundamental change in the behavior of a nation. The Japanese banking crisis of the early 1990s was a geopolitically significant event. Japan, the second-largest economy in the world, changed its behavior in important ways, leaving room for another power -- China -- to move into the niche Japan had previously owned as the world's export dynamo. The dot-com meltdown was not geopolitically significant. The U.S. economy had been expanding for about nine years -- a remarkably long time -- and was due for a recession. Inefficiencies had become rampant in the system, nowhere more so than in the dot-com bubble. The sector was demolished and life went on. Lives might have been shattered, but geopolitics is unsentimental about such matters.
The measure of geopolitical significance is whether an event changes the global balance of power or the behavior of a major international power. Looking at the subprime crisis from a geopolitical perspective, this is the fundamental question. That a great many people are losing a great deal of money is obvious. Whether this matters in the long run -- which is what geopolitics is all about -- is another matter entirely.
When the subprime defaults started to hit, the banks that had loaned money against the mortgage portfolios re-evaluated the loans. They called some, they stopped rollovers of others and they raised interest rates. Basically, the banks started reducing the valuation of the underlying assets -- subprime mortgages -- and the internal financial positions of some hedge funds started to unravel. In some cases, the hedge funds could not repay the loans because they were unable to resell their subprime mortgages. This started causing a liquidity crisis in the global banking system, and the U.S. Federal Reserve and the European Central Bank began pumping money into the system.
Told this way, this is a story of how excess emerges in a business cycle. But it is not really a very interesting story because the business cycle always ends in excess.
There currently are three possibilities. One is that the subprime crisis is an overblown event that will not even represent the culmination of a business cycle. The second is that we are about to enter a normal cyclical recession. The third, and the one that interests us, is that this crisis could result in a fundamental shift in how the U.S. or the international system works.
We try to measure the magnitude of the problem from the size of the asset class at risk. But we work from the assumption that proved true in the S&L crisis [of the 1980s]: Financial instruments collateralized against real estate, in the long run, limit losses dramatically, although the impact on individual investors and homeowners can be devastating.
The S&L crisis involved assets of between 8% and 10% of GDP. The final losses incurred amounted to about 3% of GDP, incurred over time.
The size of the total subprime market is estimated by Reuters to be about $500 billion. This is the total asset pool, not nonperforming loans. The GDP of the United States today is about $14 trillion. That means this crisis represents about 3.5% of GDP, compared to between 9% and 10% of GDP in the S&L crisis. If history repeats itself -- which it won't precisely -- for the subprime crisis to equal the S&L crisis, the entire asset base would have to be written off, and that is unlikely. That would require a collapse in the private home market substantially greater than the collapse in the commercial real estate market in the 1980s -- and that was quite a terrific collapse.
Unlike commercial real estate, in which price declines force more properties on the market, home real estate has the opposite tendency when prices decline -- inventory contracts. So, unless this crisis can pyramid to forced sales in excess of the subprime market, we do not see this rising to geopolitical significance.
From this, two conclusions emerge: First, this is far from being a geopolitically significant event. Second, it is not clear whether this is large enough to represent the culminating event in this business cycle. It could advance to that, but it is not there yet. We cannot preclude the possibility, though it seems more likely to be a stress point in an ongoing business cycle.
I reiterate a point I made yesterday on this free site and have made repeatedly to subscribers: smart investors are looking for chances to buy in this downturn.
That doesn't necessarily mean piling into what fell the most yesterday. It means knowing in advance of the sale what you think could be unjustly marked down in the likely mood ahead. Watching the list of such targets in a market-wide scare, waiting for them to get to prices that seemed impossible just weeks before, and then buying at a significant discount to profit when -- yet again -- the crisis passes, is the way to wealth.
I'm pleased to note that the home builder we're watching to buy fell another 16% yesterday. That stock, as just one example, is now selling at an 81% discount to its September 2005 price. Insiders bought recently, an encouraging sign. I wrote to subscribers over the weekend about this stock: "My initial buy target is $17, which is 16% below Friday's close." We already got there, but we haven't bought yet. This sale isn't over.
Watching and waiting is the key to this business and this is the time, folks! Crises that look frightening to the general public but are non-events to those who live in the market are manna from heaven.
When others look back in six months or a year and say, "Darn, I should have bought something," smart investors will smile and say, "I'm glad I did."