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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  Is War Bullish?

*** Is war bullish? It looks as though we will find 

*** Dow down 14% last week. Investors lost $2.31 
trillion in last 16 trading days...

*** Housing begins to soften...Microsoft below $50...and 

The market will rise at the sound of gunfire. 

That is the bulls' great hope. And maybe it will. 
Prices have fallen on 13 of the last 16 trading days. 
The Dow is down 2,200 points. Addison calculates that 
this represents a loss of $46,200 per stock-owning 

"We are now in the grips of a full fledged global 
financial crisis," writes Doug Noland. The Paris market 
is down almost 40%. Brazil is down 30%. Japan is down 
nearly 30%. And Germany is down more than 40%. 

"The business world is simply covered in a blanket 
of hesitation," remarked a spokesman for data storage 
company EMC, explaining why it will lose money in the 3rd 
quarter. "Dazed companies sit on their wallets," adds 
the NY Times. 

A few weeks ago, investors were rushing to the big 
cap companies for safety. Now they are fleeing them, 
again, for safety reasons. Microsoft, once at $119, is 
now on sale below $50. Cisco, once $81, can be yours now 
at prices below $12. 

Housing starts fell 6.9% from July to August - 
suggesting that even the real estate bubble is beginning 
to deflate. 

But when the shooting starts, many believe, stocks 
will rally 'round the flag. And maybe they will. It is 
rare for stocks to go down this much without either 1) a 
panic to the downside, or 2) a big rally. Anything could 
happen, as they say, and anything will. More below...

Eric, what's going on in Manhattan?


Eric Fry in New York:

- To judge from yesterday's sparse attendance at my 
church, faith is a little less fashionable now than it 
was last week, when a standing room only crowd packed 
into the sanctuary for the 10:00 AM service.

- Meanwhile, a friend of mine who owns a number of very 
trendy bars in Manhattan, Los Angeles and elsewhere 
reports that his business is rapidly returning to 
normal. "Immediately after the WTC attack my bar 
business in Manhattan dropped about 60%," he says. "Last 
week, it was off about 25%. But it looks like this 
weekend we might be getting back to the pre-attack 
levels." His business elsewhere in the country has not 
dropped off one iota since the attack.

- Empty churches and full bars suggest to me that 
Americans are getting back to the business of self-
indulgence. Can an economic recovery be far behind? Just 
as foreign nations should never underestimate America's 
will to fight, economists should never underestimate 
America's "will to consume."

- My prediction: GDP will fall in the third and fourth 
quarters. In fact, the fourth quarter might be 
especially dismal. But some kind of sharp but fleeting 
recovery will likely materialize in the first quarter of 
2002. All the recent stimulus from the Fed ought to get 
us at least one decent quarter before things turn sour 

- The Dow tumbled 14.3% last week - the steepest one-
week decline since July 21, 1933 when the average 
slumped 15.5%. Furthermore, the market's eight-day 
string of consecutive losses is the longest such slide 
since 1989.

- "Some folks would say this has been a horrendous week 
for the market," writes C.A. Green, investment director 
of the Oxford Short Alert. "I call it a 'short-sellers' 
rally." Indeed it has been. But the selling looks like 
it may be starting to exhaust itself. The Dow's bounce 
last Friday morning from down more than 300 points to up 
about 60 points could have been a preview of the week to 
come. (For more see: Oxford Short Alert)

- The extreme VIX Index readings at present indicate 
that some kind of rally is imminent. This index, which 
measures option volatility on the S&P 500 index, is 
currently registering high levels of fear. Often, such 
readings precede rallies. I repeat, "often" - as in, not 

- Perhaps the news that we have commenced some kind of 
military action in Afghanistan will spark the rally. 
Americans, for whatever reason, seem to get into a 
stock-buying mood whenever our military lashes out at 
our enemies.

- "Giving Terror Inc. its own Ground Zero won't bring 
back the dead or secure a quick and painless victory," 
writes's Igor Greenwald. "But it would 
certainly cheer up the millions of investors wondering 
how that patriotic market rally [they had been 
expecting] turned into the Battle of the Little 

- Historical precedent might also shed some light on the 
market's likely direction over the next few weeks. Then 
again, it might not, says Grant's Investor's Andy 
Kashdan: "Financial markets are no strangers to 
catastrophic shocks to investor confidence. To bring the 
historical record into view, Ned Davis Research has 
looked at 28 different crisis events dating to the fall 
of France to the German army in 1940. Although the Dow 
Jones industrial average dropped immediately after most 
of the events, the Dow on average had gained 12.1% after 
126 days." 

- But as Kashdan points out, "Crises naturally come at 
different points in the business cycle, and that 
variable adds to the difficulty of predicting future 
outcomes based on the past...Even before the recent 
tragedy, consumer sentiment had plunged, the 
unemployment rate was higher than expected, and profit 
warnings were plentiful." 

- Furthermore, as Paul Kasriel, director of economic 
research at Northern Trust Co., recently reminded us, 
the S&P 500's decline from its 2000 peak still leaves it 
more overvalued than in any other postwar recovery 

- "The lesson that we take from economics and from 
market history," Kashdan concludes, "is that, for better 
or worse, the path on which the United States economy 
was traveling before last week's attack will not be so 
quickly changed." (see: Crises and Keynesians)

- "The event is on. And it could be the most important 
gathering we've ever held in our 20-year history," 
writes Kathleen Peddicord, editor of International 
Living. The event? The Agora Las Vegas Wealth Symposium, 
from October 31-November 3, 2001. The gathering is 
little more than one month away and it ought to be very 
interesting. "We've all been through a lot these last 
couple of weeks...[but] it's time to make some hard 
decisions and to take action to protect our financial 
future." (Call Agora Travel for details: 1-800-926-6575 
or 1-561-266-6570.)


Back in Paris...

- Seven people were arrested over the weekend for 
planning to blow up the American Embassy here in Paris. 

- Meanwhile..."I don't know if this is true or not," 
ventured our friend Yves at tea yesterday, "but the 
French press says that George Bush is not very smart. He 
thought the Taliban was a rock and roll band...and he 
didn't know who the president of Pakistan was. Of 
course, I don't know who it is either."

- "Look," I replied, defending our president, "most 
people couldn't tell the difference between the Grand 
Mosque and an Exxon station. But so what...that's why we 
have GPS on our bombers."

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by Bill Bonner

"It is easy to criticize," said Elizabeth, letting me 
know that my views are as irritating at home as they are 
to many Daily Reckoning readers.

"What we've learned is that it is a dangerous world," 
she continued. "And if we can make it any less dangerous 
by going after a gang of murderous barbarians in 
Afghanistan, we should do so."

Polls show that 91% of the people of America agree with 
her and with President Bush. Recent surveys in Europe 
show sentiment here not too much different - with 79% of 
the British ready to back the U.S. and 72% of the 
French. Curiously, Germans are more reluctant. Only 52% 
of them want to get involved.

Perhaps enthusiasm for military campaigns is as cyclical 
as it is for junk bonds and bubble stocks. The Germans 
took such heavy losses in WWII that they have had little 
interest in beating the war drums since.

The Russians, meanwhile, have vivid recollections of war 
in Afghanistan. Their advice is clear: fighting a ground 
war in Afghanistan is a form of suicide. 

But war has been proclaimed...and now it must be 
pursued. Will it make the world safer? Or less safe? We 
may never know. For whatever happens, we will never know 
what might have happened otherwise. That is why it is so 
hard to learn from politics...we can know what happens, 
but not why.

We merely note, for the record...and just to annoy 
readers...that war fever, like market fever, has a way 
of generating its own reward. The Austro-Hungarian 
Empire felt not only justified, but duty-bound, to 
demand satisfaction after its archduke had been 
assassinated by terrorists in 1914. And what self-
respecting nation could ignore its treaty obligations? 
If Serbia went to war, Russia must too. And if Austro-
Hungary found itself in bellicose circumstances...France 
and Britain must be drawn in too. And then, though no 
one wanted it or asked for it, the whole world was at 

By September 24, 1914, trench warfare had already begun 
on the Aisnes. And a single battle of this new war - 
Verdun - would cost the lives of 700,000 soldiers. 

But here at the Daily Reckoning, we will confine 
ourselves for the present to following the money. It is 
often said that war is bullish...and it is widely 
predicted that, when the shooting actually begins, the 
U.S. will get the shot-in-the-arm...that glorious, 
heaven-sent wound...that sends us home and puts us back 
on the road to prosperity.

Could it be, dear reader? Could the world be such a 
paradoxical mess that you can get richer by destroying 
lives and property? If that is true, the terrorists' 
attack must rank as one of the greatest risk/reward 
investments of all time. At trivial cost - maybe 
$200,000 - they did $60 billion worth of damage. Will 
nature, in her inscrutable majesty, allow us to build a 
boom on these ruins?

We are not so immodest as to set out to answer that 
question. But, in the rest of this letter we will at 
least toy with it... 

"The stock market is more than 17% undervalued," says 
this week's Barrons. "It's time to Buy Stocks," screams 
the headline, illustrated with a comic drawing of an 
enraged bull with a U.S. flag tattooed on his arm. 

The article, written by Michael Santoli, claims that 
stocks are undervalued based on the Fed Model, which 
compares the earnings of the S&P 500 to the yield on 10-
year Treasury bonds. "For the next 12 months, the 
collective earnings of the S&P 500 are expected to be 
$55 a share," writes Santoli. He then does the math to 
show that the earnings yield on the S&P would be higher 
than the 4.68% yield on Treasuries.

Where does this $55 come from? It was Ed Yardeni's guess 
for earnings in 2002...current earnings are below $40. 
Thus, Yardeni expects S&P companies to increase their 
earnings by more than 30% from this year to the next. 

This seemed like a preposterous dream a couple of weeks 
ago. Now, it seems merely unlikely. The economy is 
slowing down, not speeding up. Earnings would probably 
have been lower next year than they are this. But, with 
the winds of war at the economy's back, anything is 
possible, right? 

Last week, Barron's looked at 9 international crises 
since the end of WWII. In only one case - the Berlin 
Blockade - were stocks still down one year later, and 
then only by 3.3%. In every other case, stocks went up - 
from a minimum of a maximum of 42.2% in the 12 
months following the Oil Shock of 1973. Two years after 
the event stocks were higher in all cases...from a 
minimum of 3.1% following the Gulf of Tonkin crisis in 
'64 to 66.5%, again following the Oil Shock of '73.

Looking more carefully at the details, we observe that 
most of these events had the good fortune to coincide 
with what was otherwise a modest point in stock market 
history. We see no instance of an external shock coming 
at a point when the market sat precariously on a 
pinnacle of prices, following an 18-year boom. Instead, 
each instance seemed to come along at a favorable 
moment...when the force of an impact might just as well 
drive prices up as down.

In the entire post-WW II period, the U.S. economy and 
stock prices climbed a mountain of rising valuations 
(interrupted by major valleys and countertrends from 
time to time). After the Great Depression and WWII, 
stocks were cheap...the economy boomed...and people 
became more and more confident that the future would be 
brighter than the past. Gradually, their habits changed 
as they became more and more confident - they spent more 
and saved less, and bought more and more U.S. stocks, 
which they had come to see as the greatest moneymaking 
investment they could make.

As time went by, the Federal Reserve became better and 
better at aiding and abetting the process of confidence-
building. Our central bankers learned - thanks to Keynes 
and Friedman - that times of crisis needed more active 
management...and that each shock should be an occasion 
for introducing more money to the system. 

On Wall Street, as perhaps in the rest of life, nothing 
succeeds like excess. If a few dollars could help stave 
off a crisis...a few more could trigger a real boom. 
Thus did the Greenspan Fed go about its work in the 
aftermath of every crisis to come its way - flooding the 
world with cash and credit.

As long as the big boom was in place, the extra money 
was taken up and used to expand demand, boost 
production, and puff up asset prices. Each time - 
especially, following the LTCM, Asian currency, and Y2K 
threats - the economy boomed and the stock market 

Most recently, central banks injected $208 billion into 
the world banking system immediately following the 
terrorists' attack. The Fed and the ECB each cut another 
half of a percentage point from key lending rates. 

Will the magic work again? Is it the same world it was 
in 1948 and 1998? Or has something really changed? Have 
we crossed some sort of watershed, such as people did in 
Japan in 1989...or in Europe in that the 
habits of the last generation no longer produce the same 
level of prosperity...or the same peace?

We will see, dear reader, we will see.

Bill Bonner

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About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.


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Last modified: September 24, 2001

Published By Tulips and Bears LLC