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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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PARIS, FRANCE
THURSDAY, 2 AUGUST 2001 |
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Today:
Building
the Modern 'Maginot'
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*** Beware, says Krugman...Dollar Ponzi running out of
"suckers"...
*** The nation's millionaires remain undaunted...
G'head, Litigate! It's your right!...
*** Tax rebates working wonders, already... tech
employees: from wunderkinder to criminals in two short
years... fate of the "thundernugget"... and so much
more...
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*** "A gradually rising asset price acts like a natural
Ponzi scheme," writes Paul Krugman in the NYTimes. "Each
new wave of investors creates capital gains for the
previous wave."
*** Krugman is talking about the US dollar. Since '95,
the US has been running the largest current account
deficit in the history of the world - bigger by
percentage than either Korea or Indonesia prior to the
Asian crisis of 1997... and the dollar hit a 16-year
high on July 5th.
*** Yet, according to the IHT, Treasury Secretary
O'Neill has said of late he doesn't believe the dollar
is overvalued, that concerns about the current account
deficit are based on "trivial and wrong notions"... and
the GDP is obsolete.
*** "When white-haired execs start rejecting old-
fashioned accounting," says Krugman, "the Ponzi scheme
is about to run out of suckers."
Eric, what's new in New York?
*****
Eric, back from vacation, refreshed:
- "We may well get a significant second-half recovery,"
writes Barron's Alan Abelson. "It just won't be in the
second half of this year."
- Still, the "long-awaited" summer appears to be under
way. The Nasdaq has gained about 7% since early last
week and some of the old favorites - notably, the
semiconductor stocks - have been particularly stellar
performers.
- Yesterday alone, the Nasdaq gained more than 2%, even
while the Dow stocks struggled. The Dow, which had
gained as much as 77 points midday, finished the
training session down about 13 points.
- Abbey Cohen says "the worst is over," trying to answer
the question on everyone's lips... have we bounced off
the bottom?
- "On average," reports Fleet Street Letter contributor
John Mauldin, "the S&P 500 has risen 32% from the
market's bottom before the earnings cycle bottoms out...
it seems easy enough. Just invest when the blood is
running in the streets. But the trick is to figure out
when things are worse. Are we looking for ankle deep...
or knee deep blood?"
- Mauldin has his eye on the three key "indicators" he
believes signal turnaround in the S&P... watch this
space. "Just because things may look pretty bleak
today," says Mauldin, "there's no reason they can't look
worse tomorrow."
- Still, uncertainty in the markets has left the
nation's millionaires undaunted. According to a recent
survey by Forrester, more than 90 percent of
millionaires surveyed said that they would either
maintain or increase their investments in the stock
market.
- And anyway, what's to worry about? When investments
don't pan out as hoped, you can always sue your broker.
- "Among the basic freedoms granted to all U.S.
citizens," muses the Red Herring, "are the right to
express oneself, the right to bear arms, and apparently,
the right to sue the pants off someone when you lose
money, even if it was your own fault."
- "Considering that as of June 25th," the article
continues, "the Nasdaq was down 59.4% since its peak on
March 10, 2000, class action specialists like law firm
Milberg, Weiss, Bershad Hynes & Lerach are having no
problem recruiting plaintiffs." The number of lawsuits
pending against brokerage firms is growing by the week.
- Yet few investment banks appear outwardly concerned
about their growing exposures to disgruntled investors.
Indeed, many investment banks are busy sowing the seeds
of future lawsuits. Worth magazine reports, "Now a
growing number of blue-chip investment banks are
actively marketing derivatives to a retail audience,
expanding the reach of investment strategy that was once
the exclusive domain of institutional investors and the
super-rich. According to a report by Merrill Lynch and
Cap Gemini Ernst & Young, almost a quarter of
individuals with portfolios worth $1 million or more
have dabbled in structured equity products."
- If these derivatives fail to produce the desired
result, is there any doubt that many of these aggrieved
millionaires will "dabble" in lawsuits against their
brokers?
- Addison, your comments yesterday about the American
real estate bubble are spot on. After spending two weeks
in California, it's clear that confidence in real estate
values remains unshakable... for now.
- Most of my friends admitted to having lost a lot of
money in the stock market. But each would quickly
volunteer that the "value" in their home continues to
appreciate. One doctor I know - whose 2500 square-foot
home in Marin County is currently worth more than $1
million - told me with a perfectly straight face, "It's
nice to know I can take the equity out of my home - any
time I want - and retire."
- Wasn't it just a little more than a year ago that
shares of Cisco, Corning and Ariba seemed as good as
"money in the bank?"
*****
Back to Addison in Paris...
*** A note from CNNfn.com explaining Tuesday's rally:
"U.S. stocks rallied at midday Tuesday, shaking off a
sluggish start, after data showing a pickup in consumer
spending suggested that the tax rebate checks now being
mailed to millions of Americans are lifting retail
sales."
*** "Interesting," says Mark Rostenko, the Sovereign
Strategist. "The first checks went out last week and
ALREADY they're impacting last month's consumer data!
Talk about retroactive gains. Maybe G.W. should try to
push through some more cuts and give first and second
quarter GDP a lift too."
*** Well, looks like it's not just lawsuits, anymore.
"Laid-off Workers Are Striking Back" reads a headline in
the IHT. "Many workers have put in endless hours and
sweat for the promise of hefty stock options that never
materialized," says psychologist Beverly Smallwood.
*** One 56 year-old ex-employee left a note saying: "I
have been loyal to this company for 30 years. I was
expecting a member of top management to come down from
his ivory tower to face us with the layoff announcement,
rather than sending the kitchen supervisor with guards
to escort us off the premises. You will pay for your
senseless behavior." The man later confessed to
sabotaging his former employer's computer system - at a
cost of $20 million.
*** Thom Hickling, part-time writer, full-time minstrel
and friend, sends word from Baltimore that times are
truly getting tough. Thom's 94 Plymouth Horizon -
lovingly referred as the "thundernugget" - was stolen
from out in front of one of the Agora buildings.
"Crackheads," said the police.
"What would a crackhead want with that ol' thing?" asked
Thom. He suspects someone holding shares of JDS
Uniphase.
* * * * * * * * Advertisement * * * * * * * * * * *
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* * * * * * * * * * * * * * * * * * * * * * * * * *
The Daily Reckoning Presents: A Special Guest Essay.
Having returned from a 3-week stay in Turkey, on the
heels of a 10-day sojourn to Malaysia, Doug Casey offers
some thoughts on America - in the eyes of the world.
BUILDING THE MODERN 'MAGINOT'
By Doug Casey
Domestically, I'd say the biggest problem we face is the
continual and accelerating loss of freedom - compounded
by the prospect of what I suspect could be the biggest
financial/economic crisis of modern times.
What sort of crisis will it be?
That's unpredictable, although the odds are it will be
unlike others that are still fresh in people's memories,
simply because people tend to be most prepared for the
things that have most recently scared them. The big
problems usually come from expected quarters at
unexpected times...like the monetary crisis of 1998 that
materialized in Thailand.
That said, the question remains of where to look. My
guess is that the crisis will come from outside American
borders...in the form of war.
Some might protest that a discussion of [war] has no
place in an investment letter, but I hold it's just as
relevant as discussions of politics, science,
technology, history, or any other area of human
endeavor. Investments cannot exist in a vacuum.
Not considering such basics is a fundamental error.
And what happens to your investments is certainly
subject to the prospect for war. I know the conventional
wisdom - after Fukuyama's End of History, and naive,
albeit interesting, observations like those in The
Lexus and the Olive Tree that no countries with
McDonald's franchises have yet taken up arms - is that
there won't be any more serious wars.
But I don't buy it.
War is perhaps the worst thing that can happen, not
only for the destruction it will cause in itself, but
because it will immensely exacerbate America's domestic
problems.
To quote the famous words of Stirner, "War is the health
of the State."
But neither a declared war, nor war in the conventional
sense, is likely in the cards. US troops have been in
combat in a dozen countries since our last "official"
war ended in 1945; the US troops stationed in over 100
countries are an accident waiting to happen. Besides
the Balkans and Iraq, Colombia is probably highest
on the dance card, but almost anyplace could erupt
unpredictably.
Who, after all, could have predicted that the US would
invade Somalia in 1991, a country few people besides
stamp collectors even knew existed? No place is safe
from attack in The National Interest of the world's
self-appointed policeman.
Anything is possible within this context, but I discount
the likelihood of another Vietnam, again because of the
"recent collective memory" phenomenon. Vietnam is
perhaps the major reason why the Iraq attack ended so
quickly; a speedy withdrawal obviated any danger that
ground troops might get stuck in a major tar baby. But
when you're sticking your nose absolutely everywhere it
doesn't belong, there are lots of ways to get it
bloodied.
My guess is that something resembling a Crusade is
developing against those who live in the Koran Belt. It
won't be overtly religious like the crusades of the
Middle Ages, but it will have major cultural undertones.
And there's every prospect it will be highly
unconventional in nature.
This is why all the talk about a strategic missile
defense system (ABM) for the US is so totally
ridiculous.
Why would an enemy of the US spend a fortune building
ICBMs - a clunky, inaccurate, 1950s era technology -
when a plethora of ABC (atomic, biological, chemical)
weapons can be sent by Fed Ex? They'll arrive exactly
where you want them, and precisely on time.
You may think I'm joking, but the most effective
delivery system is one that's cheap, reliable,
unexpected, redundant, untraceable and hard to detect
until it's too late. If you have an especially large
device to deliver, it can be shipped as cargo in a
conventional boat or plane. Indeed, just as a car
bomb is great for taking out a building, an equally
innocuous boat or plane can take out an entire city.
When the attack comes on the US, that's the form it will
take. Ballistic missiles may have some terror/propaganda
value for countries like North Korea or Iraq, for use
against regional enemies. But these people aren't
stupid; they know that if they launched a strike on the
US with a missile, there'd be no question about its
source. And no question about the response.
No government or group would dream of attacking the US
in that manner, since it would literally amount to
signing their own national death warrant. It's simply
not going to happen that way. If they want to take out
some US cities, it won't be with a missile.
Why, then, does the US government want to spend scores
of billions on a missile defense system that's worth
less than a Maginot Line? In fact, they should nickname
the ABM - in the manner that's long been the case for US
weapons - the "Maginot."
Are they really that stupid? Or is the money flowing to
defense contractors really that important? Or is it a PR
stunt to convince Boobus Americanus that he's safe? Or
all of the above? I don't know.
But to me, it's absolute proof that the generals and
their masters are just as intent on fighting the last
war as has been the case every time in the past.
This isn't unexpected. The US has - depending on who's
doing the accounting, and how many are built - spent $2
billion on each B-2 "Sitting Duck" bomber, and will
spend $250 million on each F-22 "White Elephant"
fighter, an aircraft superbly suited to fighting a non-
existent hi-tech enemy.
Even if building these hi-tech showboats was a good
idea, I question whether these devices aren't
overpriced by an order of magnitude. You'll recall that
the P-51, the best fighter of WWII, went from the
drawing board to production in seven months, and was
cranked out at $50,000 a copy. OK, say that's $500,000
in today's money, and the F-22 is vastly more complex
and capable. But the real prices of raw materials has
plummeted, and the advances in technology have done the
same for both design and manufacturing costs.
If nothing else, it's a testimony to the inefficiency
and corruption inherent to the procurement system.
Entirely apart from that, any (serious) potential enemy
will make sure they're taken out on the ground with
saboteurs, special operations units, or ABC weapons.
When you're dealing with aircraft that cost a few
million, and you've got thousands of them widely
dispersed, these things are manageable. But when you've
got very limited numbers you can buy at hundreds of
millions a copy, it's a different story. The US will
hardly dare deploy these weapons because the loss of
only one in combat would be a catastrophe.
But these are strictly tangential points. Weapons like
these are as useless as the ABM against what's coming in
the next war.
It's a truism that the best defense is good offense.
But it's only true once you're in an active war, and are
trying to win it. Regrettably, the US is confusing good
offense with running around the world giving offense,
and it will only result in starting a war.
The only defense against the kind of attack that will
open the next conflict is, frankly, to give the attacker
no reason to attack. Does Argentina, or Canada, or
Italy, or Thailand or, really, any country in the world
besides the US, have reason to fear a massive ABC
attack? The answer is no. Sure, the Indians and the
Pakistanis, the Chinese and the Taiwanese, the North and
South Koreans could attack each other. But the source of
the threat is discrete.
Only the US is running around the world, whacking a
hundred different hornets' nests. A major power could
get away with this in the past. The most the natives
could do in retaliation was assassinate the odd
dignitary, or ambush the odd patrol. But the world has
changed. Now, if you antagonize a group badly enough,
they're entirely capable of bringing the war to your
home ground. The World Trade Center bombing, which
should have, by all rights, been a success, and the USS
Cole bombing, which was a stunning success, are only the
most trivial examples of what's in store.
Almost anyone can build a nuclear device today. Various
designs are published, and the methods of enriching
uranium are not complex. It's not rocket science any
longer. Moreover, why bother, when a million dollars
passed to a Russian general (or maybe just a sergeant,
since he actually handles the things) can buy you state-
of-the-art equipment?
That's even more true of biological and chemical
weaponry.
The question isn't whether it will be used. That's a
certainty. Anything that can be imagined can probably be
done; and anything that can be done, probably will be
done. It's simply a question of when. And by whom.
Yours truly,
Doug Casey,
for The Daily Reckoning
International Speculator Doug Casey has been seeking and
finding investment opportunities around the world for 25
years. For more information on how you can take
advantage of profitable opportunities unearthed by Casey
in his speculative travels, please see his report:
Nobody Notices the Good News... Until It's Too Late.
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| About
The Daily Reckoning: |
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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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