All posts by John Stinson

John Stinson is a semi-retired investment counselor and a historian with a special interest in the battles of World War II. He is current written books about investing, history and politics, you can read more of his work at xlibris.com. He lives on the island of Martha's Vineyard, in Massachusetts, where he keeps an extensive library on the subject.

Monthly Commentary – April 2003

After years, of negative commentary, I promised to lay out the positive case. The promise was lucky because the events of March indicate that we may be looking at a fresh bull market. A major rally or new bull market was widely expected with the opening of hostilities in Iraq. In part that belief rested on the idea that the market and the economy were held up by uncertainty about the situation in Iraq. War is positive by removing the uncertainty. The rally forecast also rested on mirroring off 1991, when the most powerful bull phase in history was launched on the very day the Kuwait War began. In 1991 we had been in a bear market, stocks had rallied off an October low then fallen back, and the economy was in recession. You could not have a more perfect likeness of events. The hangup is that mirroring, while popular and enticing, rarely works out. As we now know, the rally opened five days before the war began, reflecting bullish anxiety to get things going. In only eight trading days the market was up 12%, or about 60% of the total three month first stage bull market rise in 1991. The swiftness reflected the high degree of anticipation, but the move was too big to be sustained. The market then sold off, but the decline was not serious enough to break the upward bias. So far, so good. Despite wide expectation of a rally, investor sentiment indicators were predominantly bearish in early March, which is positive. These surveys have moved up only slightly since the rally began. A considerable swing to bullish sentiment can be expected before the up move is threatened. Technically, the market looks good. We have a triple bottom: a low in August, a slightly lower second bottom in October, and a third higher bottom in early March. This leaves us with a technically strong base extending over five months, and suggests a new bull market, not just a rally. Individual technical indicators are also positive. My most telling directional indicator is daily advances minus declines. Although we hit new lows below those of October on both NASDAQ and ASE, NYSE A/D held. The NASDAQ and ASE are better indicators than NYSE, but A/D is not a good indicator at bottoms anyway. It is terrific at showing a building top, but not a bottom. Overall, a positive showing. Daily new highs and new lows are positive in that new lows at the March bottom were way down from October, when the level was extreme, probably climatic. A nice progression of rising new highs has unfolded as the rally continued. While not useful day to day, high-lows are excellent long term indicators. Aside from sensing a bottom in unusually attractive pricing, the only timely signal I have ever found is a nine to one up volume day. As a new bull market kicks off, one of the early days will have volume on the NYSE for stocks going up that is nine times greater than volume for stocks going down. This is a rare event and indicates such depth and breadth of buying as to create a momentum that lasts for a while. In 1991 we had something like five such days in the first two weeks, but usually only one is required. We had that big volume day on March 17, the fourth day of the rally, and it was an impressive 13 to 1. Follow through on the big mo signal was weak, but the sell off was not too bad considering disappointing news from the front. Another positive factor is time. Bear markets last six months to a year, serious bear markets (say 1973-1974) last at most two years, and even the depression market declined for only two years and ten months. March would have been the third anniversary of this decline, so we were close to setting a record (if the bear market is over, last October will be the bottom). The problem with this analysis is that at the end of the 1929-1932 and 1973-1974 bear markets, stocks were extraordinarily cheap. The foundation of those bottoms was that stocks had gone down as much as they could with values so extreme. Smart money could no longer resist. That is not the case this time. Over the long term, markets work from extremes of valuation at either end. Eventually we are likely to have an outstanding buying opportunity, but it will be hard to see because the economy will look worse than it does today. A somewhat similar positive argument is that the economy must improve. There is no such thing as a double dip, it exists only in government economic data. A double dip recession is merely a longer than usual one. The economy looks terrible now, but only because of the long time we have spent bumping along a bottom. Things always look worst just prior to a pick up. This is not a normal inventory recession, and I suspect things will remain slow for some time, but eventually there will be a pick up. Why not this summer? For the market timer, tops are easy. Bottoms are another matter. The reason market timing is unpopular is not that it can't be done, but the fear of missing bottoms, and that fear is justified. Bottoms are always hard to call. I use a strategy of going ahead and buying stocks that are extremely cheap and seem to have run out of steam on the downside, knowing there is no way I will be able to call a bottom. The worst that can be said about the market is that if we reached a bottom, it is by far the highest priced in history. The absence of genuinely cheap stocks after such a lengthy bear market will limit gains. Bear markets have always produced attractively priced stocks, and here we have a really big bear market and few bargains. The reason is the extremely depressed level of earnings. If the economy does not bounce back, and fairly strongly, a rally is far more likely than a bull market. Interestingly, many of those looking for a big up move still do not think the bear market is over because of deep rooted economic problems that are either not being addressed or are too intractable for the usual cures, and may be worsened by a deficit getting out of hand. The absence of attractively priced stocks supports that viewpoint. Although I am not yet convinced that the trend has reversed to the upside, the odds are decent that we have seen a bottom. There is no law saying a bear market must produce great value. As to the economy, I don't believe in basing my investment stance on something so unpredictable. I don't like that right wing economists see nothing but sunlight despite the clouds, but these people are in control of the government and they may well give us another big tax cut. You have to ask, if the economy really is picking up, why in hell are we going for another tax cut with an exploding deficit (the answer is that the right believes any tax cut any time is a good one). On the other hand, that cut is likely to be positive over the short term. Aside from what is shaping up as a good rally or bull market, the long term picture is not positive for more reasons than high stock prices. I am reminded of a comment by a man who builds his economic theory around historical precedent, a long perspective I much favor, who said, you would have to be crazy to be bullish on the U.S. economy. Our venture into aggressive warfare, the historical curse of leading nations, on top of a loss of interest in fiscal responsibility, has inspired me to begin reading The Decline and Fall of the Roman Empire. But that decline took centuries, and I will be long gone by the time of the fall.

Market Commentary – April 2003

After years, of negative commentary, I promised to lay out the positive case. The promise was lucky because the events of March indicate that we may be looking at a fresh bull market. A major rally or new bull market was widely expected with the opening of hostilities in Iraq. In part that belief rested on the idea that the market and the economy were held up by uncertainty about the situation in Iraq. War is positive by removing the uncertainty. The rally forecast also rested on mirroring off 1991, when the most powerful bull phase in history was launched on the very day the Kuwait War began. In 1991 we had been in a bear market, stocks had rallied off an October low then fallen back, and the economy was in recession. You could not have a more perfect likeness of events. The hangup is that mirroring, while popular and enticing, rarely works out. As we now know, the rally opened five days before the war began, reflecting bullish anxiety to get things going. In only eight trading days the market was up 12%, or about 60% of the total three month first stage bull market rise in 1991. The swiftness reflected the high degree of anticipation, but the move was too big to be sustained. The market then sold off, but the decline was not serious enough to break the upward bias. So far, so good. Despite wide expectation of a rally, investor sentiment indicators were predominantly bearish in early March, which is positive. These surveys have moved up only slightly since the rally began. A considerable swing to bullish sentiment can be expected before the up move is threatened. Technically, the market looks good. We have a triple bottom: a low in August, a slightly lower second bottom in October, and a third higher bottom in early March. This leaves us with a technically strong base extending over five months, and suggests a new bull market, not just a rally. Individual technical indicators are also positive. My most telling directional indicator is daily advances minus declines. Although we hit new lows below those of October on both NASDAQ and ASE, NYSE A/D held. The NASDAQ and ASE are better indicators than NYSE, but A/D is not a good indicator at bottoms anyway. It is terrific at showing a building top, but not a bottom. Overall, a positive showing. Daily new highs and new lows are positive in that new lows at the March bottom were way down from October, when the level was extreme, probably climatic. A nice progression of rising new highs has unfolded as the rally continued. While not useful day to day, high-lows are excellent long term indicators. Aside from sensing a bottom in unusually attractive pricing, the only timely signal I have ever found is a nine to one up volume day. As a new bull market kicks off, one of the early days will have volume on the NYSE for stocks going up that is nine times greater than volume for stocks going down. This is a rare event and indicates such depth and breadth of buying as to create a momentum that lasts for a while. In 1991 we had something like five such days in the first two weeks, but usually only one is required. We had that big volume day on March 17, the fourth day of the rally, and it was an impressive 13 to 1. Follow through on the big mo signal was weak, but the sell off was not too bad considering disappointing news from the front. Another positive factor is time. Bear markets last six months to a year, serious bear markets (say 1973-1974) last at most two years, and even the depression market declined for only two years and ten months. March would have been the third anniversary of this decline, so we were close to setting a record (if the bear market is over, last October will be the bottom). The problem with this analysis is that at the end of the 1929-1932 and 1973-1974 bear markets, stocks were extraordinarily cheap. The foundation of those bottoms was that stocks had gone down as much as they could with values so extreme. Smart money could no longer resist. That is not the case this time. Over the long term, markets work from extremes of valuation at either end. Eventually we are likely to have an outstanding buying opportunity, but it will be hard to see because the economy will look worse than it does today. A somewhat similar positive argument is that the economy must improve. There is no such thing as a double dip, it exists only in government economic data. A double dip recession is merely a longer than usual one. The economy looks terrible now, but only because of the long time we have spent bumping along a bottom. Things always look worst just prior to a pick up. This is not a normal inventory recession, and I suspect things will remain slow for some time, but eventually there will be a pick up. Why not this summer? For the market timer, tops are easy. Bottoms are another matter. The reason market timing is unpopular is not that it can’t be done, but the fear of missing bottoms, and that fear is justified. Bottoms are always hard to call. I use a strategy of going ahead and buying stocks that are extremely cheap and seem to have run out of steam on the downside, knowing there is no way I will be able to call a bottom. The worst that can be said about the market is that if we reached a bottom, it is by far the highest priced in history. The absence of genuinely cheap stocks after such a lengthy bear market will limit gains. Bear markets have always produced attractively priced stocks, and here we have a really big bear market and few bargains. The reason is the extremely depressed level of earnings. If the economy does not bounce back, and fairly strongly, a rally is far more likely than a bull market. Interestingly, many of those looking for a big up move still do not think the bear market is over because of deep rooted economic problems that are either not being addressed or are too intractable for the usual cures, and may be worsened by a deficit getting out of hand. The absence of attractively priced stocks supports that viewpoint. Although I am not yet convinced that the trend has reversed to the upside, the odds are decent that we have seen a bottom. There is no law saying a bear market must produce great value. As to the economy, I don’t believe in basing my investment stance on something so unpredictable. I don’t like that right wing economists see nothing but sunlight despite the clouds, but these people are in control of the government and they may well give us another big tax cut. You have to ask, if the economy really is picking up, why in hell are we going for another tax cut with an exploding deficit (the answer is that the right believes any tax cut any time is a good one). On the other hand, that cut is likely to be positive over the short term. Aside from what is shaping up as a good rally or bull market, the long term picture is not positive for more reasons than high stock prices. I am reminded of a comment by a man who builds his economic theory around historical precedent, a long perspective I much favor, who said, you would have to be crazy to be bullish on the U.S. economy. Our venture into aggressive warfare, the historical curse of leading nations, on top of a loss of interest in fiscal responsibility, has inspired me to begin reading The Decline and Fall of the Roman Empire. But that decline took centuries, and I will be long gone by the time of the fall.

Crossing the Continental Divide: The Building of the Panama Canal

The Panama Canal is among the most popular cruise sites in the world, and deservedly so. Its fascinating history and spectacular size inspire, and its purpose is well served by tankers, cruise ships, and more on an almost constant basis. A day going through the canal is filled with loudspeaker information on its construction and operation, but enjoyment of the passage can only be augmented with more knowledge of the canal’s history. One of the best books on the subject is David McCullough’s The Path Between the Seas, but for those seeking information without reading this or other lengthy books, what follows is a brief account of passage through this historic canal. Panama Canal Map - LargeConstruction of the Panama Canal was started by a French group in 1881. The company, called Compagnie Universelle du Canal Interocéanique de Panama, was headed by Ferdinand de Lesseps, who gained fame building the Suez Canal. De Lesseps was not an engineer, as many presume, but a diplomat and promoter--some might compare him to a modern-day Wall Street investment banker. His zeal for the project, and inexperience in technical matters, got the project started with the backing of the French government. However, de Lesseps’ greatest skill was his charisma and the ease with which he was able to attract interest and financial support from the public by selling speculative shares in the canal project. This led to much the same situation that brought about the recent collapse in the U.S. stock market: de Lesseps undertook massive promotion to sell the project to investors, all the while underestimating costs, exaggerating progress reports to raise more money, and covering up when the project ran into trouble. The promotion was not unlike an internet IPO, starting fast and intensifying despite huge losses. In fact, after the French company unexpectedly went bankrupt in the face of inevitable failure, de Lesseps very nearly went to jail, escaping only because his health collapsed. The reason behind the company’s failure was de Lesseps’ fixation on building a sea-level canal similar to the Suez Canal. The Suez Canal is in the flat desert where dredging at sea level was significantly easier than having to cross a small mountain range--as in Central America; plus the arid environment there was much more manageable that the damp, overgrown Caribbean jungle the French faced in Panama. Digging a canal where the French plan proposed required going over the Continental Divide, not high at the narrow Isthmus of Panama, but still at an elevation of 275 feet at its lowest point. To make the sea-level canal work meant cutting a central passage, wide enough for ships to pass, through the entire 275-foot wall of basalt rock. Further, particularly at the coasts, the ground was discovered to be extremely unstable, so that far more ground had to be removed than planned. On either side of the cut the land was high, making removal of slag and earth a major problem. A sea-level canal would have required moving so much rock and dirt that the job would have been nearly impossible. As the French began, they had four principle problems: water, disease, faulty engineering, and irregular management. The digging started up the Chagres River, but there was so much rain, especially in a wet season, that men, equipment, and their work were often washed away in flash floods. Poor equipment made it nearly impossible to make reasonable headway on the project, in spite of the harsh climatic conditions, and the underused and too-light Panama Railway, which had potential to guarantee removal of earth as it was dug from the various pits along the main channel, did not even reach most of the active digging sites. The problem of disease came from mosquitoes, which the wet weather made particularly serious. Hospitals had yet to draw a connection between mosquitoes and the spread of yellow fever and malaria. In an effort to rid themselves of insects in their facilities, hospitals took to placing dishes of water beneath bedposts and elsewhere, so infesting bugs would drown instead of making their way into patients’ sheets. This standing water, however, provided a perfect breeding ground for mosquitoes carrying much more deadly diseases than the other insects might have. While yellow fever and malaria spread rampantly through work camps, the hospitals themselves were notoriously thought of a "death traps"--a reputation that deterred even the sickest individuals from seeking medical help. Being assigned to the project as an engineer or supervisor became virtually a death sentence. Most of the labor was brought in from Jamaica, and death tolls ran in the tens of thousands. When the U.S. later went in to build the canal, the government of Jamaica refused to allow its people to go. (The U.S. recruited mainly in Barbados.) Finally, the scattered management took a tremendous toll on the crews, contractors, and the project as a whole. Because of a combination of ill health, old age, inexperience, and lack of sufficient progress, the chief of the canal project--known as the "director general"--was replaced more than six times before the French company collapsed. Slow progress played havoc with costs, engineering flaws virtually ensured the sea-level canal would not be built, disease ravaged the workers and management, and finally, after publicly raising funds several times, the company went bankrupt in 1889. More attempts were made to revive the French project, under different names, new companies, and more realistic designs, but by the turn of the century, the Panama Canal project was being woefully handed over to the United States. Still, the French work was helpful when the Americans picked up the job and some of the huge dredges (many of which were American-made) they left behind turned out to be useful. But there is now only one remaining sign of the French work: as you enter the canal from the Atlantic side, looking to the left, the original French channel is still visible. Tugs getting the boat ready to enter the Miraflores lockThe answer to the engineering problem that de Lesseps’ original team faced was actually in front of them the whole time. When the French government originally took bids on plans for the canal, one of the top engineers of the time--a man named Baron Nicholas-Joseph-Adolphe Godin de Lépinay--had suggested, instead of a sea-level canal like Suez, that they build an above-ground canal involving locks and artificial lakes for water transfer. A victim of his own pride, de Lesseps ignored this alternative suggestion and went ahead with his sea-level plan. When the Americans started work, they saw value in the notion of an above-ground canal. It was the best way. The idea was to make use of a tremendous amount of water by creating an artificial lake in the middle of the isthmus and a series of locks leading up to and away from that lake. Gravity would do all the work in filling and emptying the locks as needed, depending on the direction of travel. The Americans still faced the problem of disease, but even that was eventually solved with the realization that mosquitoes were the carrier. Once this was understood, hospitals and camps were screened and every effort made to limit the accumulation of standing water. Disease was still a problem, but it was brought under control. In fact, mosquito control has been so intense for so many years that presently you will not see a single mosquito in the canal zone. While the mosquito as disease bearer was supposedly discovered in Panama, advanced medical experts connected with the Spanish American War had found the answer in Cuba about five years before, but the idea seemed so incredible that it was easily dismissed. Ship entering the Miraflores lockAt the time of the canal’s construction, Panama was not an independent country, rather it was part of Columbia. As the Americans became involved in the project, President Theodore Roosevelt supported the plan to keep the canal roughly where the French had started it, in Panama. There were many calls from Congress and the public to move the site to neighboring Nicaragua, where the project could be restarted with a clean record, but eventually--with the support of engineers, politicians, and business people--Roosevelt won out. When the Columbian government objected to the American presence in the region of Panama, sending troops to quash local support for the United States, the president encouraged and then formally supported a revolutionary group that created a new independent Panama in 1903. Roosevelt took his payoff in the form of a generous ten-mile-wide Canal Zone, which was administered entirely under the American government. When the original treaty expired in 1978, Jimmy Carter turned the zone back over to Panama, which now operates the canal exclusively (though Americans continued in a few supervisory rolls into the 1990s). The under the Americans, the U.S. Army Corps of Engineers began work in 1904, and the canal was finished in 1914. The huge Gatun Lake was created by damming up both ends of the Chagres River, where locks are now located. The lake passage makes up the largest portion of the day-long trip through the canal, and is, in my mind, the least interesting part. Looking to the right going in from the Atlantic side at the Gatun locks, you will see a long stretch of high lake level land with waterfalls and a hydroelectric plant part way up. This is an earthen dam made from material drawn from the high ground; thus, it serves as both a dam and a disposal area. Looking back at the closed lock on the CanalThe greatest problem for the Americans was the cut--the high ground in the middle part of the isthmus (actually about three-quarters of the way through from the Atlantic side) at the Continental Divide. Going through the canal today, you will see walls somewhat higher than a cruise ship, reinforced with bolts and heavy screens. Originally the land was almost 200 feet higher at this point (bearing in mind that a boat floats roughly 83 feet above the lake bed). The plan was to make these walls steep, like the Corinthian Canal in Greece. Photographs taken at the Panama Canal’s opening reveal considerably higher walls than you will see today, but a tremendous slide closed the canal soon after it was officially opened. The ground at this point consisted of layers of slippery shale and a loose conglomerate that easily absorbed water and became mudlike, allowing the shale to slide much like snow and ice in avalanche conditions. Looking beyond the current walls, you can see that the land is fairly flat for a considerable distance. This land was originally much higher than in the cut itself, offering some idea of the huge amount of material that had to be removed to stabilize the area. The work was done like a large open pit mine, with terraced flat areas on which huge steam shovels picked up loads of earth and dropped them into railroad cars, the tracks being continually stretched and rebuilt as progress was made. That one of the original backers of the American plan to keep the canal site in Panama was also part owner of the Panama Railway Company is no coincidence. There were many such cross-interests among the canal’s management and supporters, which had the effect of making them even richer. Shortly before the beginning of the cut (from the Atlantic side), lies the work town of Gamboa. Just beyond the town on the left, you will see a river coming into the canal. This is the relocated Chagres River, then as now the principle source of water to Gatun Lake. In order to better control the water supply, up this river about a mile is another dam, not visible from the boat. If Panama had a serious drought, the canal could become inoperative from the large volume of water let out each day from both ends. Trains holding the ship off the wall The canal is built with three all-together steps up at the Gatun Locks on the Atlantic side, and one- and two-step locks on the Pacific side, with the mile-long Miraflores Lake in between. There is a marina on the left-hand side, but not much else on this lake. As I understand it, Gatun Lake is very clear and beautiful once off the traffic path. It is a huge body of water, stretching back well away from the main traffic lane into many nooks and crannies. As ships become bigger, there is a temptation to widen the canal by building another set of locks. While the canal itself is very profitable, the cost of such a project would be so great that it will probably never happen, despite Panama’s announced plans. Instead, on a worldwide basis, large ships are built to either go through the canal or not. The largest ships able to navigate through the canal are called "Panamax." Anything bigger than these must find another way to move their goods across the isthmus. One alternative includes smaller cargo ships that operate almost exclusively within the canal, taking containers from terminals on either side. A number of large container ships may be passed during the passage, though generally traffic is all in one direction for half of each day. One interesting fact is that U.S. naval design has in part been determined by the width of the canal. Tracks for the trains between the two canalsThe most famous feature of the canal is the system of trains operating on either side of the locks. The original concept for these trains was to pull ships through the locks while their engines were off. The fear was that a ship could get caught in gear, not be able to stop, and ram one of the gates, spilling out the water and closing the operation until the gate could be fixed and the water level raised. It’s easy to imagine this happening at the three-step Gatun locks, causing a massive flood of the entire lake rushing into the Atlantic. As an extra precaution, there were once huge chain brakes stretched across the locks. These precautions have now been eliminated. The chains are gone and ships get in and out of the locks under their own power. I suppose engines were less reliable in the old days, but today the risk of such an accident seems remote. But the question remains, why are the little locomotives still there? The answer is, they always had second purpose: to keep ships locked in position as the water swirls rapidly in and out of the huge chambers. The cruise ships that daily go through the canal come very close to the canal’s side walls (cruise ships are also built with an eye to the Panama Canal). Given the great weight of these ships, considerable damage could be done both to the ship’s sides and to the canal walls. While operating the trains is obviously expensive, it is cheaper than having to constantly repair the canal, not to mention damage to the ships, and using bumpers, such as you see elsewhere, would strain the system by reducing the already precious width of the canal. I went through in a tandem lock with an oil tanker that just barely fit. It took much longer to get the ship in and out, and the process halted part way because one of the tanker’s sides had apparently struck the canal wall. Transcontinental bridge, Bridge of AmericasAs you come out to the Pacific, you pass under the soaring transcontinental bridge and then pass a breakwater on the left several miles long. This is the refuse from the Pacific-side construction. It is the largest and longest breakwater I have ever seen, and again reminds me of the immensity of the job. One final feature that always interests me is the large number of ships waiting to go through at either end--a reminder of how important the Panama Canal remains today.

The Corporate Sky-box Administration – March 2003

Interpreting the actions of this administration requires an understand of two conditions: 1) Bush was elected by big corporation interests and the country is being run for their benefit. 2) Bush has no interest other than politics and his decisions, when not a response to his corporate sponsors, are always political. Bush showed a bit of independent activism in his first eight months, then came the war. The only outside interest shown since 9/11 was when the Enron revelations threatened his sponsoring corporate chieftains. Enron demonstrated how the management of many publicly held companies had become corrupted by an orgy of bonuses and options. Corporate heads needed to cut short the resulting reform movement. They awakened Bush from his war fixation and distaste for new proposals. He announced support for, first a limited restriction on the ability to cash in shares received in 401K plans, and, second, against a plan to penalize management that makes off with huge option awards only to see their stock crash. Bush's efforts are an attempt to limit reform to something his mentors can swallow, although they have already reneged on the company stock holding time limitation. The Enron situation has the potential to correct the accounting problem and the excessive option awards that led to the cheating. Bush is trying to short circuit reform by putting soft proposals on the table. Next came tariffs on steel. This issue has been around for a long time. No president, not even Reagan, did anything because the dumping charges are empty. The war allowed the steel industry to place itself in the position of a needed national interest. The modern portion of our steel industry, so-called mini-mills using largely scrap, have been expanding year after year, and the efficient ones are profitable. Tariffs are terrible economic policy and worse for international relations. The whole structure of world trade, the foundation of a world of understanding interaction, has been undermined. Why did he do it? The only possible answer, other than responding to corporate sponsors, is politics - a hope of buying union votes. The champion of free trade suddenly turned to tariffs, at another loss of credibility and deepening distrust abroad. The decision was typically pragmatic relative to his corporate sponsors. It was blatantly protectionist, and a setback for both free trade and foreign relations, but it met the urging of his backers. The movement to foreign factories, or just buying from foreign sources, has been further encouraged. Steel users are far more important to our economy than the industry itself, but they failed to mount a strong counterattack. The key issue, though, appears to be politics, the hope of picking up votes in steel making states. We could see more tariffs, as Bush has revealed his willingness to sell out free market principles for votesf. Foreign competitive pressures are growing in many American industries, and Bush responds to the requests of his corporate buddies. Normally a president trying to lead an international war would avoid moves that harm allies and cast us in the worst possible light (remember the ABM treaty, unnecessarily given up for an anti-missile research program that was going to be worked on regardless). Other than intervening to help his sponsors, since 9/11 Bush has been interested only in sounding off with tough guy bully talk, building the worst foreign relations in American history, if a strangely based popularity in his own country. His talent for cheerleadering, first seen at Andover, is being applied on a national scale. In the meantime, he has nothing to offer, no recession fighting plan, no domestic anti-terrorist program, no oil dependency program, no nothing, just as would be expected of a far righter who thinks government, other than defense, is bad. A normal president would have seen recession fighting as his job, but Bush used it only for political advantage. He is so detached from anything other than his little war that he seems to be wound up daily by his handler, Karen Hughes, and sent out like a toy soldier to make ha daily speech, saying nothing except how brave we are, what cowards everyone else is, and what a great leader he is. At first it was the same speech, now he has about three variations. This man started running for reelection the day after inauguration and the pace picked up once he had an issue as a guide. Anyone getting in the way is termed unpatriotic. Bush became a popular hero because of the war, but the image is built on a strange foundation. His transformation from a smirking, shallow man interested only in helping his rich friends and big corporations into a great wartime leader is based on his single minded purpose in defeating terrorism. Now his lack of knowledge and interest in affairs of state, his child-like attitudes toward difficulties, his very simplicity, comes in handy. Bush seems resolute and engaged because of his extraordinarily narrow attention span. The focus on getting the evil doers is cast as great leadership, the empty braggadocio as inspiring. The almost daily round of flag waving speeches goes smoothly because he has the three variations down pat. The goofy-friendly manner is most unpresidential, but seems to make him liked. Reagan was a bit that way and got away with his cowboy act, but on him it seemed sincere, and he expressed himself in an intelligent witty manner. Bush overdoes the cornpone and nothing intelligent ever leaves his lips. The war made Bush seem more knowledgeable, but whenever caught in an unprepared situation, he comes across as dumb as ever. His lack of curiosity and thoughtfulness is covered up by flag waving. His handlers won't let him near an open press conference because extemporaneously his still comes across as uninformed and bumbling. It isn't the messed up grammar, it is what he says. What appears to be purposeful is a narrow minded inability to think about consequences. Though he is currently viewed as unbeatablke for re-election, the American people can't continue to fall for this act, they are not that dumb. It is important to remember that his popularity is based on the war, but this was never was a real war. How can the most powerful nation on earth fight a war against maybe 10,000 semi-beggars spread out over thousands of miles. Afghanistan did give us the sole concentration and the leader, but we bungled the job (while the generals and the administration have been strutting about their great victory). We popped off a lot of toys, but the only accomplishment was to driver the hidden enemy more underground and probably increase his numbers. in the worldThe phony war is not going nearly as well as we are told. Everyone but the generals knew bin Laden and most of his followers would get out through Pakistan and might have been cut off (apparently we overestimated them and failed to consider they would move on to fight another day). The U.S. has never shown much flanking ability (good in Iraq and Inchon, otherwise almost always straight frontal assault). From a post Afghanistan point of view, the impossibility of invading other countries is becoming clearer. Now Bush is stuck with a phony over-propagandized war and no place to go. The weird combination of bombast, bombs, and stupidity leaves us not trusted by the rest of the world. Foreigners see Bush as a combination bully-idiot-kid with a lot of scary toys to play with. Bush has to keep going because of the initial failure and the promise of a long war, but mainly because of politics. Despite the propaganda from the White House and the Pentagon, fighting a phantom enemy will inevitably degenerate into ineffective flailing. Since he needs to keep the war going at all costs for political purposes, it has been expanded to a war against "weapons of mass destruction". Iraq is the target, for lack of a terrorist one, but the rest of the world recognizes that Iraq has little relationship to terrorism and they are offended at aggressively invading any sovereign nation. They have seen this before, from the Romans, to Napoleon, to Hitler. As a result, Bush has failed to land Turkey as his mercenary ally and staging base. Apparently the right wing saw Turkey as buyable in exchange for Iraq's oil fields, but Iraq means Kurds and the Turks already have a serious internal problem with their own Kurds. They disappointed Bush in saying no. Europe has turned him down. It looks as if we have to put in our own troops, but there is no chance of the kind of strong coalition of 1990-91. Then we were repelling the aggressor, now we are the aggressor. Europe has long memories of aggressors. Neighboring countries have refused to serve as staging areas. Renewed fighting in Afghanistan is a great break, as would be another terrorist attack (for him politically). Politically he has to go for Iraq as the only alternative in maintaining his popularity, and enough foreign nations will be dragged along to cover up, at least in this country, the resulting bitterness against us. But the move against Iraq would probably harm the war against terrorism by being distracting and building hatred against us. Among the many dumb decisions resulting from these policies is the proposed increased in the defense budget. Bush used the "war" to try and foist off a major increase in defense expenditures. The circumstances of this war make it clear that heavy weapons are a thing of the past. The only conclusion I can draw is that the warmongers want to take in China, probably because they are a growing economic threat. But the lack of need for the new heavy equipment is going to make for a hard fight in congress. You don't need big weapons to fight a small guerrilla war. Bush has missed his period of great popularity to get through needed programs, of which internal defense against terrorism and a long term oil program are merely the most obvious. The reason is that he totally lacks genuine leadership, he ever avoids it because he has no understanding of the problems and holds the right wing position that governmental action is always negative. Bush showed once again that he has no interest in the general good, but will respond to special corporate interests. Certainly Bush has political talent, probably because that is his only interest, but his utter lack of engagement in national policy has led to a failure to use his popularity. The he internal defense program against terrorism is wallowing in ridiculous militia carrying unloaded rifles in airports and color coding. There is no program of any sort, like cleaning up the mess in the immigration agency, or tightening borders, or planning for another Oklahoma City like bombing (a more likely next step rather rather a jetliner bomb). 9/11 made clear that we must eliminate dependence on Moslem oil. Bush could get Alaska approved for his oil buddies, but it has to be part of a long term program to eliminate middle east oil through alternative means. Instead, Bush pushes the oil company line and pretends that Alaska would make us self-sufficient. Since the oil buddies do not want a plan for seriously cutting oil usage, we are unlikely to hear anything from Bush, though the need is so obvious perhaps even he will get the message. Thoughtless policy and an ineffective war have to be covered up. The means are flag waving, propaganda, and a blanket of non-information. This is the most secretive administration in history. What have they got to hide? Why is so little being discussed about the cause of Moslem hatred and how to meet it? Instead, Bush strikes out like a spoiled kid and makes the problem worse. We are sending terrorists under cover, but the resentments that brought on terrorism are growing deeper and more widespread. You can't bomb this kind of fervor away, it must be dealt with intelligently. We are fighting a guerrilla war and guerrilla wars are always embarrassing for the ruler-invader. Guerrilla wars are about harassing the bully boy. The Bushies can't see that it is this is the kind of war. Smash 'em with overwhelming power has always failed in guerrilla wars. We must deal with the underlying problems, for our present policy will only create more guerrillas. The battles go to the invader, the war goes to the home team. We played the invader with overwhelming force once before, and lost that one. We won't lose this one on the battlefield, but we are likely to lose by increasing hatred the point where terrorism becomes a greater threat. Bush can get all the support he needs against terrorism, but when it comes to invading countries just because we don't like then ,it is another matter. There is little evidence he understands the distinction. The war on terrorism isn't a big weapon war. It takes intelligence and working with the home country. The threats and stupid diplomatic moves harm the effort. The manifestation of the corporate culture in the administration is a don't give a damn attitude about anyone else. Arrogance was always Bush's worst problem. You can see this same quality in Ashcroft and Rumsfeld. The right is pillaging Powell because he talks reason and is not sufficiently macho. The results are bad tax policy and hopeless foreign policy. Bush is ruled by hard line right wingers who are dogmatic in doing things their way and to hell with the cost. His skill is in appearing to be a non-dogmatic good guy, but the actions say otherwise.

Market Commentary – March 2003

My work tells me the market is not going anywhere, and if it does the direction is likely to be down. We are probably in one of these extended flat periods that can serve as an alternative to a gut wrenching bottom. I hope so, but what is the evidence we may go down? First, this appears to be a major bear market in the category of 1929-1932 and 1973-1974. Such declines are marked by major changes in the economy and the way the investors perceive equities. So far there is evidence of important change in the economy, though it is probably not yet reflected in stock prices, but investor perceptions have barely begun to adjust. The lack of attitude change is reflected in the way high technology stocks lead every rally, even though their earnings remain terrible and pricing high. High tech products continue to sell well, Dell for instance is selling more computers every year, but profits are down. That is not the magic formula to success, but you would not know it from the price of Dell’s stock. Wall Street thinks it is 1994, with its strategists recommending high equity exposure, and cash in mutual funds at low levels. Investors are waking up, but their minds are still influenced by Wall Street bulls. Bull/bear opinion statistics are positive (heavily bearish), but the all day stock market show has a parade of money managers selling the bull case. Mixed into the bull crowd are a few quiet bears. I suppose it is because I share their point of view, but these people sound thoughtful and intelligent, while the bulls sound like they are pushing stocks for a living. It is also comforting to have Warren Buffett and John Templeton in your corner (maybe you have to be seventy and have gone through a previous secular decline to get a feel for these things). The consumer held the economy together, but now consumer support is weakening. The downtrend in consumer sales gains has not reached zero, but getting close. It could weaken further with employment numbers making no progress and an indication consumers are tightening their pocketbooks because of worry about the future. Some of this tightening is from necessity, revealed in high and rising credit card and other consumer credit delinquency. The buying inspiration from no interest loans is old hat now. More directly, the great mortgage refinancing boom that injected hundreds of billions into the economy in the last two years appears to be over. Lower long term interest rates would extend refinancing, but that is likely only if the economy weakens, so the medicine is worse than the cure. Experienced hands have an uncomfortable feeling about the strength in housing. Every instinct says it can’t last. Enthusiasts say there is no housing bubble, but if not a bubble certainly a boom. If it ends, important support for the economy is removed. Some of the housing boom comes from conversion from apartment living, but apartment vacancies are rising and rents falling, so the mathematics is working against the trend. An end to the housing boom could mean trouble because, not only would the money coming out of refinancing disappear, but prices are likely to weaken, reducing the wealth affect and discouraging consumption. Housing will probably level off or slump a bit, not a catastrophe, but adding to the sluggishness of the economy. The dollar is going to weaken further, perhaps substantially. The happy folk say that is great because the trade deficit will ease as foreign goods rise in price and domestic products become more competitive, but the dollar is already off a lot and the trade deficit continues to rise (many far east currencies, notably China’s, are pegged to the dollar). The trade deficit guarantees that foreigners will be getting a large dollar inflow, but the weakness is leading to unloading those dollars. Our image as the land of opportunity has gone up in the smoke of internet and high technology disintegration. The exploding deficit is not a confidence builder, and our fecklessly aggressive foreign policy is alienating the rest of the world. Not only does this leave us isolated to pick up the cost of the foreign ventures, but it strains any desire by the rest of the world to help us out. We are in a bind. We probably ought to be raising taxes, but can’t in a weak economy, and Bush is so committed to tax cuts he would never reverse course, especially as his father’s responsible tax increase may have defeated his second term. Assuming Bush gets a second term and vigorously pursues the war on terror, we will be breaking new ground on deficits with unknown consequences. We have no trouble financing the exploding deficit at the moment, but suppose the economy picks up and there is demand for money. The right wing economists claim deficits have no influence on interest rates, citing the experience of the last year, but that is ridiculous, of course rising deficits influence interest rates. If the economy picks up enough to create demand for money, interest rates could go up rapidly. Then there is fiscal policy. A swing from a couple of hundred billion surplus to several hundred billion dollar deficit and interest rates going from over 6% to 1 1/4%, has merely succeeded in ending the decline. These numbers suggest that our problems are not the traditional ones. We are suffering a hangover from the greatest speculative blowoff of all time. Bush has no ideas for directly countering this drag. His only proposal is lower taxes, mostly for the upper brackets, under the theory they produce greater savings and greater investment, the old trickle down that lifts all boats. But upper bracket taxes were far higher during our years of greatest growth. There seems to be no connection between upper bracket tax rates and investment, it is a matter of opportunity, not tax rates. Good investments will find funding. With Wall Street having directed investment dollars down a rathole of sexy internet and non-earning high technology companies, and talked industries like utilities into idiotic diversifications, while the government acts like a spendthrift with low return weapons, we are not getting much return on capital. The apparent absence of good investment opportunity expresses the hangover of the speculative bust, and in time will correct, though less so than in the past because we are a mature economy. Not only are investors turned off by losses, the lack of investment opportunity in the U.S. is influenced by, to use one word where I mean many, China. We may be a consumer economy, I think the data is that industrial employment is only 15% of the total and industry makes up only 30% of GNP. It is a precious 30%, however, and the 30% is eroding. I wonder, what percentage of the products sold in Wal-Mart comes from abroad? And what is the trend? We bought a stock called Salton a few years ago. Salton has become the king of kitchen appliances, an original American business. GE, Westinghouse, Sunbeam, and many others in kitchen appliances, are disappearing, some of the brands names bought by Salton. Everything Salton sells comes from China, or a neighboring country. George Foreman grills, new innovative stuff, it all comes from China. Though undoubtedly included in our industrial base, Salton is not a manufacturer, it is a distributor of Chinese goods. We have been able to hold onto larger appliances like washing machines, ovens, and refrigerators, but GE is planning to get out, just as it did small appliances. Is there a message? Have you seen a U.S label on any item of clothing in recent years? Textiles, the foundation business of the industrial revolution, now going. We did save the automobile industry when it seemed headed abroad, so it isn’t a battle we must always lose, but we are losing. I feel the change when it comes to picking stocks. There is nothing exciting out there any more. I feel as if I am picking over the same old tired lists, looking for a stock whose only attraction is its price. Perhaps declining opportunity is why investors lost their head over internet stocks, though the absence of profits told experienced hands it made no sense. I recall visiting WD-40 thirty years ago when it had six employees and distribution only in the west. The opportunity was easy to see, the product was simple, and the manufacturing process was two men stirring a not very large vat in the back room. We hit a home run with Movie Gallery, but that was a special case of combining a weak market for small company stocks and recovery from a troubled period, allowing us in at an extraordinary price. There will be more of those, but how much better to find consistent growth companies. Movie Gallery has a couple more good years, but its market is tenuous, it’s not something to lock away in the safe deposit box. I see opportunity in health care, HMO’s for instance are very cheap, but the medical care area is in a crisis of rising costs, and HMO’s have not proven to be the hoped for answer. Being a price opportunist, I operate well in a flattish market, but I hoped a major bear market would allow us to get into solid long term situations in my old age. Drugs, maybe, but the growth rates are skidding and they are coming under more and more pressure because of runaway health costs. Remember how drugs plunged under the Hilary threat in 1993 and 1994? Well, we are going to end up with a Hilary-like plan to control medical costs (though not under Bush). Considering everything, I think it will be a break if the market follows the hinted direction and goes a lot lower. Then we can get the opportunity to make real money before I lose my eyesight. Maybe I should become an expert on China, but its too late to teach an old dog new tricks. Besides, those guys who claim to know all about foreign stocks don’t do as well as I do. I have been too gloomy lately. Next month I will write about the good stuff. I smell a good year out there, if I can avoid losing too much of your money first (we are off 4-5%, not bad considering that our companies are issuing one bad news bulletin after another, though discouraging with a 30-35% cash position and another 20% in conservative high dividend payers).

An American Aristocracy? – March 2003

In trying to figure out why George W. Bush bothers me so, I may have found the answer in the book, Founding Brothers. Adams and Jefferson had years of correspondence after retirement and in discussing the differences between the U.S. and Europe they got into an argument over aristocracy. Both believed that superior people must provide leadership, but Adams leaned toward the idea that ability was inherited and Jefferson thought the cream would rise to the top in a free society regardless of inheritance. Of course, Jefferson’s view is the heart of democracy and it made this country, but in their day the ability of a common man to rise from nothing had not yet been demonstrated. The Virginians, especially Washington, Jefferson and Madison, were of the landed aristocracy, if not so much by inheritance as by force of personality and rich wives. Washington appears to have taken on imperial airs as president, but his deeply felt sense of justice and common sense made him a true democrat. Ironic that the Boston (Adams) view is pro-aristocracy, but it makes sense: Adams was the only founding father with a son, who later became president. Both Adams’ were among the least successful presidents (both were one termers). My discomfort with Bush arises out of experiences in school with those I call "WASP elites". Some elites were smart and had a lot on the ball, but their attitude of entitlement made them ill-equipped to govern in a democracy. My partiality does not eliminate everyone. Jim Baker, a Princeton classmate, was definitely a WASP elite, Texas version. Baker, though, is different. I don’t know how he got into running campaigns, but as I recall he first emerged running Ford’s reelection, then Bush’s run in 1980. Both were defeats, Bush’s leaving his supporters with an empty feeling. He acquired the designation "wimp" out of that campaign. Despite these failures, Baker so impressed his rivals that he was invited to run Reagan’s campaign. Then as part of a triumvirate in the White House chief of staff position, he rose to the sole post, even though the other two were Reagan cronies. He then maneuvered himself out of the White House into Secretary of the Treasury in the second term, ran Bush’s successful campaign, then got State. Bush’s wife blames the second term loss on him for not taking charge of the campaign from the beginning, indirectly a huge compliment to Baker. Then Baker masterminded the stealing of the 2000 election for his old friend’s son. This is a wildly successful man whose proven ability easily overrides my objection to WASP elites. So, what is the difference with Dubya? It starts, appropriately, with father. He earned the wimp label, despite flying off aircraft carriers, phi beta kappa, success in business, and an amazingly varied career of important appointments. When he got the leadership of the country he came across as a nice guy, but weak. His great triumph, the Iraq War, turned to nothing by an unwillingness to follow through and throw out the most oppressive dictator in the world outside Africa. I still recall discovering with amazement during my St. Paul’s reunion in 1993 that a majority of my class had voted for Clinton (more class members went to Yale than any other college, as well). They had a kinship with Bush and he didn’t come across as a winner, so they voted against him. Now we get sonny boy, unlike his father a man of no accomplishment (if you can say that of someone winning the biggest prize in the world) and who indeed appears dumb. Partly it is father. If father didn’t have it, why should son, who seems a man of much less ability and certainly much less experience. Son is a better politician and a forceful schmoozer, but can you make a presidency on those talents? After reading the book, my feeling developed around the Jefferson/Adams exchange over aristocracy. The trouble with Europe and the rest of the world, the reason we ended up on top, is that we don’t have aristocrats and are led by men who rise on the basis of merit. There is no inherited station in this country. Yes, there is inherited wealth and Rockefellers and Kennedys did become successful political leaders, but they are the exception and the Kennedys would not be considered aristocrats. Money undoubtedly did it for them and money does talk in this country, but these families produced outstanding individuals. Aristocrats in the old world originally earned position through ability, but after generations passed and the successors retained position without ability, aristocrats dragged down those countries. In Dubya I think we have an aristocrat who didn’t in any way earn his position. He got there purely and simply because of his father. Papa had a senator father, who was apparently a very forceful figure, but Bush Sr. did make it on his own. His route to the presidency was a strange one: almost 20 years of appointed positions of stature (first envoy to China, UN envoy, head of the CIA, vice president), in none of which he made much of an impression. If his resume is strange in the variety of appointed positions, it is still remarkable. Dubya, on the other hand, would probably have been a total loss without father: no Yale, no Harvard Business School, no Texas Rangers, no governorship, no presidency. He is just another good time Charlie, probably a broker in the Houston office of a Wall Street firm. And that, I think, is what bothers me about W. We don’t want sons of aristocrats as our presidents. It is a sign of a weakening nation. On the subject of aristocracy, Adams names five pillars: beauty, wealth, birth, genius, and virtues. To me W qualifies only on birth. These qualities may provide a clue to the visceral hatred of Clinton. The president by his very position becomes an aristocrat. In Clinton’s case, he wins on beauty and genius, perhaps the two qualities most likely to provoke jealousy. He failed on wealth, birth and virtue, which led to an almost pathological hatred among those who consider themselves aristocrats. They could not accept such a man as one of them. Since he was an impostor, they felt justified in sleezy maneuvers to bring him down. The sense of entitlement among American aristocrats may actually have won the election for Dubya. The anti-Clinton ardor among the elite got them to thinking that any means were legitimate to win. This sentiment slipped over to Gore, whose great shortcoming as a potential aristocrat is an absence of beauty (even Tipper got fat, taking away some of his cover). I could never have imagined anyone attempting to win an election restricting the vote, as the Republicans did. I also could not have imagined that the Supreme Court would intervene decisively where they did not belong and endorse the act of restricting the vote. Baker, on the other hand, understood that enough justices felt they belonged to the aristocratic elite and shared the anti-Clinton/Goreism. Thus, he had the vision to push on to the Supreme Court despite being summarily rejected in Florida and the regional federal courts. Visiting this subject raises the question of whether we may be developing a wealthy positional aristocracy. Dubya himself is the best example. One of the foundations of an American aristocracy is elimination of the inheritance tax, something the new president is passionate about (noteworthy for a man who is not passionate about much). Recently, I heard a far-righter say, “I challenge anyone to find a justification for the inheritance tax.” The justification is to reduce the possibility of creating a moneyed aristocracy in this country. The proliferation of $100 million and up individuals may pose a problem in the future, for a 55% tax on a billion still leaves $450 million. Many of the very rich I have known share my feeling. The foremost example is Warren Buffett, who points out the critical role the estate tax plays in promoting economic growth by helping create a society where success is based on merit rather than inheritance. He is fearful that leaders will be created by money rather than competition. "Without the estate tax you in effect will have an aristocracy of wealth, which means you pass down the ability to command the resources of the nation based on heredity rather than merit". One of the most interesting developments of Bush’s stand on eliminating the inheritance tax is the banding together of a group of wealthy people to speak out against the proposal. This is a matter that both expresses Bush’s aristocratic viewpoint and his political incompetence at the policy level. He sees what is beneficial to him as good for everyone, when his interests are far apart from what helps the man on the street. He just does not get it when it comes to his personal prerogatives and in the end that is likely to bring him down.

Market Commentary – February 2003

Having progressed about half way through the quarter's earnings reports, I am altering my view that the market remains severely overpriced. That judgment is true as determined by the price earnings ratio on the S&P-500, still about twenty-eight times earnings, but the reported number is skewered to the high side by many companies with losses and the high price of its high technology components. For most stocks, the price is neither high nor low, but some where in the middle. I am finding one company after another with a PE ratio in the fifteen to eighteen range, neither attractive nor notably unattractive. What I am not finding is bargains. After such a severe bear market, this is disappointing and unusual. Every bear market in memory has generated great buys, so the absence is not encouraging for the market. From these observations, I draw a number of conclusions. First, the direction of the market will be determined by whether or not the economy comes back and earnings advance. Off a low base, profits have jumped back, but at a level far under the previous peak, and there is no sign that the economy is picking up to serve as a basis for further gains. The majority of companies continue to warn of slowness. In each of the last two years, the experts assured us of a second half rebound, and it didn't happen. Will it this time? Who knows. Optimism about a pick up seems to be based less on solid evidence than the feeling that an upturn is inevitable after such a long period of slowness. On the other hand, the economy looks slower from a long term perspective. One industry after another is losing out to foreign sources. Sometimes the company is merely contracting out its manufacturing and profits do not suffer, but domestic jobs do. The latest I have come across is furniture. We are winning the arms war, but losing the economic war. Also suggesting non-growth is a worldwide trend is to flatness. It started in Japan long ago, and for years Europe has failed to achieve a sustained pick up. Why not us? The Fed has shot its bolt, though it could simply print money. The administration shows little interest in programs to boost the economy, rather it is using the need for help as an excuse for more tax breaks for the rich. Not much stimulus there. Second, forget the talk of Iraq war fears holding back the market, that is baloney. The economy is what counts. Will Iraq help or hurt the economy? Again, who knows. One thing for sure, we will pay the full cost of this war and its aftermath is going to be very expensive, so no war is probably the best alternative. And the market seems to do better when there is hope for no war or a coalition war. If we do get war, the already declining dollar will weaken, foreign money will continue to come out of our market, and deficits are going to explode (they already have). Sooner or later, that will lead to higher interest rates, not exactly a help to the economy or the markets. The Bush administration's international aggressiveness introduces a new equation to the stock market, and it is not likely to be a positive one. Third, if the bear market is over, any recovery is apt to follow the pattern of recent months: a hesitant back and forth movement. Major bottoms of the past, 1932 and the end of 1974 come to mind, were made because stocks had gone down too much and were extremely cheap. On both occasions, the economy remained weak, but prices had reached an extremity of valuation, and stocks went up regardless. That is not the case this time. As I suggest, stocks may be close to fairly priced, but they are not cheap, the norm at the end of a major bear market. As a result, any recovery in stocks will be gradual. Finally, I see nothing in the technical pattern to suggest that we have entered a new bull market, therefore as a believer in the trend, I have to presume that we remain in a bear market. New bull markets identify themselves by broad based strength. On a stock by stock basis, bad news has little affect because stocks are washed out and ready to go on favorable news. In recent months we are still experiencing disasters of the day. The market does not look right, and when you wonder why, there is no difficulty finding reasons. I never try to guess the economy, I look at what the market is doing and assume the economy will take the cue. The present cue is stagnation, with a high risk that the outcome will be negative because there is no indicated trend change. The non-taxed dividend proposal is the most interesting new front for investors. Double taxation of dividends has been around for a long time without harm to the economy, and the timing for a change is terrible since it provides only minor stimulus at the cost of adding to a soaring deficit. But our economy seems to need help, and the Bush proposal may indicate a movement toward comprehensive overhaul of the tax code (I think Bush is reckless, but that is not all bad). Making dividends non-taxable to corporations, rather than to individuals, would be a telling move, so that in its present form the proposal is not all that bold. If the benefit went to corporations, they would increase dividends significantly, at ultimately greater benefit to stockholders, earnings would get a considerable boost, and the stock market would probably recover. Moreover, the preference for debt to equity would be substantially reduced and balance sheets improved, a plus for the bond market as well (though a lot more stock coming into the market is negative). The present proposal has not been well received, even by Republicans, but resistance may work out best. Once the debate is under way, the benefit might be shifted to corporations. In turn, that would mean such a loss of revenue at a time of mounting deficits that the entire tax code would have to come under review. The Bush idea has stirred the pot, maybe something unexpected will happen. Although we are unlikely to get the fully untaxed dividend, we will get something. Investors were already looking at dividends as a surer way of making money in stocks, and whatever we get will further stimulate interest. Our stocks have been in a strange pattern since the October low, particularly this year. We ran way behind the sharp upmove in early January, then did much better than the market once it sold off. That pattern continues on a day to day basis - we don't do much on the big up days, but decline only slightly, sometimes even have a small gain, on the big down days. Since downers have predominated in the last three weeks, we look OK. But the pattern is strange. I think it says we are in the right stocks, that the rallies have been led by the wrong stocks, and if this market ever gets straightened out, with sound stocks going up and speculative ones trailing, we will do well. If a third bottom in the range of the August and October lows holds, we should get another strong rally. If so, I have solid candidates warming up in the bullpen that have not been bought because the market looks so bad.

Adolph Bush – February 2003

"Anesthesia, no matter how well administered, eventually wears off"- Frank Rich, N.Y. Times I have had an eerie feeling about George Bush from the beginning. He seemed a spoiled brat of no accomplishment who must be a poor president. That his vision did not extend below his own social level has been confirmed by his only domestic program, a determined effort to lower taxes, a policy that largely benefits the rich. Although he has done a remarkable job gaining political popularity, he has not dealt with the troubled economy and his policy of international aggression has earned us hatred all over the world. Despite the record, he is popular. How? Two factors are responsible: 1) he has developed into a brilliant politician and 2) he has skillfully played upon the emotions aroused by 9/11. Let us look at the record to see if the popularity is deserved. As background, Bush has little interest in government policy, and as a result the administrative side is left to others. At the same time, he is keenly interested in keeping attention focused on himself, so that other cabinet members do not get any notice. The result is that no one knows what is going on in this administration. That is important because obscurity has allowed the right to carry out anti-government programs unobserved. Some of what they are doing will end up as positive, but it is suspicious because of being done on the sly. Meanwhile, the game of politics is what entrances Bush, he merely adopts an issue here and there for its political impact. As for domestic accomplishment, he pushed for and got a mild version of an education program, but the changes have never been funded and it is now forgotten. It was compassionate impressionism, and the right does not like government programs of any kind. The main Bush program, the one he ran on, was a tax cut. Remember, give the people back their money. If the economy had kept going, Bush would not have gotten much, but fortunately for his tax program, he immediately ran into a recession. Now tax cuts could be economic stimulus, and suddenly were wise. We ended up with a new tax law far different from his proposal, but Bush got credit for it anyway, although it was a bipartisan effort at economic stimulus. The early benefits went mostly to the lower brackets, the upper bracket cuts were delayed, and the entire plan was set to expire in ten years because wiser heads were aware that financial pressures will mount after 2010 because of a major increase in retirement. Bush was not satisfied and almost at once began pushing for acceleration of the delays in the high brackets. When the Democrats made an effort for further tax moves because the economy remained weak, Bush pushed harder for acceleration and also for making the law permanent, not a sensible cause with any tax law, especially with deficits exploding. To defend the high bracket cuts that became increasingly questionable with the need to boost the economy, the president pulled a twist that has become his standard mode of operation, tagging any effort at changing the tax law as a tax increase. The notion that curtailing the reductions that had not yet taken place was a tax increase is ridiculous, but it seemed to create the desired impression. Not only did he use the need for more stimulus in this way, he introduced yet a further high bracket focused request to make dividends tax free. You could hardly get less stimulus for the dollars lost, yet typically Bush pushed it as a stimulus program. Bush's lack of interest in a truly stimulative tax program derives from an overriding belief that no one should be taxed at more than 25%. If that leaves the government short, then cut government. This is standard right wing dictum, but abrogates present management of the government and the economy. This fiscal irresponsibility comes out of Bush's lack of interest in economics. He simply ignores economists, as reflected in the departure of his entire economic team because no one was paying any attention to them and they were insufficiently cooperative in bending their economic beliefs to his political needs. Being on the Bush team means blindly following whatever he wants. He has never proposed a program for specifically dealing with the weak economy, as Clinton or Gore would have, a problem because we seem to be facing a new and more intractable situation. The style of baiting with high sounding motives and switching to a hidden intent first appeared in the tax area, and has become Bush's keynote, repeated over and over. For instance, the call for a prescription drug benefit started as a disguised attempt to curtail overall medicare benefits, while appearing to be the compassionate supporter of the aged. Something has to be done about soaring medicare costs, but rather than attacking the problem frontally amid careful study, we get a program aimed at tricking people into getting out of medicare and medicaid through a drug benefit (drugs may be expensive, but they are a minor factor in rising medical costs). The hydrogen power research project is fine, but it is an attempt to cover up despoiling the environment. Bush initiatives are almost always based on putting a favorable light on something the American people would not approve if addressed directly. Tax benefits of his programs always appear as averages, where huge benefits at the top average out reasonably well, but the median taxpayer often gets nothing. He uses statistics in the most dishonest manner, something all presidents are guilty of, but never to such an extent. Another example of domestic deviousness, escaped through the distraction of 9/11, is the business scandals. The Enron blow up could have been disastrous, for big business created the Bush candidacy, and Enron was his foremost corporate supporter. It had gotten several people into the administration, including a cabinet member, and its fingers were all over the proposed energy program. Suddenly, the very corporate leaders responsible for Bush's rise were revealed as greedy cheats using their position at public corporations to line their own pockets. Bush's problem was compounded by his man at the SEC having sworn to eliminate the reforms of his predecessor (standard practice for anti-regulation Bush). One gaff after another led to SEC chief Pitt being canned, but again Bush pulled a slick one, naming an old Wall Street hand to head the SEC, where he will be in position to protect the interests of the major brokerage companies. Again, Bush displayed that his loyalties always lie with corporations and the rich, he never has any interest in the common good. During the Enron and accounting fuss, Bush stuck loyally by his business constituency and would not hear of reform, until the Worldcom bust created such outrage that something had to be done. Only then did he sign the Sarbanes law increasing the powers of the SEC and adding supervision to the accounting industry. After signing the bill and rendering his usual tough guy speech about locking up the crooks (his backers!!), the president went right back to fostering his business supporters. He sought to undermine the new law by under-funding, to defang the new accounting oversight board by appointing a bumbling old man with little knowledge of accounting, and to protect the besieged brokerage industry by appointing a Wall Street stooge as new head of the SEC. Bush's most repeated act of governance has been sabotaging regulation to the advantage of his corporate and Wall Street supporters. They put up the money and he dishes out the rewards (it's called loyalty, a trait he admires above all others). With 9/11 arriving almost simultaneously with Enron, Bush had lucked out again. He is fortunate in having a soft press. The right wing press would have crucified a Democratic president under these circumstances. The Democrats don't have that kind of opportunistic partisan support, and the legitimate press seems to have a guilty conscience because of unfair treatment of Clinton over White Water. Another difference seems to be that Clinton drew an automatic distrust that went with an over-smart over-sexed poor boy from the sticks, whereas Bush has an establishment propriety that creates a clean impression. One of his most remarkable feats is maintaining an aura of cleanliness despite support for corporations that would normally be considered suspicious. Bush escaped unscathed from this contemptible record not merely because of 9/11, but also due to a knack for being perceived as a man of the people. That is no mean feat for an upper crust Ivy League aristocrat whose vision does not go beyond his own tax bracket. How did Bush get away with this favorable impression? There are a several parts. First, he has no personal interest in right wing, or any other, policy, ideology is not his thing. He is a politician who wants to get elected, and that is the only thing on his mind. Gingrich loudly positioned himself behind the right wing program, opening himself up for counterattack. Bush is silent. He leaves the dirty work to Cheney and those actually running the government, who operate quietly, covered by the headline grabbing Bush ranting on taxes and terrorism, Osama and Saddam. What little involvement Bush has is in backwater issues like education and stem cells. When questioned on domestic matters, he changes the subject by answering in terms of tax cuts or fighting terrorism. He can turn almost any question into getting Saddam, or earlier Osama. In control of the forum, he simply does not answer questions that might be embarrassing. In a recent conference on the economy with a group of financiers and economists, they got nothing, everything led to Iraq. Press sessions are used for propaganda about tax cuts and war on terrorism. He takes full advantage that anything he says is news, no matter how innocuous or repetitive. The 3/6 press briefing was a total loss from the point of view of actually answering the questions, and when anyone tried to follow up, he moved on. Using this formula, he no longer seems the idiot before the press because he never allows himself to be trapped in anything of substance that might make him appear awkward. But I want to pose a question - how can you trust a man who won't answer simply questions? The Bush presidency has marked a new phenomenon on the American political scene, management of the daily news to create a favorable impression of what is happening and what they are doing, taking advantage of the average voter's gullibility. Right wing opinion molders are skilled Wall Street traders taking advantage of the public's emotions. Their remarkably success has extended to taking over whole TV networks, and continually planting their people on talk shows as experts, or using their business influence to get far right programming, as in a show by a panel of the Wall Street Journal editorial staff. The ordinary listener is unaware that it would be hard to get more to the right than this gang. Next in the Bush act is the Texas cornpone drawl. Bush, the eastern establishment Yalie, has succeeded in pulling off a kind of slow, barroom-casual, slurred country speech with a gospel evangelical tone that makes him seem exactly what he is not. His acting has improved immensely, supported by a schedule that in a typical week includes four carefully scripted appearances outside the capital. Like no other president, he is always on the stump. No president has ever made so many speeches, or had so many speech writers. This is his role, and he is good at it (lately the cornpone drawl has been curtailed to appear statesmanlike). Others run the government, he makes speeches and smoozes. This is covered up by the press reporting everything as a Bush initiative when he usually has nothing to do with it, while cabinet members and staff have disappeared from public view. The minions are coached to praise his participation and judgment. The effort to built up the boss is orchestrated on a scale never before seen in American politics. Speeches are not directed at a specific topic, but at personal image building. A keynote to the Bush presidency is his extraordinary self-centerness. Here is an example, drawn from a puff job book by one of his speech writers. The speech writer writes what he considers a good speech on some subject, and Bush, who spends a great deal of effort editing, had marked up the speech so badly that the speech writer asks, what does all this mean. The answer, "you don't get it, the speech is about me", not whatever the subject was supposed to be. That's Bush, detached from events, but absolutely determined to hog whatever credit is available and ceaselessly working on his image. Let's face it, that's weird, weak, and most unfortunate for a president of the USA. It is a vital job, not merely a stage for enhancing image. The most remarkable example of the emptiness of Bush's domestic policy, and a foremost example of his political cleverness, is home defense. Following 9/11 you had to be blind not to see the need for a program of home defense. Bush did nothing, encouraged by the right wing abhorrence of any government program other than defense. The only exception was a massively overdone airport security program to salve the public and give an impression of activity. From a practical point of view, the airport set up is ridiculous, but it was good showmanship. Inaction on home defense brought the Democrats to attempting home security legislation, only to pull back because Bush was opposed (we don't want another government agency). The Democrats blew a heaven sent opportunity, failing to recognize that the Republicans and Bush could never have vetoed such a bill. When hearings about the shortcomings in intelligence and lack of action elsewhere captured the news, Bush, with an ever keen political ear, quickly slapped together a proposal for a massive new agency. At this point Bush's politically devious mind reached the point of brilliance. He proposed that the new agency not abide by civil service standards, a maneuver that put the Democrats in a bind because of their labor constituency (since a major reduction in civil service jobs was involved, the old personnel system will continue). Bush was then in position to assert that the Democrats were sabotaging home defense! You gotta love a guy able to pull off a dirty trick like that, real genius. As the election approached, he emphasized the imperative need to act immediately (when Bush finds a new political cause, it must always be done immediately), and the Democrats were holding things up. This affair was hilarious if you have no concern about truth and proper management of the government. With no program of his own and little interest in government, he feels free to work all the political angles, but you have to ask yourself if Bush recognizes the seriousness of his responsibilities, or is someone having fun playing games. The home security department is likely to be a mess, because Bush's interest does not extend beyond political expediency, confirmed by the unwillingness to fund new initiatives (admittedly hard with an exploding deficit). The massive, slapped together department is the wrong way to go about a serious task. It is almost as if the new department was sabotaged in its creation because the right does not believe in government programs. Eventually, another terrorist attack will be a great political event for Bush, and he can build capital throwing money at whatever area is hit, but the concept is prevention. Why would we, a democratic nation, be attracted to a man with no compassion for the public good, who supports survival of the fittest laissez faire capitalism that led to the rise of socialism and Communism two hundred years ago. The answer is that he is expert at covering up his true direction, achieved through clever political maneuvering and distracting the public with fears of terrorism and warlike revenge. Social programs will be smothered in a rising federal deficit, exactly the purpose of right wing reactionaries in control of policy. The opportunity to do something about a rotten financial system is already going by the boards, just as these people want. Moderate Republicans, who might have restrained the extremism, have knuckled under, impressed by the right's winning ways. The right wing program is impossible to understand until you realize that destroying programs they regard as socialistic is their goal. It is as if our form of liberal democracy, marked by the union of capitalism and governmental regulation in the interest of fairness, had not proven itself. These people want to go back to the jungle, to policies that failed long ago. They recognize that the law of the jungle will not sell in a democracy, so it has to be hidden behind warlike bluster, tax cuts that sabotage social programs, and dishonest numbers. The tax cuts were not intended to give back "your" money, but to destroy a surplus that permitted emotionally hated government spending (anyone looking at the numbers knew the surplus was a temporary bull market phenomenon). Huge deficits are of no concern because they foster the anti-government program. No one knows the consequences of soaring deficits. This president is recklessly playing with our future in support of right wing ideology that is not favored by the large majority of people. Unanimity gives the right wing a force far beyond its numbers, but a one directional government lacking debate inevitably becomes undemocratic. Employing expertly drawn myths of politically clever people like Bush, they are fooling voters. The sad part is that some right wing programs are fine, I think particularly of tort reform, a serious effort to trim costly bureaucracy and excess in government programs, and overhauling the tax system, but Bush shows no interest in these because they lack political impact. Reagan believed in the right wing philosophy, but he was a fair person and did not attempt to stuff it down our throats. As a result, not much happened. Cutting social programs is nickel and dime stuff that could help, but takes years of serious effort. Defense offers the only potential for substantial cuts. But the right remains determined and they have learned to work behind the scenes and cover up their actions. These people are both clever and ruthless, they know how to use power once they get it. The right needed a politically astute cover up artist, and they found one. Bush himself seems to believe in little other than that no one ought to pay taxes of more than 25% of income, but that position plays into the right's hand, and he is happy to lend his support for political assistance. It is testimony to Bush's absence of vision that a man so devoted to politics, an apparently devoit Christian, with no real interest in right wing causes, could allow himself to be maneuvered in these directions. In fact, Bush is our best hope of preventing right wing extremism. Being intensely political, he shows some appreciation that right wing positions could cost him a second term. Meanwhile, we are left with a domestic policy of inaction because the right wing program is to tear down. When all is said and done, we are a democracy and the right will lose. A government that lives off misrepresentation will ultimately fail. In both economic and international affairs, this administration is an utter failure. It can use war to distract the public only so long. If Bush's domestic policy is a blank in the face of rising problems, foreign policy is a disaster. Bush started out on a strange course, doing his utmost to offend other nations by abrogating old treaties for no apparent purpose and backing out of virtually all worldwide cooperative efforts. Again, this is standard right wing dogma, and it has now come back to haunt him over Iraq. The overwhelming factor in Bush's success at home is the war. 9/11 may be the luckiest event in presidential history, and the least lucky for the rest of us. The Bush popularity outside the right wing could not have been sustained without the warrior cover, for the difference between what his administration is doing and what he claims it is doing is just too great. 9/11 came to the rescue. You have to hand it to Bush, he realized the latitude the terrorist attack provided, and its ability to turn him from a bumbling aristocrat into a down home national hero. "War" provides an excuse for politically advantageous propaganda to deceive the public, justified as in the national interest. Let us go back and look at his war on terrorism, which has rescued a political career headed for the rocks. While it made Bush, the war on terrorism has not amounted to much. Freeing the oppressed people of Afghanistan was never our purpose, it had to be substituted when we failed to get Osama and most of his followers. When the terrorists holed up in Pakistan, Bush chickened out on chasing them down, as promised, and the war was fading away. Now his loud bombastic threats, so politically successful sat home, so outrageously viewed abroad, looked hollow. Something had to be done. Bush pulled another master switch by turning attention from Osama to his father's old enemy, Saddam. Rumsfeld had been talking about getting Saddam all along, now was obviously the time. Although there has never been any evidence that Saddam participated in international terrorism, he has potential for becoming dangerous, he was a most oppressive ruler, and he had defied the arms control agreement from the beginning. Going after him was a reasonably logical next step. Iraq also had the advantage of offering a big target, when it looked as if terrorists would present no large objectives suitable for our big arms approach. The war on terrorism was hard to make a real war. A "war like no other war" covered up the reality that al Qaeda was nothing more than a few thousand ragtag religious fanatics (even including other terrorist groups, you are not talking about even a small army). We could not fight them with massive forces, it was a more subtle job. Such a "war" is better seen as a patient police action, using a combination of reaction and prevention. Terrorism is a common phenomenon around the world and many countries have learned to live with it, as we are going to have to. The Cheney/Rumsfeld warmongers came up with a solution. Using the concept that terrorism can't survive without state sponsorship, they determined to fight or threaten into submission terrorist sponsoring states, but a base was needed and Afghanistan was not suitable. Iraq was the key: take over Iraq, which we had a reasonable excuse for doing, and use it as a base against the rest of the Arab world. Oil gave Iraq the potential to be a successful economic nation, and we might be able to establish a successful democracy. Bush then utterly butchered the Iraq program. He led off with his usual lionlike roar of emotional threats directed not only at Saddam, but at anyone questioning the legitimacy of such a move. Overstatement has continued ever since, leading to a failure to make a plain and simple case that was strong without invective. Having alarmed the rest of the world with his fevered ranting, Bush then made the mistake of yielding to Powell and going to the U.N. As delay met delay, and we became ever more shrill, we looked increasingly unhinged to the rest of the world and turned them against us. As a final indignity, we are threatening those who have a vote in the U.N. on proceeding against Iraq. Now we are backed in a corner where we have to go, and alone, or appear weak. Meanwhile we have the earned the hatred of the rest of the world and stirred up a nuclear hornets nest. What should Bush have done once the decision was made that Iraq was the next step in the war? First, the American people, as well as the rest of the world, needed to be convinced this was the right thing to do. Having looked at the facts, I believe this could have been done, but we never made a reasoned case. Bush screamed about evil ones and imaginary terrors Saddam was about to unleash, blowing the argument with juvenile bluster. The performance was so bad that the rest of the world began to wonder if Bush was not a lot more dangerous than Saddam. Many Americans and most foreigners were turned off. Clinton, for instance, or certainly Albright if Clinton was too hard a pill for them to swallow, could have been enlisted in support after all the troubles they had with Saddam, adding great strength to the argument, but the Bush presidency is all about Bush. He could not pass up the opportunity to swagger. The idea of a joint and thoughtful effort where he would have had to share is completely against his personality. Powell should have been send around the world in a diplomatic effort to re-form the coalition, and while it is doubtful he would have succeeded, he probably could have gotten a promise to sit on the sidelines. In the meantime, we should have been building our forces, the only hope of getting Saddam to give up. Powell was a liability in wanting the UN and was simply wrong that Saddam could be scared into leaving without troops breathing down his neck, but Powell should have been told to get on the team (Powell seems to be the only one that can get away with defying Bush, and if he were not black and the only one in the administration foreigners trust, he would be gone). Meanwhile, Bush continued his effort at intimidation, even going before the U.N. and threatening them with talk of irrelevance. The Bush U.N. speech, seen as great here, was a disaster internationally. You don't build a coalition by insulting potential allies, a high school graduate knows that. If we had moved ahead it would all be over now. Instead the world has lined up against us, we are supported only by those directly threatened by Saddam (the oil countries in the mideast), and a few bought off others and small countries sucking up to us for one reason or another. The people in every one of our so called coalition partners detest what we are doing, while we blithely brag about all our support. U.S. voters buy the sham, the rest of the world is appalled at our dishonesty. When you put the Iraq package together, it is difficult to recall a greater diplomatic fuck up in the history of the world. The idea of fighting the war on terrorism through a takeover of Iraq is intriguing, and it might work, but the odds are long. Sitting right in the middle of the Moslem terrorist world allows us to strike, but it also makes us highly vulnerable to terrorism. A military government in the land of the enemy is an ideal set up for guerrilla warfare and terrorism. It is not unlike our situation in Viet Nam, not to mention Somalia and Lebanon. It could work, but there is plenty of reason to bet it won't. Given the added factor that the cost will be huge and ongoing at a time our deficit is soaring, the wisdom of the move is even more questionable. It is a reckless gamble by the combination of a president who has never shown any willingness to think out problems and a militarist clique that has taken over our foreign policy. The polls say it is good politics, and that makes it right for Bush. Another important factor weighs against invading Iraq, the moral one. The Iraq invasion and what will follow is devastating for our position as the great land of peace, principles, and fairness. Strange that a group of evangelically inclined Bible pounders could go off on such a course, but the grouping of militarism, anti-government, and evangelical Christianity characterizes the hard right. What they overlook is the tragic break with our history and the principles that made us great. It not only saddens the rest of the world, but turns them against us. Imagine the U.S., founder and inspiration of the U.N., who worked for 58 years for peace with its help, threatening its very existence to satisfy our thirst for revenge about 9/11. It's a very sad day for America. An even more tragic consequence of Bush's loud-mouthed menacing is the sudden re-emergence of a nuclear threat. In our college days after the war we envisioned a chaotic world of A-bombs in the hands of irresponsible small nations. It never happened because the world was mostly at peace and responsible countries made an effort to keep A-bombs away from that sort of country. Suddenly it is real because of the threat we pose to the rest of the world. When you parade about threatening everyone, the other side is going to look for protection. The only protection against us is the A-bomb. Why didn't we go after Pakistan, where al Qaeda retreated? We felt its government would control terrorists, but after all the threats about harboring, others took note that Pakistan had the bomb. The "axis of evil" is probably the dumbest remark ever in a state of the union address. For a dramatic sound bite, he neglected to consider what Iran and North Korea were likely to do after being singled out. I doubt any other president in history would have acted so irresponsibly. Iran had to have accelerated its nuclear program and we have seen the reaction in North Korea. Bush had already threatened the 1994 nuclear control agreement with North Korea, apparently just because he decided he didn't like its head man, or anything accomplished by Bill Clinton. To compound the idiocy, we refused even to talk to them, though from every indication North Korea appears to be looking for a bribe, something similar, though undoubtedly more costly, than the agreement Clinton worked out. This is arrogant stupidity on a grand scale. Bush may have accomplished the inconceivable, let the nuclear genie out of the bottle. If it was a Democrat, the right wing would be screaming impeachment, but Bush has the public worked up to such a state of blind patriotism that few noticed this incredibly folly. If history is a guide, the Bush administration foreign policy is headed for a serious accident. The foundation of that policy is to get our way by war or the threat of war. These people are off in groundbreaking direction (for us) that has historically been tragic for any nation going down that path. The haughty, uncooperative, muscle flexing aggression probably originates with Cheney, and Bush glorifies in the Falstaff role of muscle flexing leader. His fixation on himself is the clue to Bush's willingness to do something so stupid. The precipitous break with our peaceful honest broker tradition is rapidly making us the most hated nation in the history of the world. How can the world's most hated nation be other than an inspiration to terrorists? The disastrously flawed international policy is part arrogance, and part Bush sounding off for votes at home. Loud-mouthed bully-boy talk by the leader of the world's most powerful nation could hardly be more counterproductive, but it has succeeded in driving the American people into a kind of get 'em at all costs mood that generates popularity for himself. As a nation we have reached that peculiar state of mind where doing anything thoughtful is shouted down as appeasement. Few of us at home, though many overseas, have noted that the Bush approach - playing on the psychology of revenge, threats aimed at raising the temperature of the people, heavy doses of propaganda about questionable successes and impending dangers, and, above all, focusing attention on ogre villains - is a political program developed by none other than Adolph Hitler. Hitler succeeded because of the depressed state of morale in Germany following World War I; Bush is succeeding because of the shock to American's feeling of safety at home. Bush has surprising personal similarities to Hitler, such as the intense interest in politics and disinterest in the governmental process, an insistence on absolute non-discussive loyalty, and self-important talk of being a great leader (embarrassing for a normal person). The effort is to transform the boasting into an image of tough guy fighting leader in whom we should place unquestioning patriotic trust. Sadly, it is working for Bush, as it did for Adolph. I do not want to make out Bush and Hitler as the same when they are obviously different (Hitler would be insulted to be equated with such an airhead). The point is that the political tactics being employed by the Bush administration are right out of Hitler's book, and Bush is ideally suited to carrying them out. The Bush role is to sell a Hitler-like course to the American people, and it is altogether sad that he has succeeded, while his impetuous rhetoric hastens our loss of esteem. We are going to win the battles, but lose the war, for nations that have behaved this way in the past (the you-know-who lookalike again) have always come to grief. The old saying, power corrupts and absolute power corrupts absolutely, is coming home to roost in America. It may be the saddest time in our history. Already the tough talk is beginning to bring on one crisis after another. In all the politicking, Bush has become a man who never tells it straight. He relates non-taxed dividends to job creation and helping small business, though the thread is thin and the major beneficiaries elsewhere. Prevarication is less noticeable in one whose public conversation amounts to silly utterances about evil doers and tax cuts as the answer to all our problems. Politicians are not known for telling the truth, what is troublesome is that Bush has somehow created a trust that allows him to get away with it. Although he changes the facts to suit the occasion, he never changes direction, and the fixation is not seen as narrow-minded, but great leadership. The image of leadership is a big thing with Bush, perhaps because he is such an unlikely leader. He is a man of absolutely no accomplishment in life OTHER than the remarkable achievement, all the more remarkable for his lack of prior accomplishment, of getting elected governor of Texas and then of the U.S. No other president has achieved such a miracle on so few credentials. On the leadership issue, he is the only man I have ever seen who constantly praises his own leadership, as if it can be willed by advertising. He brags about it, casting every decision as a great achievement. Bob Woodward's interviews with Bush in his strange new book, Bush at War, center on self-congratulation to a sickening degree, while also revealing his detachment from events and intense devotion to "communications", the euphemism for politics. All this self-back patting would be comical if he were not our president. This is a man who takes criticism as disloyalty, like a spoiled child who has to be right. Bush has an amazing talent for creating an impression of strength, yet most of the talk is misrepresentative justification for tax cuts or overstated finger pointing at evil doers (again reminiscent of Hitler). Many of those who listen to the words rather than being carried away by the emotion are appalled, and can't stand listening to him. I felt the same, so boastful, so obnoxiously pleased with himself, so black and white, so repetitive, so sophomoric, but now I listen, amazed at his gall and the willingness of the American people to fall for the jingoistic braggadocio. Our approach to the war on terror is all emotion, lacking in any effort to get at the underlying causes of Moslem hatred. Smash 'em and forget 'em, they are just evil (admittedly, dealing with people whose leaders want to go back to the seventh century is an experience we are not equipped to deal with). Eventually someone is going to research the obvious question - why do they hate us so intensely and what can we do about it (apparently the "communications" staff did ask the question, but on failing to come up with an answer - where in hell did they look - forgot it). Bush's lack of compunction about misrepresentation is not unusual for a politician, but he does it as a matter of routine, and avoids being caught because the public trusts him, though the very actions prove him unworthy of that trust. He and his people have no shame, to them it is winning the great game of politics, and they cover up their true intentions with clever talk that when stripped down is simply lies. Eventually this kind of thing has to backfire. It's like stealing, you can't get away with it forever. Voters may be gullible, but they can be fooled only so long. At some point the legitimate press is going to get tired of this stuff and turn on Bush. If you think about it, the Bush act is some where between amazing and appalling (the Hitler look alike again). The fact that he has gotten away with childish foot stomping and dirty political tricks encourages more of the same. This course must lead to serious trouble. This is a well brought up, well educated, son of a president, yet his actions in no way resemble those of a gentleman, or someone interested in governing in a fair and judicious manner. Bush will fascinate historians like no other president in our history, especially if he gets a second term. It is impossible to imagine a man more opposite from Abraham Lincoln. Lincoln didn't go to church, but thought constantly about the downtrodden. Bush is a religious freak, but couldn't care less about the downtrodden. Who is in fact more Christian? We have never had a president who said one thing and did another to the extent of this one, or a president who endlessly boasted and carried on about his marvelous leadership. No doubt we have had many egotistical presidents, but they did not advertise. I doubt any president has been more reliant on instinct (and he's proud of it!). Imagine relying on instinct when his decisions affect the entire world. Reliance on instinct probably reflects a lack of maturity that leads to fear of careful consideration. A man of conviction would want to participate in policy matters and be willing to discuss his actions. Bush does not evaluate, he reacts emotionally. That results in stirring talk, but dumb decisions. The Bush bluster and bullying is characteristic of those with deep seated lack of confidence, a bit like Lyndon Johnson without the brains and experience in government. The penchant for threatening anyone who gets in his way is not a sign of inner strength. One of his more interesting characteristics is a lack of awareness of who he is. If you want to make him mad, refer to his patrician background. Apparently he sees himself as a man of the people, even though his lack of interest in social programs and emphasis on tax cuts for the well off starkly reveal the patrician point of view. It seems impossible that he could not recognize ending taxes on dividends as a huge break for the privileged few, a virulent form of class warfare, to use the term he uses for its opponents. This self-interested way of seeing things is not unusual for a patrician, but it is amazing for someone able to win the presidency in modern times. Steve Forbes is in a similar position, but his arrogant fruitcake demeanor could never win. This suggests that Bush may actually believe some of the baloney he spouts, that it isn't all politics. Bush psychology may be overdone, for he is a devotedly political animal. The bombast reflects not just an absence of character, but is directed at domestic political consumption, making Bush a combination of under-confident blusterer and political Machiavellian. Whatever the case, it is interesting that the wanna-be cheerleader of prep school days now behaves like a swaggering football hero. As I say, he will be a fascinating study for historians. How much permanent damage can the Bush crowd do? Unless voters wise up about the bad situation we are now in with the rest of the world, and that domestic programs are aimed at boosting the rich and destroying social programs, he is likely to be reelected. Four more years and the damage could be serious. We will end up in a dark corner internationally, saddled with a crushing deficit and shrunken dollar, regularly struck by terrorists. My own inclination is that by the time of a second term, voters must recognize an undemocratic domestic policy and a shipwrecked foreign policy. The increasingly crowded Democrat candidate field reflects a feeling of looming catastrophe. But Bush is much cleverer than I thought, a true master of misrepresentation. I have been reading a book on Hitler, and it is amazing how his popularity continued to grow by means of rabble-rousing speeches, suppression of free speech, and originally bloodless military victories. Germans ate up his line, just as Americans are Bush's today. But we are not the traumatized Germans of the 1930s, we will come to our senses. While it seems strange that a man from the eastern establishment, with an internationalist father of conventional domestic and economic thinking, should have Bush's positions, they are simply standard right wing dogma. Despite his background, Bush is a Texan at heart, and we should not be surprised that he holds the same beliefs as Dick Armey, Tom Delay, and Phil Gramm. These positions can be summarized as less government and less taxes on the domestic front and a kind of isolationist aggression internationally. While I see tax cuts as playing to his fat cat friends, with income and taxes so concentrated today in the upper few, any tax reduction must necessarily go largely to the benefit of the high brackets. This very fact, though, suggests that tax cuts are not the answer to today's troubled economy. The problem for Bush personally and for us with him as our leader is that he is a weak man, as revealed in a frivolous past of non accomplishment and the present self-absorbtion, self-congratulation, unwillingness to debate or answer for his actions, and the constant deception. When confronted with a grand plan for action in the war on terror, and having to choose between different directions proposed by Rumsfeld and Powell, his weakness meant that he was bound to make bad decisions. Some combination of doubt and shortage of comprehension or thought inevitably led him astray. I think it likely that the Bush presidency will be one of the saddest in our history. Hopefully, mercifully for both him and us, it will be short.

Saddam – Running Cover For Dick? – February 2003

Free flowing propaganda about the pressing need to get Saddam, in which kernels of truth are built into wild imaginings as to his intent, worries Americans, and frightens the rest of the world. It took me a while and some study, but I am leaning to the idea that kicking out Saddam is the right move, that he really is dangerous, and that Iraq is a reasonable next step in the war on terror. The case is plenty good enough not to have been spoiled with exaggerated rhetoric. The American public could easily have been convinced, and, more significantly, foreign support was there for the asking, by making a straightforward case, as father Bush did in 1990, instead of sounding off like spoiled brats and bashing anyone offering resistance. Although the administration sounds like a bunch of warmongering klutzes, there is something behind the bluster. While they are so secretive that their own cause has been injured, there is something sensible going on here. I have been trying to figure out what it is. Our indecisiveness stands out because of the loud rhetoric, but it probably results from a struggle between two camps: the non-war Powell side and the Cheney/Rumsfeld warmongers. On the Powell side, the plan all along has been to use threats to get Saddam to comply. Assuming he wasn't the frenzied madman we portrayed, it was logical to assume that if we were firm enough (that is, took decisive steps to invade, the only way to deal with him) he would give up his weapons in order to remain in power. Unfortunately for Powell, we had threatened too often in the past, and Saddam had worked wonders with the U.N. and felt he could again, so we have had to follow through by positioning troops. The Cheney side is anxious to get on with it because, if Saddam saves himself at the eleventh hour, he will remain a threat and their plans will be thrown awry. In the end, Saddam will make the decision, which is unfortunate for us if he remains (so I am rooting against Powell at this point). What about the troubling political vacuum should Saddam be eliminated. The warmongers have a plan. Here it is. The following theory on what the hard liners are thinking comes from the February 17 The New Yorker, in an article titled After Iraq by Nicholas Lemann. Lemann uncovered a plan in the defense department, a mighty aggressive and optimistic one, but at least a rational approach. Remarkably, no one seems to have noticed because of intense concentration elsewhere. It goes this way. The belief is that terrorism can survive only with state support (right wing pundits have begun to recite this as gospel). One of the reasons we did not go after Pakistan, the new home of al Qaeda, is that the government there makes a passing attempt at not letting terrorists run free. Better to support the military government because if it falls, fundamentalists, who support terrorists, will take over. Pakistan's possession of the A-bomb adds to our reluctance, but the official reason is that the present government is "safe" as related to terrorism. Saddam, while not active in terrorism, provides a heaven sent opportunity for an aggressive strategy in the war on terrorism. The concept is to make Iraq an example, to put fear into other Moslem states that we mean what we say and will knock them off if they support terrorists. Iraq sits right in the middle of the Moslem world on the border of both Iran and Syria, the two main terrorist supporting countries. We will be right there, with all our arms, saying, clean up the terrorists or it is your turn to be crushed. Military force, or hopefully threat, will be used to bring enough pressure on the governments to get them to reform, modernize, renounce terrorism, and go after terrorists in their own countries. At the same time, gradual creation of a humane representative government in Iraq, operating in the Japan occupation style, will have a spillover effect on the entire region. Combine the idea that terrorists require state support with the immense pressure we will be able to apply by sitting squarely in the midst of the Moslem world, and you have a strategy for winning the war on terror. The apparently foolish urgency relates to Powell's fear that time is running for out his peaceful solution (which is not a solution as regards to Iraq and Saddam), and Cheney/Rumfeld's even worse fear that Saddam will wiggle off the hook at the eleventh hour. Supporting the idea of a forcible military government is that nothing is heard any more about regime change because we have no interest in a new regime, we will be in charge (at least for several years). This is the vital change brought about by 9/11, the inadequacy of regime change and the need for an occupation government. I understand we are pretty much ignoring the people who might have taken over (they are very fragmented anyway), and they are beginning to get worried. Liberal fears that removing Saddam will leave chaos behind are wrong. The fact that Iraq is a Versailles Treaty 1919 put together is all the better for the plan since it is relatively ungovernable anyway. The hard line theory is to make terrorism like piracy and the slave trade, unacceptable in the world (Bush is good at articulating this when he isn't carrying on about evil ones). Moslem countries used to be proud of their piracy, but we wiped it out (after Mediterranean countries themselves failed). We think it can be done again by putting pressure on every country to consider terrorism as similar to poison gas (used only once by Iraq/Iran since World War I) and the A-bomb (used only once/twice by us), that is to say, not acceptable for a civilized nation. The hardliners believe that, because of jealousy and our support for hated Israel, terrorism can't be ended through moral pressure. We've got to force it by making an example of what can happen to them and be on the spot to back up the threat. Afghanistan was a diversion, a get al Qaeda and Osama campaign that failed. We are accused of neglecting Afghanistan, but that was a side show. We won't neglect Iraq, because it is the key to the plan for defeating terrorism. Iraq offers another plus: it has the economic potential in its oil to be self-sustaining, and become a successful economic nation. We are going to supervise a major oil development program by seeing that reliable contracts are issued to oil companies in exchange for rapid development (another reason why we have to remain in control) because oil fits neatly into the overall plan. Oil can be used in addition to military pressure to bring non-oil countries, notably Syria, in line, perhaps even to produce enough oil to pressure Iran and Saudi Arabia. The hints coming out of Washington support this as the plan. It is reasonably sensible from the militarist point of view, but whether or not it is doable remains to be seen. The biggest danger is a perfect terrorist set up, an occupying army in an uncooperative country, where nationalism is added to the motivation of religion. Even if some see us as providing freedom from an oppressive regime, that good will is apt to quickly wear thin. It is Lebanon and Somolia all over again on a grand scale. The plan is also probably too optimistic about threat versus shooting, and any more invasions will make us look like a conquering hoard. I suspect we are overlooking the religious factor that makes terrorism more difficult to stamp out, the horrible example being set by Israel, and the difficulty of conventional forces against an at home guerrilla movement (Viet Nam already forgotten). Another probably unanticipated difficulty was the severity of the shock around the world, especially in Europe, at our provoking a war, a problem that will be intensified by an occupation government. I sense we have at least temporarily lost our world leadership, other than militarily, because of the hopeless diplomacy of the Bush administration, but it might be recovered some time in the future. No matter which alternative unfolds, the strategy could not be revealed. The very man Lemann talked to refused to say anything the other day before a Senate committee, leaving the impression we have no plan for a post-Saddam Iraq. There was a hint at a two year program for Iraq, but the real plan involves a lot longer. Revealing a plan to use Iraq as a long term foil to terrorism might have created even greater resistance. Even if countries like France understood what we were up to, the plan is extended, fraught with future problems, and undoubtedly very expensive, so they did not want any part of it. Both France and Germany are emotionally opposed to occupation, whereas we have the arrogance to think that everything we do is well intentioned. The perhaps unintended consequence is that we are going to be left with the full cost of the war and the occupation. While everyone is trying to figure out the cost of the war, the more pertinent question is probably the cost of maintaining a large army in Iraq for years, and the lack of maneuverability a large force there leaves us elsewhere. In the administration's mind, some of that cost can be covered by Iraq oil royalties on greatly increased production, but taking their royalties to pay for our occupation will create even greater bitterness abroad. Another reason for secrecy is Bush's determination for more tax cuts. Apparently we are looking at a deficit building toward $400 billion, before a war that might cost $100 billion (we have had to do a lot of bribing, not just to Turkey, so the cost will probably be much higher), and occupation another $50 billion a year. Put that on top of $50-100 billion more in tax cuts (remember, the largest portion of the 2001 cuts, those in the top brackets, have barely begun) and who knows where we are headed. It may seem inconceivable that Bush would take such a reckless course, but the far right is in charge of domestic policy and they view any tax cut as good. They are emotionally committed to chopping social programs, and how better to accomplish that goal than to make it a matter of national security. The lesson on the Iraq controversy is the bankruptcy of the Bush foreign policy. As soon as he came to office, the bashing of foreigners began, we pointedly refused to cooperation in any global effort, and most of our treaties were renounced. When the decision was made to make Iraq the second step in the war on terror, the Bushies immediately began bashing anyone who did not step up and offer support. The situation was made worse, both for foreigners and at home, by exaggerating the immediacy of the affair. It is likely that the tense international situation could have been avoided by reforming the old coalition through friendly face to face diplomacy. Proceeding recklessly ahead, while bashing anyone expressing caution, was the kind of thoughtless hot headed arrogance this administration has become noted for. When Powell talked them into going through the U.N., the case was already in trouble because of the president's excessive rhetoric, then Bush made a tragic mistake: he went to the U.N., made a grand, highly exaggerated, talk down his nose speech, and then threatened all who would not provide support. He even concluded with the extraordinarily unwise statement that the U.N. would render itself irrelevant by not following his lead, referring to them as a budding League of Nations. While seen as a great fiery speech in the U.S., at least in conservative circles, it was a truly amazing blunder, a blueprint for turning friends into enemies. These kinds of words are almost never used in diplomacy because they are so counter-productive. All of this is incomprehensible until you remember that the radical right wing wants to destroy the U.N. and exercise our superior military power to get what we want (in other words, the people calling the shots are seriously dangerous). However, after throwing away any hope for help and backing ourselves into a corner, we ought to go ahead and clean up Saddam. Reviewing the history of our ins and outs with Saddam, the following events are likely. The U.N. difficulties encourage Saddam to remain firm, but he will fold with action. We always open with lengthy bombing and when that begins, the game will be on. He will be back-tracking, we won't. He will try to remain by giving up the weapons (not all at once, chemicals first), thereby enlisting support from the rest of the world, we will want to go on, get him, and execute the plan. It will be a process, not a sudden happening. In this final showdown, our ridiculous diplomacy will make life much harder for us, but at this point we might as well win the war, and hope that Bush, if not his militaristic aides, has learned from the mistakes.

Market Commentary – January 2003

Despite fair strength in recent months, and what appears to be a January effect in the most beaten down stocks, I think the evidence is that the bear market remains in force. If so, in another month the length of the decline will match the 1929-1932 bear market, though it is much milder in severity. That mildness may not be good, for despite the long decline stocks remain high priced. In the spring the bear market would enter its fourth year, which would raise the question, are we in a Japanese style decline, now in its thirteenth year? The situation in Japan supposedly could not happen here because their monetary authorities fiddled while Tokyo burned. In reality, Japan did react, but failed to stem the tide. As to the idea that we would move more decisively, by going along with the speculative boom, the Fed failed when it might have had enough influence to make a difference. Fed inaction is a primary reason we are in this pickle in the first place, and subsequent moves failed to lift the economy, indicating that its influence may have been forfeited. Now the administration is proposing added tax cuts where the major benefits go to the rich, who don’t need stimulus. There is a pattern here - the same kind of inadequate action we criticize the Japanese for. The Japanese seemed to do everything wrong, and we may be following. The recklessness disregard for deficits just might worsen our situation. Has anyone noticed that the dollar is off 25% against the Euro? The few who have claim that is great! But if we defend the dollar, interest rates go up, and if we don’t, there could be a run on the dollar. Our new belligerent foreign policy could add to the pressure. Crazy stock markets, like Japan’s in the late 1980s and ours in the late 1990s, have always been followed by severe declines. When you dig yourself a deep enough hole, it isn’t easy to get out. We are also following the Japanese model in the absence of a severe recession that clears the slate for recovery and prompts more decisive action to help the economy. According to government statistics, we barely had a recession, and the economy advanced all of last year. As I have noted before, there is something fishy about this data, and it has the effect of generating complacency. Far from being cheering, then, the benign economy suggests we are following Japan’s lead. Another similarity is ongoing high stock prices. The Japanese market continued to be recommended for years after the downturn because prices were cheap compared to earlier levels and investors were unwilling to accept that the Japanese miracle had ended. As a result, Japanese stocks remained extraordinarily high when earnings retreated along with prices. The same pattern prevails here, and hope springs eternal because of the belief that somehow our economy is invulnerable. A value myth has been created by the assumption that earnings will quickly return to 1999 levels, even though there is no sign of that happening. A recent earnings rebound is only as measured against 2001 levels that were loaded with inventory and downsizing charges. As for the nuts still buying high technology stocks, they too remind me of the true believers about Japan in that they refuse to face up to the evidence that times have changed. The present tech rally, like the others over the last three years, appears almost orchestrated by traders, rather than based on fundamentals. I suspect that traders start the rallies in hopes of rekindling memories of 1999, and they succeed temporarily as shorts cover and momentum players jump aboard. One of the foremost reasons for thinking the bear market will extend is the recent action of tech stocks. The circumstances that make me believe the bear market is not over fall into three categories: 1) an absence of the kind of give-upsmanship you would expect after such a long decline, 2) the failure of stock prices to reflect the reality of a slower economy and slower growth prospects, and 3) our changed circumstances internationally as reflected in a weak dollar, hatred of the Bush policies all over the world, and diminishing industrial might. We could have a decent rally if the economy picks up a bit, but the great bull market is over, and our circumstances have changed. Ultimately the bear will work its way out, though, either in another severe decline or a lengthy period of relatively flat prices. Most of the best thinkers believe we will have such a flat phase, but that good money can be made, as in the 1975-1981 period preceding the market takeoff in the summer of 1982. However, compared to 1975 there is a serious problem. Then stocks were extraordinarily cheap, today they aren’t. Part of the fast start in 2003 arises from the Bush proposal to make dividends tax free, a move estimated to lift the market 10 to 20%. I would accept that number, and more, if the tax freedom for dividends had gone to corporations, for then they would have been strongly influenced to raise dividends (there is no real influence in the present proposal, other that stockholder pressure), reported earnings would rise meaningfully, and the new system could have been used to straighten out balance sheets. Such a policy would have been highly stimulative, though difficult to pay for without some offset in higher personal taxes, which probably explains why Bush chose short term political expediency and feeding his fat cat friends. As to how much boost the market may get, the S&P-500 yields 1.7% and the overall market less, so a big payoff is unlikely. On a tax adjusted basis, only about ½ of 1% is added to already low dividend income, not enough to make much difference. The very rich with substantial dividends would be a huge beneficiary, but between the low market yield and a goodly portion of dividend payments already being tax free, it is hard to see much boost to the economy. Even conservative economists see little help, other than a better tone for consumer spending out of the assumed rise in the stock market. The Bush proposal is not drawing much support, and he is undoubtedly following a strategy of asking for more than he expects to get, so the plan will be trimmed to a 50% exclusion, or more likely a dollar exclusion like $5,000 to $10,000 (which would get him off the hook about favoring the very rich). While the overall affect is helpful to the stock market, it is not apt to be decisive. The economy is what counts, and at the moment it seems to need more direct help. A bear market, however, is not without hope. For instance, a 1.7% dividend is not enough to lift the overall market much, but far higher payers are out there. Not many stocks yield 4.5% or more, where you get a meaningful plus from a non-tax status, but they are out there. In addition, while stocks in general remain overpriced, low priced special situations have been available all along. These led to our great year in 2001. I blew 2002 by becoming overconfident, but we still suffered only a small decline in a generally terrible year. I am less optimistic than two years ago, however, because extreme bargains were far more numerous then. Still, there are attractive, if not extremely attractive, stocks, and the changing environment will produce special opportunities as the year unfolds. With a little luck, and a better ear for trouble, we could have another good year even if the bear market continues.