The Daily Reckoning February 12th
Poor Chuck Hagel. Every day, The Wall Street Journal wallops the fellow. He is whacked for not knowing what he is doing…smacked for not appreciating the threat of a nuclear Iran…and slapped hard for not bending over quickly enough to kiss neo-con butts.
John McCain and Lindsay Graham went to work on him in the Senate. They went at it clumsily and disgracefully — like a pair of goons with lead pipes. And then, in the WSJ, Dorothy Rabinowitz hammered him last Monday; she was so hysterical we couldn’t follow what she was talking about. Then, on Tuesday, Brett Stephens took over…and began pounding away in a more usual, ham-fisted way.
We’re enjoying the show. McCain and Graham acted like thugs. Still, it’s amusing and gratifying to watch a man like Hagel get beaten up. Too bad we couldn’t watch the same sport when Hillary Clinton was put up for the job! Hillary actually deserved it.
Those who would presume to meddle should have their own mettle tested first. In addition to getting roughly handled by the press and the politicians, candidates for any post — elected or appointed — leaders should have to bear certain ordeals, to test their courage and their resolve. These should be designed not to reveal weaknesses or shortcomings, but merely to allow the man (or woman) to demean himself in petty and irrelevant ways. For example, a candidate for the Secretary of Treasury might have to fish a wedding ring from the bottom of a Manhattan sewer. A mayoral candidate might be locked out of his house…stark naked…just to see how he handled the situation.
This actually happened to our old friend and colleague Dan Denning. He had just moved to Paris. Somehow he got locked out of his apartment, with just a towel around his waist. He had no phone. No money. And he didn’t even speak French. All he knew was that there was another set of keys on the other side of the city.
Situations like that build character. But that is not why we propose them for prospective leaders. Instead, we just want to humiliate and discourage them. Maybe they’ll think twice before offering leadership. These otherwise pointless ordeals will also help to eliminate candidates. Anyone with so little dignity as to submit to them isn’t worthy of the office. And if he refuses, he should be denied the office too; because he hasn’t been willing to comply with the requirements.
The point is, the world needs a lot fewer leaders than it has. Most of the time, people go about their business with no need for the expense and distraction of leadership. That is true in businesses as well as government. A leader just gets in the way, wasting everyone’s time and energy.
Think about what you really want. To fix the crack in the swimming pool before warm weather. To get your father-in-law into a rest home or a casket. You want to figure out how to play “All of Me” on the guitar and how to make beef bourguignon in the oven. None of this requires leadership.
Most businesses work best without leadership. People dope out how to get things done. They don’t need interference from the top. Besides, the ‘leaders’ often have no idea how the business really works. This is especially true of celebrity CEOs whose real job it is to goose up the stock price. Often, a business will go along plausibly well, with the lower- and middle-level employees innovating as necessary. Then, a strong leader will take over, pulling the whole business down some dead-end road, typically by grandstanding a large merger or acquisition. The CEO gets headline fame; later, the business goes broke.
The Secretary of State is meant to lead America’s foreign policy. But what need is there? Who needs him? Each American can perfectly well decide for himself where he will travel and with whom he will trade. He needs no leadership. Many of the bruises on Chuck Hagel’s face come from his claim that Iran’s government is ‘legitimate.’ But who cares? Everyone knows perfectly well that Iran’s government is as legitimate as any other, including the government of the United States of America. All democratic governments owe their legitimacy to the same thing — the decision of delusional voters, based on fraudulent representations by dishonest leaders.
Another point that brought the blows down on Hagel was his comment years ago about a powerful “Jewish lobby.” There isn’t supposed to be a ‘Jewish lobby.” And the one there isn’t supposed to be isn’t supposed to be powerful. Of course, everyone knows there is a very powerful lobby, composed largely of Jews, whose main focus is to protect the interests, as they see them, of a foreign nation — Israel. Leaders are just not supposed to say so. Everyone else can speak the truth; but leaders should only open their mouths to lie. That’s what people expect of them. Which was Hagel’s big mistake. He slipped up.
That’s what leadership is all about — solemn and pompous lying. The greatest leaders are those who do it most grandly. Abraham Lincoln, for example. Without his leadership, the US would have probably split apart, which is to say the southern states would have been permitted to exercise the right laid out for them in the Declaration of Independence. They merely demanded to do what the 13 colonies had done before them — to misgovern themselves rather than have it imposed on them by others.
Lincoln — at Gettysburg — told the biggest lie in American history. He said they were fighting to preserve the promise of the revolution, and that the war was a test of whether “any nation, so conceived…can long endure.” In the end, his generals, Grant and Sherman, decided the matter in the negative.
The next greatest leadership debacle came in 1917. That was when Woodrow Wilson launched the US into someone else’s war on the basis of a breathtaking deceit. It was a “war to make the world safe for democracy,” he said. But if that were so, the US went in on the wrong side. Specifically, Britain and France ruled hundreds of millions of people — in Africa, Ireland, India, Southeast Asia — with no votes allowed! Germany, in comparison, was a model of democratic humbug.
Leaders lie. And their leadership — founded on lies — typically brings disasters. WWI was a disaster. Then came an economic disaster — the Great Depression. In the previous depression, 1920-1921, US president Warren Harding and Treasury Secretary Andrew Mellon, simply ignored it. No leadership was provided. Two years later the depression was over.
When the next depression came — in ’29 — Herbert Hoover, and then, Franklin Roosevelt met it with aggressive leadership. Giving out the lie that they knew better than business people and investors, they promised to mitigate the depression with ‘counter-cyclical policies.’ They blocked the markets from making necessary (but painful) adjustments, thereby stretching out the depression for almost an entire decade.
It’s not that leaders are always a waste of time. It’s just that leadership is subject to the law of declining marginal utility — just like everything else. A little, occasionally, may be useful. Any more, and you’re headed for trouble.
Recently, the US has been the victim of two leadership whoppers. After terrorists brought down the World Trade Towers in 2001, George W. Bush led the country in an attack on Iraq, based on the fraud of ‘weapons of mass destruction,’ which a team of inspectors said the Iraqis didn’t have.
Then, after the crisis of ’08-’09, the Obama team provided leadership, with the now-familiar lie that bankrupt institutions need to be kept alive at all costs and that a slowdown caused by too much debt could be remedied by adding even more debt.
If George W. Bush had shown a little less leadership in military matters, the US would have saved 157,000 lives…and as much as $6 trillion dollars.
If Barack Obama had shown a little less leadership in economic matters, the liquidity crisis would have swept away incompetent managers, bad debts would have been flushed out quickly, and the economic crisis would have ended 3 years ago.
Not that lies are always bad. There are probably times when a lie is just what a group needs to stiffen its backbone or calm its nerves. Occasionally, a gifted leader can help guide a business or even a government. But those occasions are rare. Considering the damage leaders do, the world is better off without them.
Imagine a time when the government knew nothing about the money in your bank. It cared nothing about how much you made, where you made it, and what you did with it. You could take your earnings in gold, silver, paper, or anything else, and never filed a sheet with the government.
How you earned a living was none of the business of the political class. For that matter, your bank account could be under a false name and absolutely no one cared.
This was the world of a mere 100 years ago in the United States. That’s why it was called the “land for the free.”
Back then, all federal revenue — tiny by today’s standards — came from a tax on imported goods. That tax did plenty of damage, as all taxes do. However, the system was superior because it took only a tiny share of private wealth and, most importantly, it had no privacy implications for average citizens.
The reason for the dramatic change is rather simple. Now we have an income tax. The government determines how you are paid and what you can do with your money, and spends vast resources tracking it all. The government wants its share. Therefore you have no right to earn money without coughing up.
The intrusion into our bank accounts was only the beginning. Over the course of 100 year, everything changed. The government can spy on our emails and cellphone calls, confiscate homes and cars with no legal proceedings, and even send drones over our houses and kill us legally. We are wholly owned. It is a world that no one living in late 19th century America could possibly recognize.
This situation has many people extremely alarmed and very confused. Surely there are ways that we can protect our privacy. Surely there are ways to guard our freedoms from these intrusions. To that end, people who do not entirely understand digital technology will often react in ways that are counterproductive. They decide to stay away from all social media altogether. They don’t get a Facebook account, they don’t Tweet, they don’t do LinkedIn, and some people won’t even use a credit card online.
These same people rail against private business in the digital age for collecting data on us. They won’t use shoppers’ cards at grocery stores. They denounce Amazon for tracking purchases. They freak out when Gmail feeds them ads based on subjects covered in the body of emails. They imagine that these are all symptoms of an age when privacy has been vanquished by the regime.
I can understand this reaction, but here’s the truth of the matter. All of these behaviors are the digital equivalent of digging a big hole in the ground and jumping in it. This will not protect you against intrusions by the state. In fact, this approach to protecting yourself can even have the opposite effect of making you more vulnerable than ever.
There is a world of difference between a government that is spying on your bank account and an online retailer that tracks your buying habits in hopes of selling you more things you like. Government’s actions are a threat to your human rights. The actions of private enterprise are ultimately designed to serve you better.
I take what seems to be a counterintuitive view of how to protect yourself in age of ubiquitous government snooping. The solution is not to hide but exactly the opposite: become a public person. Embrace social media. Do not fear having your name online. In fact, the more of a known entity in the digital world you are, the more protection you actually enjoy and the more likely you are to have advocates should you find yourself mixed up with the police state.
There will come a time when this network can save your life. You end up without a job and need that LinkedIn network right away. You might find yourself hauled off to jail and only have a few minutes to post that Tweet or status update. You can find yourself trapped in a high-crime area and need to help; this is when that Foursquare update can mean life or death.
On the other hand, obscurity is something the government loves. If you get caught up in the criminal justice system, there is no network out there to cheer for you, rally on your behalf, and provide you legal help. If the arrest or the problem you face, makes the papers, there is no public profile to check against the government’s claims.
It was very intriguing that after the Sandy Hook massacre, the killer’s own internet obscurity actually worked to convict him. People these days figure that a person who is in digital hiding is a highly suspicious person who has probably done something wrong. This is just about the worst way to begin an entanglement with the government.
On the other hand, you can use social media as a way of shaping your professional and social personality to your own benefit. It is a way of taking control. And as for the tracking cookies that commercial sites are dropping on your browser, this is a complete distraction from the real problem. Amazon and Google don’t want to send drones to your house. They want to engage in the completely non-threatening behavior of trying to sell you stuff. There is nothing about this desire that represents a threat to your well being.
To be sure, it takes some degree of sophistication to use the internet in a way that that helps rather than hurts your professional reputation and life prospects. Generally, the rule applies always and everything: do not post anything anyway that you do not mind the whole world reading now and forever. That same is true for email. There is probably no venue of communication less secure than email.
In the early years of the Internet, I thought that the public demand for privacy would doom attempts to create public social networks. No one wants their every thought and their whereabouts broadcasted to the world. On the score, I was completely wrong. In fact, the opposite is true. Vast numbers of people are gluttons for attention wherever they can get it. This is particularly true of young people who are acculturated to living public lives from an early age.
Some people have a difficult time understanding this crucial fact. For the most part, the seeming privacy intrusions that private internet companies engage in are entirely in keep with consumer wishes. Nor is this anything that most people need to worry about it. Private enterprise is not the threat. Government is the threat.
To be sure, private companies have proven themselves to be willing to cooperate with government agencies when they are asked to or forced to. This is truly awful. In the balance, however, staying away from digital media does not help maintain any freedoms or privacies. The better approach is to browse using the privacy settings on your browse. If you go to sketchy sites, use an IP scrambling device like Tor (which you can easily download).
The privacy problem is a government problem. It is a policy problem. So long as we have a government money monopoly and an income tax, our rights are being violated. The spying, the confiscations, and the drones are just the mop-up operation. It’s the politicians and bureaucrats, not the dot comes and the CEOs, who are the real enemy.
Original article posted on Laissez-Faire Today
After years shunning anything that even smelled like a stock, investors collectively decided to throw record amounts of cash at the market last month.
The whole situation was baffling. People don’t usually change their attitudes that quickly — especially when it comes to investments. So you can understand why record stock fund inflows coupled with this huge rally became a bit of a concern.
However, some new numbers show some sanity has entered the fray. As it turns out, the average investor isn’t going all-in this early in the game…
TD Ameritrade’s Investor Movement index shows that even as stocks continue to rise, investors haven’t been shy about hitting the sell button.
Why bother looking at a proprietary TD Ameritrade indicator? Because those are the guys that have your money. They know when you buy and when you sell. Their information is based on actual investor behavior — not some survey.
In the newest data, you can see a big divergence emerging on the chart. Investors are getting defensive while the S&P 500 cruises higher.
So what the hell does it all mean?
Short answer: I’m not completely sure…
The divergence might end up as nothing more than an anomaly. But the index doesn’t reach back too far — so it’s difficult to say how the market might react as it slumps.
What we do know is that investors aren’t as gung-ho as we thought just a couple of weeks ago. The emotional climate has found some balance.
That’s helpful when it comes to the longevity of this rally — and the hopes that the market will pull itself out of the sludge bucket affectionately known as the lost decade.
It is in the air and has no name, but something wicked this way comes. Stirrings of another cold war — this time with the giant in the East.
In what follows, we’ll take a look at a potential flash point in the South China Sea, run over some geopolitical history and circle back with investment conclusions.
The impetus to take to the keyboard starts with the worrisome tensions between China and Japan over a mishmash of contested islands. If that were all, it would be bad enough. But it is far worse. As The Wall Street Journal reports, recent naval encounters “heightened fears of a military conflict between the Asian giants — one that could entangle the U.S.” The italics are mine.
How could the U.S. get dragged into this? We pick up again from The Wall Street Journal:
“The continuing tensions put Washington in a bind. While the U.S. doesn’t want a war in Asia, it also can’t risk weakening Japan and emboldening China without undermining its entire strategy in the Pacific… The U.S., Japan’s largest military ally, is bound by a six-decade old security treaty to defend Japan from any attack.”
There is so much that is awful here; I hardly know where to begin.
The root of this “strategy” and “security treaty” is a flawed worldview, one hatched by flaccid old men who look at the world as a chessboard. It is the kind of thinking that led to the Cold War with the Soviet Union, the Korean War, Vietnam and all our costly adventures abroad since. It all began just after World War II.
The blood spilled in WWII had not yet dried, the ruins of European cities had not yet ceased to smolder. Yet the powers that be were already itching for another fight.
On the evening of April 25, 1945, the United Nations Conference on International Organization opened at the San Francisco Opera House. Eyewitnesses likened it to a Hollywood opening of a film, with camera flashbulbs popping and huge crowds. There, the architects of world politics gathered. They were an unimpressive lot, a bunch of gray and stooped and wrinkly men in suits and ties. Save for the flowing robes and headdresses of the Saudis, the group looked like they might work at an IBM building or a Social Security office.
Appearances deceive because what was happening here was sinister and foreboding. Reporters on the scene picked up the unmistakable vibe. Walter Lippmann, the renowned journalist, wrote “that the main preoccupation of so many here has not been Germany, but the Soviet Union.” He added that normal relations with the Soviet Union would be impossible “if we yield at all to those who, to say it flatly, are thinking of the international organization as a means of policing the Soviet Union.”
The San Francisco conference was a failure of diplomacy. Both sides were at fault. (I don’t need to remind you about the crimes of Stalin.) And looking back on accounts of the conference today, later events seem inevitable.
If San Francisco was the coin toss before the game, what came next was the kickoff. Historian Alan Milchman, writing for the journal Left & Right in the spring of 1965:
“The Cold War can be said to have begun in earnest in March 1947 when the president issued his now famous Truman Doctrine. The Truman Doctrine was a declaration of war on communism throughout the globe in which encirclement of the Soviet Union was arrogantly proclaimed.”
In 1949, the Western powers created NATO, which would further chill relations with a host of excluded countries. For the next few years, the U.S. would fight a war in Korea that would cost more than 35,000 American lives. Barely a decade later, the U.S. would find itself in an even bloodier conflict in Vietnam. And so the whole nightmare of American foreign policy unspooled.
When I think about the potential conflict between China and Japan (with the U.S. invariably fouled up in the mess because of its entangling alliance with Japan), I frame it in this context and cannot miss the parallels. From a geopolitical point of view, the most important outcome of WWII was the emergence of the Soviet Union and America as the world’s superpowers. This rivalry would cast a long shadow for a long time.
Keep that in mind and let’s look at the rise of China as a muscular force on the world stage.
I turn now to one of my favorite history books, Power and Plenty: Trade, War and the World Economy in the Second Millennium. Authors Ronald Findlay and Kevin O’Rourke write that the rise of India and China “to their natural roles as major economic and political superpowers” poses a great geopolitical challenge. “In the past,” they write, “the world has found it very difficult to adjust to the emergence of industrial ‘latecomers,’ new powers eager to play an equal role with the dominant nations of the day.”
And thus history threatens to repeat. Perhaps a new Cold War will emerge between the U.S. and its allies against China and its allies. Pushed by abstract ideals and “strategy,” will the world powers fumble along a path to war?
I hope not, but let’s ask the question: What would a new cold war mean for investors?
Power and Plenty provides a clear answer. The book deals mainly with international trade. What the authors show is that such global trade is fragile. Openness between borders ebbs and flows. Times of peace lead to great expansions of trade. Political turmoil leads to its contraction. Here is Findlay and O’Rourke:
“The comparatively peaceful 19th century saw an unprecedented trade expansion; World War I, World War II and the Cold War all had large, negative, long-run effects on trade. The most recent globalization coincided with the end of the Cold War, and took place in a period in which warfare remained all too common, but tended to be national or regional, rather than global in scope.”
Power and Plenty points out that trade between East (Eastern Europe and the Soviet Union) and West (Western Europe and the U.S.) contracted immensely as a result of World War II and the Cold War. From the East’s perspective, trade with the West was 73% of all trade in 1938, but only 14% by 1953. From the West’s perspective, trade with the East was 9.5% of all trade in 1938 but only 2.1% by 1953.
In short, trade collapsed. So we have our investment conclusion. Should relations between China and Japan/U.S. turn frigid, then trade between the two camps would be the first casualty. Hence, any businesses in one camp dependent on doing business in the other camp would be hurt. Said another way, you would want insular ideas not so exposed to international trade flows.
It will be a shame if that happens. I am watching developments in Asia with interest. (For our own portfolio, we’ve focused on U.S. real estate and small U.S. banks of late. These ideas have more of a buffer against chilled trade flows than, say, an export-dependent manufacturer or miner.) American foreign policy has been a travesty for a long time, which is ironic given the country’s founding.
Everything America needs to know about how to conduct its foreign policy comes from two early sources — the farewell address of George Washington in 1796 and the inaugural address of Thomas Jefferson in 1801. Washington advised the U.S. to “steer clear of permanent alliances.” And Jefferson most eloquently encouraged “peace, commerce and honest friendship with all nations, entangling alliances with none.”
Yet look how far we have strayed from this wisdom today. Now we apparently have an “entire strategy in the Pacific” to quote from The Wall Street Journal. One that was never put up for a vote. One that the people have had no say in crafting. One that — like other stupid doctrines created by flabby old men behind closed doors — leads to young men dying in rice paddies or mountain passes far from home.
The great libertarian Randolph Bourne’s most famous epigram comes to mind. “War is the health of the state.” It pretty much sucks for everyone else.
Original article posted on Daily Resource Hunter