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Hard Landing... a geopolitical and financial reality check
Craig Harris
President:
Harris Capital Management, Inc. CTA
March 22, 2003

I`d like to try to unravel the current state of the world and the financial markets the way I see it. I`m going to start by highlighting what I think were the significant events of an historic week this past week.

The Japanese have been fairly open regarding the intervention that has been occurring in the NIKKEI for a long time now. I`d like to note also that this intervention has not worked other than in the short term. That`s not my point tonight however. My point is this... US financial market participants have debated whether or not we have been seeing intervention in the US markets for years now. Anyone who agreed with the possibility was stamped on the forehead with the "conspiracy theorist" label. This past week however, the Japanese inadvertently let the cat out of the bag. They probably did that because they didn`t realize the degree of secrecy this sort of thing commands in the US. The original story link is here from our friends at the BBC:

http://news.bbc.co.uk/1/hi/business/2863051.stm

and here are some of the important quotes:

"Just days ahead of a war, the United States and Japan are prepared to co-operate to support the financial markets if there is a crisis."

(there most certainly is)

"A deal was struck last week in the United States between a former Japanese finance minister and the head of the U.S. central bank, the Federal Reserve`s Alan Greenspan."

(you can assume this same deal was struck with the rest of the G8)

"There was an agreement between Japan and the United States to take action co-operatively in foreign exchange, stocks, and other markets if the markets face a crisis," Chief Cabinet Secretary Yasuo Fukuda said. "

(lets just call it any market where it is deemed necessary)

"The move came as Japan`s key Nikkei 225 index dropped to another 20-year low, falling about 1.5% to hit 7,824.82, before rebounding. "

(and it went up all last week... )

"Finance and economics minister Heizo Takenaka said the Bank of Japan and stock exchanges would be watching the markets closely during the current Iraq crisis. "

(watching closely is a euphemism for having their hands in them)

"We will follow the prime minister`s instructions, co-operate with the Bank of Japan and exchanges, and respond appropriately," he said.

(respond appropriately is a euphemism for intervene)

So, there you have it... why did Japan and the US share markets have a long successive string of UP days? Because the governments were buying shares. Why did gold open in the US virtually unchanged Tuesday through Friday during one of the most uncertain weeks in the past 50 years? Because gold would fall into the "other markets" category of those comments and was being micromanaged to prevent panic and a loss of confidence... and so far it`s working.

This was clearly a psy-ops move in the markets... get them going in the direction you want on the onset of war so the participants think that what`s happening is good and the moves should continue in those directions. So, it`s important to understand this whether you`re using technical analysis or a fundamentally based approach. This is not a completely free market environment, I`d call it a managed free market environment. it`s a controlled environment, with the controller having unlimited funds in the short term. That`s my take. I mean... they told me so.

Now; what I`d like to point out is that in terms of the economy... in terms of earnings... in terms of anything that really matters quantitatively, there was nothing that happened last week to indicate that going forward there is reason to be optimistic. Even forgetting completely about this war and its implications, the US economy is in trouble. With the war factored in, tremendous damage was done last week... most investors realize that, and that`s why the g8 is intervening. they are using the Soros axiom of "markets influence events they anticipate" to its fullest. The markets are telling us there will be stability and optimism and therefore the hope of the financial engineers is that will be the case... and it`s no longer a conspiracy theory... they told us that`s what they`re doing (maybe by mistake but they did tell us).

The biggest damage last week was not in Baghdad. The biggest damage centers around the US split with its most important allies (and both neighbors to the north and south I might add) and launched a non UN sanctioned pre emptive attack on a sovereign state. The first in modern history I might add unless you consider Germany`s attack on Poland a pre-emptive strike. Russia, Germany, France, China, Mexico, Canada, South Africa and many others called it a violation of international law at one time or another last week. The bottom line? There is no more international law. How`s that you say? Because with the UN left in tatters and stripped of any authority, "international law" is now in the eyes of the beholder. As a sovereign state, international law is now what you think it is... and if someone disagrees then they either live with it or if they think you may represent a threat, they bomb you preemptively. That`s what the US told everyone last week by its actions. I think a lot of people don`t get that yet. The UN is gone except as a humanitarian aid outlet... think of it as a politicized Red Cross. Look for a lot of diplomats to be looking for work. There is now currently no serious framework to resolve disputes among countries except war... setting us back oh I`d say 50-70 years... and the US has indicated to the world that if you feel threatened, it`s ok to bomb your neighbor and take it over. That`s the reality people. A reasonable person might conclude that this will point to... more war. That`s certainly where I think it points.

In the US, we had over 1000 people arrested in San Francisco in one day... so many that the jails weren`t big enough to hold them all and they had to take them to temporary holding facilities. We had police checkpoints across the country and random searches and seizures last week. We learned that the entity that monopolizes the US radio airwaves is for some reason staunchly pro war, paying for pro war rallies and banishing the likes of the Dixie Chicks from the airwaves with a "no play" order because of an anti war comment. The message is clear to all high profile individuals. Oppose the war and your career is over. The US has entered a state of decline, let there be no doubt about that. Freedom of speech and the right to dissent is on the wane as the power brokers attempt to hold things together.

The problem is that as I`ve been saying, this war on IRAQ is just the opening salvo, and I expect things to continue to get worse. By "worse," I mean a continued trend towards less ability to dissent and more control over your "reality." One important point I have to make is that all of this control costs money... and lots of it. Worse than that, as control is transferred from the citizens to the government, productivity goes down. In my mind it is very much like the reverse of what happened in the Soviet Union. The free markets and capitalism are now being constrained by increased government control in all areas. This is a blow to free markets and capitalism in general. This seizure and subsequent occupation of IRAQ is going to be incredibly expensive. This will probably cause more civil unrest at some point going forward because many Americans already know what`s up and don`t like what they see. That combined with more and more people being unable to pay their bills is a toxic mix. We saw a preview of that with the arrests this week. You can tell from the interviews with protesters if you`re lucky enough to see one.

The San Francisco protest and mass arrest of over 1000 people barely made the news on CNN. It was covered more by foreign news services. What does that tell you? It`s an indicator of the extent of the control over your reality. I have been watching the war coverage almost completely from non US media outlets and I can tell you that the coverage is dramatically different than it is here in the US... it`s almost like they`re covering two different events. That in itself is worthy of comment. The main reason my opinion is different from many in the US is because I have more information tools to shape my thinking. I`m not held hostage to a few outlets who all say the same thing. That`s telling because when you look to places like the former Soviet Union, their population was controlled in this manner until it couldn`t work any longer. In many ways, I see the US becoming much more like the Soviet Union or China in terms of Government control of information and the rights of the Citizens. It`s happening before our eyes. I can see a day not too far off in the future when people like myself are not free to express their opinion to others as censorship takes hold. I hope we don`t get to that point, but the mere prospect is truly frightening (and stifling for a democracy I might add).

The US had to close or fortify its embassies around the world during the week because the angry mobs in many countries were threatening violence. You didn`t see any of those protests on US TV or read about it in the US media, but the foreign outlets had a lot of coverage of it.

I don`t know what a prelude to WWIII would look like for certain, but I have a feeling it could certainly look about like things do now. I`m not saying I`m convinced that it`s coming, mainly for the reason that I think most world leaders desperately, sincerely, want things to get back to "normal." They want the US to be the "good guy" again. They want peace and economic growth. I want to live in Mayberry RFD but it`s not going to happen. Do you get my point? The rest of the world is still clinging to a balloon that has already burst. If they continue to cling, they`ll have a "hard landing."

On the positive side, during the week IRAN said they wouldn`t get involved in the war, and Israel has stayed out. Those were all very reassuring elements as the war broke out. So, for the mean while, the US actions in IRAQ have not caused an escalation. That`s good news... very good news... but the prospect of it happening in the future has increased.

The problem is that I don`t think "getting back to normal" fits with the US agenda of "securing the realm." I wish I had the exact quote, but at one time last week GWB confirmed what I`ve been thinking... that US troops would be in Bagdad for the foreseeable future. Then, as soon as IRAQ falls, they will turn their sights to IRAN and Syria, and at some point have to deal with North Korea. So... the people that have the idea that this is a "gulf war" kind of over and done with cloud lifted I think are completely wrong... and that`s the only legitimate reason I could see for financial market optimism. Steven Roach, a guy who I find is usually writing things that fit with my thinking, was saying similar things last week about the market... so I think there`s a group that understands this, while the government and wall street are trying to sucker the public back into the market (again). If I bought shares now, I`d think of it as a charitable contribution to the government... because those dollars go in, the US spends it to buy shares, the market goes down ... you lose it and presto changeo... your money was converted into temporary market fuel... but don`t worry they`ll make some more. The problem is it won`t be yours. Isn`t this fiat system convenient?

I think a more sophisticated analysis might be that countries that feel they have been dissed by the US realize that they cannot challenge the military might and yet they do not want to be subservient to the US and its enveloping empire and world domination aspirations. So... a natural function would be for them to seek new alliances and strength in numbers. In the long run I actually think this is beneficial because it will preserve a balance of power and fairness. I suspect in many foreign leaders minds, their reality has shifted significantly in the last week... sort of like their world got rocked... I know it has for Putin, whose head has been reshaped over this. He went from munching cheeseburgers at the ranch to being back on the verge of a cold war. World leaders now know can no longer count on a monopolar superpower model for world security because it`s inevitable that the superpower will be like a black hole, sucking in more and more power at the expense of other countries. Think of the amount of global power as a pie. If you take more, you take some away from someone else. Russia, France and Germany have just had some of their pie eaten... and they`re finding themselves hungry and unsatisfied. The Us will try to pacify them by giving them some pie. I don`t think they want leftovers out of the dumpster though. Third world countries are happy to eat leftovers out of the Dumpster. Russia, France, Germany and China are not. Look for an economic power struggle to emerge among the EU and the g8.

Look for a Russia/Franco/German alliance to emerge from this. Look for a US/UK/Japan alliance. Look for the EU to have serious problems. NATO and the UN are goners. The UK and France are having a war of words... a friend just told me they removed French wines from the wine lists at many of the high profile restaurants in my area... we haven`t seen the end of this divisive split... not by a long shot. On Friday the EU had a divisive meeting. The economic impact? All negative.

So... what`s my short term market outlook? I think I could give you an accurate one if the G8 governments weren`t in the market. In the short term, the markets are going to go where they want them to go. In the longer term, I am not optimistic. Even if half of the US citizens were paying more than the minimums on their credit cards I wouldn`t be optimistic. Even if many of the states weren`t bankrupt. Even if the US deficit wasn`t about to spiral out of control. Even if the share markets were fairly valued. It`s a time to be very careful with your money. Personally, I like real things... things whose reality I am certain of.

I think that next week we can look forward to a siege of Baghdad with Hussein going up in flames. Then we can sit in our duct taped rooms and wait for the Arab backlash and the "hard landing" to begin.

March 22, 2003
Craig Harris
President
Harris Capital Management, Inc. CTA