hey BigDog... Eric Fry in New York City
- So far, war is proving to be somewhat less bullish that
advertised...for the stock market, that is. War is plenty
bullish for oil and gold and all the other sorts of assets
that investors seek when they're terrified of buying
stocks.
- The first 13 days of war have brought very little luck to
most investors. Yesterday, the Dow tumbled another 154
points to 7,992 and the Nasdaq dropped 2% to 1,341.
Meanwhile, gold, oil and bonds continued to power ahead.
The safe-haven metal gained $4.50 to $336.90 an ounce; oil
gushed 88 cents to $31.04 a barrel; and the 10-year
Treasury jumped three quarters of a point, pushing its
yield down to 3.82% from 3.90% last Friday.
- Given the considerable national angst that is resulting
from the Iraqi campaign, investor demand for safe-haven
investments is hardly surprising. But what is at least a
little surprising is that any investor could consider a 10-
year debt obligation from the U.S. government to be a "safe
haven". Is this not the same government that will borrow
about $300 billion this year, just to keep the lights on?
And isn't this the same government that will spend about
$100 billion waging war against Iraq, and maybe tens of
billions more to clean up the place afterwards?
- Last week, while on the air as guest host of CNNfn's
"Market Call," your co-editor dubbed the 10-year U.S.
Treasury note, "the single best short sale in any financial
market". Whatever the eventual military outcome of the
Iraqi conflict, the fiscal campaign back home is already a
resounding defeat. And yet, bond buyers somehow believe
that victory is theirs.
- Whether the military onslaught against Iraq leads to a
fast victory, slow victory or medium-paced victory, the
bond market is sure to become a prominent "collateral
victim" of the costly campaign. Strictly speaking, the $100
billion or so that it will cost to "liberate Iraq" is not
an unbearable burden. But that's just the tip of the
iceberg.
- "The burdens that follow - from occupation,
reconstruction, humanitarian aid and checkbook diplomacy -
could extend well into the coming decade," the New York
Times predicts. "Taxpayers for Common Sense put the total
cost of the world's engagement with Iraq at $544 billion,
spread over 10 years."
- And then there are the substantial "hidden costs" - like
high-priced oil. William Nordhaus, a professor of economics
at Yale University, calculates that in a worst-case
scenario, rising oil prices cost as much as $391 billion
over 10 years. The Iraqi war will also speed a regime-
change in the bond markets from one of low and falling
interest rates to one of high and rising interest rates.
- How much the war in Iraq will ultimately coast - or, for
that matter, any of the future wars in the Middle East that
the Bush administration may have up its sleeve - is
anybody's guess. "The start of war is like the break in a
pool game," says Jim Grant. "Predictions are out the
window. Possibly, President Bush will not allow this
country to become overextended in places where the Founding
Fathers would not have expected to find U.S. troops on any
pretext. However, the presidential rhetoric is messianic -
a 'liberated' Iraq could 'show the power of freedom...by
bringing hope and progress into the lives of millions,' he
declared in a February 28 speech at the AEI - and the logic
of a preemptive foreign policy points to years of full
employment for U.S. forces abroad.
- "The Fed and the Defense Department have, in effect,
traded places," Grant continues. "In the 1990s, the Fed
policy was preemptive and national security policy was
reactive. Now, it's the Fed that watches and waits, the
armed forces that move on a forecast (specifically, on the
forecast that Saddam Hussein had the United States in his
chemical, biological and nuclear sites and would squeeze
the trigger). We, too, have a forecast.....
It's that strategic preemption combined with monetary-policy inertia will make the 10-year note priced to yield 4% a dissatisfying investment experience." |
