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he thinks they actually work. And he's not at all unhappy at going through numerous checkpoints where he's asked to prove that his papers are in order. He's already learned the art of not only being helpless, but obliging, while The Authorities hold his leash and order him around like the whipped dog he is.

Well, I really shouldn't kvetch about all these things. After all, people are just getting what they want, and that's what democracy is all about. If you'd asked any German in 1933, after the Reichstag fire, whether it wasn't important to trade some liberty for security, he would have surely, as he rolled over on his back and wet himself, given you the same answer most any American will today. I doubt one American in a hundred is either aware of or in agreement with Ben Franklin's thoughts on the subject. He said: "Those that will give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety."

And, unbelievably, most seem to think the war is good for the economyat least if the stock market is any indicator.

The Effect on the Economy

Can anything good come out of this war? Can it, for instance, add to prosperity? I've heard it alleged, for instance, rebuilding the World Trade Center will provide much needed stimulus, and that's a positive thing. If that makes sense, why not destroy every building in the US; think of the stimulation that would cause in rebuilding them. This is actually a larger version of Bastiat's famous "broken window fallacy." The fact is, capital devoted to rebuilding the WTC (or a broken window) must necessarily be diverted from other uses, which remain unsatisfied. And, at the end, you wind up worse off than where you began.

What really scares me is that if the economy really gets bad the government may take this fallacy to its logical extreme, believing, as most do, that World War II got the economy out of the last depression.

Perhaps they'll think that extending the war to Iraq, or Sudan, or Somalia, or any number of other fly-bitten places in the rumor mill, will put an end to terror and stimulate prosperity. It won't. Rather just the opposite.

WW II didn't get the country out of the depression. The depression was caused by the Fed inflating the money supply, which caused an aggravated business cycle; it was compounded by government actions like the Smoot-Hawley Tariffs, which collapsed international trade. The depression was greatly prolonged by Roosevelt's moronic socialist/facsist regime of taxes and regulation.

What the war did was further reduce living standards because it prevented consumers from purchasing new homes, cars, major appliances, or even much gasoline. Even though people's standards of living were lower, however, they didn't mind it as much because they had other things on their minds like the war. It's very much like the phenomenon of a painful cancer taking your mind off a toothache. The major favorable economic consequence of the war was that it forced people to greatly increase their savings rate, simply because they couldn't spend, and it was those savings that financed the post-war boom. And that's how a person or a nation becomes prosperous: by consuming less than they produce, a.k.a., saving. In Nation, State and Economy (1919), Mises wrote, "War prosperity is like the prosperity that an earthquake or a plague brings."

So far, the airlines are the part of the economy most directly affected by the war. Let's take a look at them. The effect has not been good.

The Airlines as Business

The government has granted a $15 billion bailout ($5 billion cash, and $10 billion loan guarantees) to the airline industry. Predictably, it will necessarily accrue to only the most sclerotic and mismanaged entities, since they're the ones that need it. Perhaps surprisingly, the bailout is probably the least costly part of the government's reaction to 9/11. And it's certainly the only thing that can actually be justified on some basis. Since the government mandated a shutdown of flights for several days following the 9/11 murders, it amounted to what is known as a "taking," by preventing airlines from using their property. Maybe that amounts to a billion dollars; the rest is a pure subsidy to airline shareholders at the expense of taxpayers.

In fact, as I think about it, the airline busi

He's already learned the art of not only being helpless, but obliging, while The Authorities hold his leash and order him around like the whipped dog he is.

And, unbelievably, most seem to think the war is good for the economyat least if the stock market is any indicator.

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ness is perhaps as bad or worse a business to be in as mining. Like mining companies, the airlines have negative equity, in that the industry shows a cumulative loss since its founding. Like mining, airlines require huge up-front capital expenditure. Like mining, airlines are highly cyclical. Like mining, they're subject to intense political pressures. Like mining, they can't control the prices of essential commodities they consume (e.g., fuel), but their services are priced like a commodity. Like mining companies, they operate on paper thin margins, as demonstrated by the fact that revenue loss for only a few days in September was alone enough to outright bankrupt some, and bring most others to the ragged edge. And that's the bright side, because airlines are much more labor intensive than the mining business, and almost all of it is unionized. Furthermore, unlike miners, they have to deal with the general publicabout the worst fate that could be wished on anyone.

These things may be in the back of the minds of people who want the government to bail out the airlines. Is there, in fact, a good argument for doing so, since the airlines are so important to the economy? Well, actually, no. Who cares if United, American, and some other biggies disappear? Their planes won't disappear, nor will the people who make them fly, or the gates, or the technology. It will just change ownership. And, able to buy assets at bankruptcy prices, the new owners may actually be able to make moneysomething the current industry has never been able to do.

And it would disabuse all the beggars in a half-dozen other "vital" industries (insurance, car rentals, hotels, etc.) of the notion that their owners should be party to the profits, while taxpayers should pick up the losses. Of course I can halfway understand their rationale, in that the government expropriates half their profits in good times. But I can't condone it. It's just one of a myriad of ways the State corrupts the very nature of everything it touches.

Predictably, while they're subsidizing the shareholders of the airlines, Congresscritters are introducing bills to provide scores of billions to create competition for them, by building more railways. I happen to like trains; whenever possible, I like to jump a freight in the summer and ride for a few days across the West. But if passenger trains are what people want, the railroads can pay their own way. At least they should, although we can never be sure, since after driving the industry to bankruptcy with a morass of regulations, taxes, and subsidies to competing industries, the government has been forced to

subsidize it for decades.

Hmmmhave to pay closer attention to these stocks. By the time most people figure this stuff out and want no part of them, they might be a good buy.

Airline Stocks

Indeed, if you look at UAL, which owns United (UAL, $16.50), the second largest airline after American, there's some theoretical appeal. At the current price, its total market cap is only $893 million, which isn't much in today's market (52-week range $9.40-$45.50). And selling at only 5% of sales, when most corporations sell for a multiple of sales in today's inflated market. An old economy stock is historically considered cheap if its market cap approximates total sales. At .29 book value (when one times book is considered cheap), it passes that test as well.

That, and I've always been a bit partial to United (in spite of myself, because everyone is supposed to hate airlines) for two reasons. One is that I fly them enough to have 1K status, and therefore merit treatment almost approaching civilized norms. Another is that my mother used to be a stewardess with them during WW II, a time when stews were all not only young and pretty, but had to be RNs as well. Today most are almost my mother's age, and not only lack her maternal instincts, but are members of the Teamsters to boot.

The problem with United, of course, is that they're losing a lot of money, not quite $2 billion in the most recent 12 months alone. On a per share basis (54.5 million out), they're losing $36.54 this year, and are projected to lose $24 next. The most they ever earned was $6.83 a share in 1998. Considering their total cash at the end of the September quarter was $2.75 billion, you can do the arithmetic unless things get better soon. The fact that their debt/equity ratio is 3-1 (total debt out: $5.27 billion) isn't good. What makes it worse is that most of their aircraft are leased, and those leases amount to that much more off-balance sheet debt. United is

Who cares if United, American, and some other biggies disappear? Their planes won't disappear, nor will the people who make them fly, or the gates, or the technology. It will just change ownership.

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worse than most, but the total market cap of the entire US airline industryas important as it is, and as long as it's been around is just more than $10 billion. Excepting, I should add, Southwest Airlines (LUV, $18).

Southwest, although with sales of $5.8 billion only the 7th biggest airline, has a market cap of $14.2 billion, considerably larger than the rest of the industry put together. It has earnings, dividends, and limited debt. I attribute that to the fact it's still run by the entrepreneur who founded it in 1971, Herb Helleher, rather than some suit who's mainly in it to play big shot with someone else's money. It underlines the fact that, far more important than a company's business, or finances, or anything else, is the man running it. It's why successful investing is much more a poker game than a numbers game. It is, in great measure, a question of assessing the character of the players.

What is to be done with this data? At this point I'd say the answer is nothing. The airlines are cheap. I'd say they're as cheap, and perhaps ultimately as high potential, as the mining companies. But, unlike the mining companies, the timing is wrong. The economic and stock market environments are likely to get considerably worse, and do so for some years. The airline business needs a real crisis, one that will result in radical changes in management, labor, the imbedded cost structures everything. Maybe 9/11 will provide the impetus for that restructuring. As bad a business as airlines are, Southwest is evidence they actually can make money.

Would I buy Southwest? No
hurry, that's for sure. Why not wait until Newsweek runs a cover picturing a golden bear tearing down the
NYSE? n

Delusions? Reality? Which is Which?

We've had a nice run since September, with the Nasdaq up from a low of 1387 to above 2000, and the DJIA again clearing 10,000. It's unclear to

me what the average guy really thinks about the future of the market.

Clearly, the speculative bubble has burst, and once a bubble bursts it's impossible to reinflate. But people have been trained throughout the long bull market to believe in at least three fairy tales that I can think of:

One, the market will grow at 15% per year on average.

Two, every scary sell-off is followed by an even bigger resurgence upward.

Three, stocks should be bought for the long haul.

As with most fairy tales, there's an element of truth to each of these assertions.

One, the market has grown by 15% per year since the early 90s. That's not at all unusual during a bull market. It's just unusual that the bull market has gone on as long as it has. And, of course, people forget that bull markets are followed by bear markets, and the cycle repeats as certainly as every breath in is followed by a breath out. We've been breathing out for somewhere between 18 and 36 months, depending on what index you want to look at. But after a bull run of 18 years, my guess is this bear will last several years more; it's still a baby.

Two, during a bull market scary sell-offs are indeed followed by even stronger run-ups. That's analogous to the waves crashing while the tide is coming in. Now, however, the tide is going out. What the waves do only confuses the issue. The direction of the tide is what counts. And the tide is still going out.

Three, stocks should, ideally, be bought for the long haul. The problem is that it's the rare person who has the patience to look across the span of a lifetime. And, even if he does, it's even rarer he's got the judgment to pick stocks that will perform over that horizon. People who combine those qualities, like Warren Buffet and John Templeton, are literally one in a million. My advice, therefore, is to use any strength as a selling opportunity.

And now. . .

After the market crashed in October 1929 it didn't descend in a straight line to its ultimate bottom in June of 1932. It fell 45% by year-end 1929 but then recovered about 45% (of the new, lower figure) by the summer of 1930. A strong performance, rekindling many hopes, inducing stock junkies who had any money left to put it back in the market, confident they were picking up bargains. The problem is that pattern kept repeating itself over and over, leaving them with a cumulative loss on the order of 90%, as

It's why successful investing is much more a poker game than a numbers game. It is, in great measure, a question of assessing the character of the players.

Clearly, the speculative bubble has burst, and once a bubble bursts it's impossible to reinflate.

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Standard and Poor's Composite (weekly)

bottom of a nearly 22-year bear market, and when the bull arrives, it's going to be something to behold, something that will be well worth the wait. And I don't think we'll be waiting long. n

Notes

Allow me to draw your attention to a certain flyer that fell out of the envelope this month, on acquiring a secure food supply. Usually I have no more interest in, or knowledge of, the ad supplements than an editorial writer at the New York Times does of who buys space in the ladies' wear section.

However, I urge you to read the flyer closely. The company is run by David Galland, one of my closest friends, and the product is ethical and well-priced. Interestingly, most of the people in this business experienced a meltdown after the Y2K non-event, so this type of product is now quite hard to get. But more important than ever to have. $1,500 and change is a small price to pay for the most basic security. Call them at 888-846-9028.

The affable but dim Baby Bush exhorts his countrymen to spend, and consume massive quantities of everything in order to stimulate the economy. At a time when most people are up to their ears in debt of all types (see last month's IS) that's not only bad advice, but the complete opposite of what they should do. And what they'll have to do eventuallynamely stop consuming more than they're producing. Does it make much difference if you declare bankruptcy with $1 million of debt as opposed to $10,000? I suppose we'll find out.

Incidentally, do you think it's appropriate that I refer to the young Bush in a more respectful manner, now that we're supposedly in a war, and are all supposed to pull together?

I do think that something resembling a major depressionindeed, the Greater Depression, as I'm fond of calling itis in the offing. As a consequence of it, earnings and dividends will be cut substantially.

Are today's professed "long term, buy the dip" investors patient enough for one of these?

-51.0

June 1, 1932

4.4 - Final low

illustrated by this excellent chart courtesy of my old friend Ian MacAvity, using the S&P rather than the more popular DJIA. Notice that S&P bottomed at 4.40talk about something that looked like it needed a reverse split. The index itself would qualify as a penny stock today.

Do I think the market will lose 90% of its value? Frankly, I have no idea; anything is possible. I do think that something resembling a major depressionindeed, the Greater Depression, as I'm fond of calling itis in the offing. As a consequence of it, earnings and dividends will be cut substantially. And market bottoms typically show about 6% in DJIA dividend yield. Of course the DJIA yielded 13% at its absolute bottom in 1932, but I'm not predicting that. I'm just confident that the market will revert to the mean. And in order for that to happen, it's either going to have to drop substantially, or stay flat for quite a long time while the economy grows around it. My guess is that it will be the former option. Eventually the super bulls will be right, and the DJIA will go to 40,000 although I hesitate to guess whether it will be in 40 years because of normal growth, or 10 because of hyperinflation.

Like absolutely everybody in the market (except pathological liars), I'm used to being wrong. That means I'll still make the odd bet on an industrial company to stay hedged. After all, it's a market of stocks as much as a stock market.

But, as I've emphasized so many times in this letter, the place to be at the moment is gold, silver, selected other commodities and the stocks of companies that produce them. They're at the

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I think not, certainly based on a lot of infamous things now emanating from the White House. I think Bush is over his head, and while he's surrounded himself with some good people, there are many very bad ones, of whom I offer John Ashcroft as a prime example.

I think it's useful to repeat the FBI's definition of terrorism; it's an accurate and servicable definition, in my opinion. But the way the word is being used today, almost anything can be linked to terrorism, and few people can even approximate a definition. Well, that's typical for mass hysteria. Read the definition carefully: "Terrorism is the unlawful use of force or violence against persons or property to intimidate or coerce a government, the civilian population, or any segment thereof, in furtherance of political or social objectives."

You may recall I have an at-legnth discussion of it in the XXII/9 issue.

In late September, a USA Today/CNN/Gallup Poll asking Americans what they'd be willing to do to fight terrorism, found that:

· 29% would allow police to randomly search people.

· 49% would mandate special IDs for Arabs in this county including American citizens of Arab descent.

· 33% would make it easier for law enforcement to tap phones and read mail or e-mail messages.

· 58% would require special security checks for Arabs including American citizens before boarding commercial flights.

Well, I'm sure there's no reason for concern. The willingness of half of Americans to require Arab-Americans to carry special identification is, I suppose, totally different from the Nazis requiring Jews to wear Star of David armbands, or of the Taliban requiring non-Moslems to wear special identifiers.

And the hysteria whipped up against anyone who questions the war, its purposes, morality, or conduct is, I guess, totally different from

what happened during the War Between the States, when Northern newspaper editors were imprisoned for espousing sympathy for the Confederacy. Or that, during World War I, Congress, with the Sedition Act of 1918 (which wasn't finally struck down by the Supreme Court until challenged during the Vietnam War) made it a crime to use "abusive language" about the government or the military. Nor, I'm sure, will the FBI and CIA again spy on, and attempt to discredit anti-war activists, as they did Martin Luther King, Jr. And we're still a long ways off, I would think, from putting other Americans in concentration camps based on vague suspicions, as happened to the Japanese in WWII.

A further note on the fragile psychology of Boobus americanus. Another CNN/USA Today/Gallup poll of Nov 29 reports that 54% of them think Bin Laden should be killed rather than captured, a rather surprising majority in view of the fact none of them know anything about him other than what they've heard in the media. Forget about a trial, and the revelations that might bring. It's all too reminiscent of the Arnold Schwatzeneeger movie Running Man.

92% approve of the current military action in Afghanistan, although I suspect less than 10% can spell its name correctly, and there's absolutely no evidence the Afghans, and precious little that Bin Laden, were responsible for 9/11. Since 15 of the 19 attackers were Saudis, it makes more sense to attack Saudi Arabia. But there'll be time enough for that, I suppose, when the terminally corrupt and shaky regime there is overthrown by one which will hate Americans simply because they supported the old regime.

62% of Americans feel we should "mount long-term war" agaist terrorism. Which, as I've tried to explain in the last several months, makes no logical sense, in that terrorism is simply a method.

These things make me feel that the US government will get the public support it needs to (selectively, presumably) use torture to extract information from those accused of terrorism. And the use of military tribunals, where a five man panel of officers gets to act, literally, as judge, jury, and executioner for those so accused.

I'm not a fan of the managers of large corporations. As a general rule, they're glad-handing hacks who've in-fought their way to the top using political skills. Any competence they have in their employers' business tends to be purely coincidental. They can only be counted on

These things make me feel that the US government will get the public support it needs to (selectively, presumably) use torture to extract information from those accused of terrorism.

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to feather their own nests. One popular indirect way of doing this was to orchestrate corporate buy backs of stock during the Late Great Bull Market, at any price, in order to drive it higher and with it the value of their stock options.

That doesn't mean the old direct ways of looting the shareholders' pockets (managers and directors are rarely also shareholders, unless they got their shares with options, or as bonuses) have gone by the boards. I refer, as an example, to the recent (Sept 1) case of LM "Bud" Baker, the Chairman of Wachovia bank. Mr. Baker is being paid a million dollars a year, plus benefits, to sit behind his desk. Better yet, he gets $2 million annually, for life, if he leaves their employ for any reason, including just wanting to play more golf. Should he die, his wife gets $1.2 million annually for the rest of her life. Talk about a golden parachute. Mr. G. Kennedy Thompson, age 50, the CEO, takes home $5.9 million per year in compensation, perhaps because he doesn't get a lifetime bonus. What can these suits possibly do that's worth that much in salary?

Things like this are scandalous, but they've become entirely the norm over the course of the bull market; they should be the subject of shareholders' suits. But, in a bull market, nobody cares. As the bear market grinds on, let's hope that self-dealing suits like Baker not only have their parachutes cut away, but that their cronies on the boards that approved these things are dragged through court as well.

I've remarked here in the past on the activities of investment clubs as an excellent coincidental indicator of where the market is. You'll notice that the total number of clubs last peaked at the top of the last boom in the late 60s, bottomed in 1982 with the bear market, and has risen ever since with the long bull market. Until just last year, when it turned down sharply.

The reason this correlation exists is that the market is driven by money and psychology, and the number of people in the clubs is an indication of both. The amount of money millions of people have to invest, and their willingness to do so, changes slowly; it seems that trends in investment club membership are a good tipoff to the tenor of the markets. I'd say, based on this picture, the market is likely to be ugly for a long time.

See chart above.

The only time I've ever had an encounter with US Customs while leaving the country was in DFW, on my way to Kazakstan via Frankfurt. It was a distinctly unpleasant experience being

interrogated by an armed, jump-suited little bedbug about how much currency I was transporting. But the chances are good we'll see more of them due to the Forever War. Last year customs "Buck Stop" patrols "seized" (although I submit the verb "stole" is more accurate) more than $55.9 million from 1,351 travelers.

I highly recommend the new movie, "Harry Potter and the Sorcerer's Stone." It's well-constructed, good-humored, ethically sound, and just plain fun to watch. Certainly, if I was a kid, I'd give about anything to attend Hogwart's school. And, for all my pessimism about Boobus americanus, it was gratifying to see the public turn out in droves for it, frustrating morons like Jerry Falwell, who believe it to be a snare set by Satan. Apparently there are some people who actually believe in witchcraft. I'd like to believe in it, just as I would in the Easter Bunny, Bugs Bunny, Batman, the Tooth Fairy and about a hundred other delightful creations which would only make life that much more fun if they really existed.

It seems that trends in investment club membership are a good tipoff to the tenor of the markets. I'd say, based on this picture, the market is likely to be ugly for a long time.

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Well, since my suggestion for a Gore/Bush cage fight (see XXI/10) wasn't picked up by the Establishment, let me recommend a movie with some great battle scenes, as a consolation: The Thirteenth Warrior. The tale is about a group of Norsemen in Russia in about the 10th century, and might be described as Conan the Barbarian meets The Magnificent Seven (two more superb movies). Antonio Banderas plays an Arab who manages to fall in with them, and his character offers a contrast between Islamic and Nordic cultures of the eraboth are portrayed in a sympathetic and respectful manner. I didn't see it on the big screen, where it really belongs, because I read several bad reviews, and foolishly credited them. Movie reviewers are apparently all pear-shaped girly boys living on the Upper West Side of New York who hate movies; it's important to remember that, otherwise you'll see nothing but dreaded Chick Flicks.

The Norsemen themselves (accurately depicted in 13W) are an under-rated group. In actual organization they were among the most libertarian of societies, and (not to excuse their warlike ethos) I find their ideas of virtue (courage, fortitude, hospitality, loyalty, forthrightness, and the like) much more appealing than those promoted by more popular religions (faith, hope, charity, meekness, etc.). It would have been great to see Odin go one-on-one with Yahweh back in the days when men had the real gods, not just movie stars and pro wrestlers, to entertain them. n

Endquotes

I think there's good reason to believe that the average quality of peoplebut especially the leadershipin the US government has declined and consistently since 1776, and that since at least WW II that trend has accelerated noticably. But that doesn't mean the government won't be successful in prosecuting the

Forever War. Gibbon's observations about the conquest of Britain are apropos:

"After a war of about forty years, undertaken by the most stupid, maintained by the most dissolute, and terminated by the most timid of all the emperors, the far greater part of the island submitted to the Roman yoke."

Edward Gibbon, Decline and Fall of the Roman Empire, Chap 1, pg 3

It's been a while since Kropotkin, one of my favorite thinkers, has appeared here. He was no friend of either Church or State, would have been an avowed enemy of the Taliban, and most everything they stand foras am I. His comments here apply perfectly to them, as well as literally thousands of other groups through time and across space. Like Bakunin, an ex-officer in the Czar's army, as well as an adventurer after leaving it, he saw lots of examples of both Attila and the Witchdoctor all over Eurasia:

"The priest and the warrior. The charlatan who makes a profit out of superstition and, after freeing himself from the fear of the devil, cultivates it in others. And the bully, who procures the invasion and pillage of his neighbors, that he may return laden with booty and followed by slaves. These two, hand in hand, have succeeded in imposing upon primitive society customs advantageous to both, while tending to perpetuate their domination of the masses. Profiting by the indolence, the fears, and the inertia of the crowd, and thanks to the continual repetition of the same acts, they have permanently established customs which have become a solid basis for their own domination."

Peter Kropotkin, Law and Authority, 1886

It would have been great to see Odin go one-on-one with Yahweh back in the days when men had the real gods, not just movie stars and pro wrestlers, to entertain them.

Douglas R. Casey's International Speculator is published monthly by Douglas Casey. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. Publisher, editors and officers, including Douglas Casey may from time to time have positions, either long or short, in securities or commodities recommended by or referred to in this newsletter. No more than 250 words of this newsletter may be extracted or reproduced in context without permission of the publisher. ©2001 by Douglas Casey.

EDITOR/PUBLISHER: Douglas R. Casey; GROUP PUBLISHER: Laura Davis; PRODUCTION: Marketing Solutions Unlimited; LIST SALES MANAGER: Beth Ketzner

Please address subscription, customer service, and editorial inquiries to: International Speculator, 1217 St. Paul St., Baltimore, MD 21202, 1-800-433-1528, between 9 a.m. and 5 p.m. Eastern time, Monday through Friday. Subscriptions: 12 issues, $199; back issues, $25 each. All prices are in U.S. dollars unless otherwise noted. For international prices please call International Customer Service at 1-978-514-7857, Fax 1-410-230-1262.