'Tis Only My Opinion!

February 2003 - Volume 23, Number 2

Has the case been made?

Waiting for the word . . .

The President ended the State of the Union message outlining some of the difficulties which the current administration has with Saddam Hussein and Iraq's observance of the various U.N. resolutions including the latest one to disarm.

To many of his critics, the only breach of those resolutions that will be acceptable proof that Iraq has weapons of mass destruction is when a nuclear bomb detonates in Washington, DC.  The position of Germany and France with respect to the UN resolutions is strictly political theatre to enable the politicians to get elected.  Of course, the stand will anger the Bush administration and could very easily backfire in the elections this weekend.

Colin Powell will give the UN on Wednesday a look at the duplicity of Iraq and the ineptness of the UN inspectors when he discloses the data contained in satellite pictures and NSA intercepts which should remove all doubt (except to those afraid to see) of the failure of the Iraq regime to comply fully with the UN resolutions.

Be prepared to hear from those third world nations and the suppliers of material to Iraq  that the data has been fabricated by the US.  Unfortunately, the main reason that France and Germany are unwilling to side with the US is that both of those governments have encouraged and allowed companies within their borders since the end of the Gulf War to sell Iraq equipment and supplies that can be used to manufacture weapons of mass destruction.  Despite attempts to hide the transactions by shipments to various countries initially other than Iraq, the CIA and NSA with the help of various defectors including one of Hussein's personal bodyguards have been able to detail the shipments and the mode of transportation taken.

The President is being pressured by several of our so-called allies to give the inspectors more time to find a "smoking gun."  After 11 years, the fact should be obvious that Iraq has not met the original conditions of the cease-fire at the end of the Gulf War with or without inspections.

The failure to present information about the anthrax and sarin material missing from the work of the inspectors before they were thrown out of Iraq a few years ago should be sufficient to prove that a material breach of the latest UN resolution has occurred.

The problems arising from waiting

It should be obvious to those that argue that we must wait that their course of action carries substantial risks to the coalition and their forces.

  • First, the weather changes as we move into spring and the ability for soldiers to perform in chemical suits becomes exceedingly difficult.

  • Second, a call-up of troops and movement of equipment and supplies into the combat areas is not only expensive but also serves to generate momentum in the armed forces. To delay is to reduce significantly the momentum and lower the morale of soldiers operating in the theatre. 

  • Third, a delay provides Iraq with more time to develop weapons of mass destruction and to strengthen defenses.

 Since a material breach has been found and both of the chief UN inspectors have stated that Iraq has not been forthcoming and cooperative in the inspection period, the real question caused by waiting is whether the UN continues to serve a useful purpose or should it be disbanded.

For, if the US goes into Iraq alone or with a few allies, and discovers not only weapons of mass destruction but also empties the various Iraqi jails and detention centers and shows those images to the world, the usefulness of the UN is finished.

Muddling along

During the fourth quarter of 2002, GDP in the US grew only 0.7%, less than the 0.9% the economists were predicting.  Of course, that number could very well be changed downward when the first, second and final numbers are published in the future.

The only sector showing significant strength has been the retail housing market which has benefited by extremely low interest rates and loan policies which enabled dogs, cats, and horses to get a loan for a house.  With delinquency rates increasing on mortgages, mortgage lending standards are being tightened.

The other sector that has shown strength has been the health care field which has benefited from the demographic curve in the US and increased longevity of its population.

Auto's have also held up rather well as the Big Three producers attempt to keep their plants running until the expiration of the current labor contracts at which time things will change. At the moment, it is cheaper to hand out rebates and 0% interest rates than to lay off workers who will receive full pay anyway.  Sometimes, I have to wonder about the intelligence level of the management employees who negotiate labor contracts.

Greenspan continues to tout productivity improvement the reason the economy continues to move forward. The Fed fails to understand that as more and more jobs at all levels are being outsourced overseas, the productivity level will improve. However, the persons who have lost their jobs will not be able to continue to afford their previous standard of living in the vast majority of cases.

If one really looks at the unemployment numbers for the past three years and not just at the unemployment rate, it is apparent that about 3 million formerly employed workers are no longer in the workforce.  Add those to the rolls and the unemployment rate doubles.  Also, the BLS statistics uses a fudge factor each month for the number of new self-employed workers.  If you believe that . . . well, I have a well known seaside villa in North Dakota for sale.  

What's causing the dollar to fall?

The US dollar index peaked over 120 in January 2002.  During the later half of 2002, the US dollar index traded in the narrow range from July to December as shown in the following chart but upon breaking the 104 level, the slide started again.

The simple answer to the above question is that there are too many dollars in circulation.  A significant portion of those dollars were generated by the trade deficit while the Fed's increase in the money supply is also a contributing factor.  Perhaps, a more realistic answer is that foreign holders of US currency have lost confidence in the US dollar.  It doesn't take a genius to do the math . . . a 2% interest rate return versus a 20% decline in the value of the US dollar in a year is not good for foreign investors.

Since the market bubble burst in early 2000, many overseas investors have begun to rebalance their investment portfolio and to remove money from both the US stock and bond markets but also to trade their US dollar holdings for other assets including the Euro and gold.  With the Fed continuing to keep interest rates at record low levels, the risk/reward ratio for dollar holdings has materially deteriorated in the last three years.

We are beginning to see net capital outflows occur whereas the US requires a net capital inflow in excess of $1.5 billion a day just to finance its trade deficit. To offset this deficit, the Fed can either print more money or withdraw funds from the system.  Since the middle of December, the Fed has reduced the growth rate of M3 by withdrawing funds from the system. The risk is that banks will tighten up lending requirements significantly thus cutting off consumer credit growth and the housing market.

Where went the Santa Claus rally?

Market pundits like to suggest that a Santa Claus rally occurs each year.  Well, perhaps, as markets go up and down for traders.  As the graph indicates, the market rose in the last week of December until the second week of January. However, the fact remains that the US markets are in a secular bear market and the odds favor a retest of the October 2002 lows in the near future.

Earnings reports and sales forecasts for the rest of 2003 have not suggested that this year will see a major expansion occur.

Almost every day, you can read of another major layoff.  Also, it appears that American Airlines will join United in bankruptcy shortly. AOL announces a $100 Billion loss for the year and their shareholders just shrug their shoulders.  Oh, well, it is just $100 Billion.

Until the financial excesses are really purged from the system, the secular bear market will continue. 

The President's Wishful Thinking

With our national debt almost to the statutory limit, the President announced in the State of Union speech new spending programs that can only increase the deficit.  Perhaps, it is time that every federal program was subjected to a 10% reduction in spending.  Also, every federal employee including those in Congress were required to join the Social Security program and eliminate all government pension and health care programs.

Aids, hydrogen cars, defense, prescription drugs and immediate tax-cuts . . . all will increase the spending of the federal government.  The hope is that somehow the economy will be able to generate the growth to pay for it.  Don't hold your breath.  The one sure thing that will occur is that foreign investors will see the increases in the deficit and continue to withdraw funds from the US.

Not a word was said about the need to gain control of our borders and remove the illegal immigrants from this country.

The pending disaster facing our interstate road system from a failure to modernize and upgrade the roads was also ignored.  Last year, I drove about 45,000 miles on that system and from personal experience from Atlanta to Seattle, Los Angeles to Dallas and Chicago to Denver and points in between . . .  I can attest to the potholes, the washboard pavement, and the traffic.

As Homeland Security takes over the function of the airlines in providing security at airports, an increasing number of travelers will forsake the hassles of the airlines.  Failure to profile persons with backgrounds similar to the vast majority of terrorists and an insistence on random checking is nothing less than pandering to the public and political correctness.

Two months ago, one of my neighbors who is 85 years old and walks with two canes was stripped searched at LAX while there were 30 young men from the Middle East on the same flight to DFW.  Of course, the canes were also inspected as was the metal plate in his leg from his WWII injury on Guadalcanal. 

Is it not any wonder that the airlines are in trouble?

Watch out . . . inflation is coming?

The CRB index heralds the increasing likelihood of inflation raising its ugly head in the near future. 

As the cost of commodities increases, either the price of goods must increase or profits will decrease. 

The worst case scenario occurs when corporations are unable to increase prices because of deflationary pressures. 

The CPI and PPI numbers prepared by the government statisticians can not be relied upon to provide any useful information.  The CPI index has been revised 8 times since 1996 . . . a case of changing the index to get the results desired.

A quick glance at the trend of the CRB index and the CPI index for the last few months illustrates the disparity that exists between these two indicators.  Of course, by keeping the CPI index down, the social security adjustment is considerably less than might be suggested by the CRB index.

Looking at the cost of gasoline

One of the major cost factors in the CPI is the cost of gasoline.  The possible war in the Middle East, the unrest and strike in Venezuela and refinery closings for routine maintenance have all contributed to increases in gasoline prices.

The price of oil is now in the $34 per barrel area and if a major disruption to the Mideast oil fields occurs, the price could increase substantially to the $50 or even $75 per barrel level. Nevertheless, the environmentalists are adamant about drilling in Alaska but ready to press for hydrogen fueled automobiles.

The real point about the gasoline chart is that from the beginning of 2002 until the end, gasoline rose about 20% in price whereas the CPI index showed the gasoline component hardly increasing. 

All those assumptions and hedonic adjustments were the culprit . . . but if you drove a car, you know the cost increased.  All the statisticians inside the Beltway probably ride the bus.

The new Farm program is unbelievable!

The last Congress passed a new farm bill.  Then the Department of Agriculture issued regulations on what it all meant. We now know that there are no real farmers in Congress.  During the past two months, I have been to several meetings where government bureaucrats and farm consultants have tried to explain the program with its various alternatives.

It is obvious that this is unworkable to anyone that has spent even a few minutes studying it. The program is unbelievably complex and difficult to understand.  Pity the poor farmer with only a college degree.  During the same meeting with two FSA agents from adjacent Iowa counties giving presentations on the ramifications and options, two totally different interpretations of the same paragraph were presented to the attendees.  And then a farm consultant got up and challenged both of those interpretations.  Finally, the largest landowner in the area threw up his hands in disgust and suggested that both Congress and the Department of Agriculture consisted of nothing but idiots who were lawyers.

It is past time for the Department of Agriculture to be disbanded and for Congress to stop writing farm bills.  During the past 15 years, we have lost over half of our serious farmers in this country and under this farm bill, probably the next five years will see another reduction of 50%.

Agribusiness is still the largest sector of the economy. But say goodbye to the family farm operation if this bill is not repealed. Iowa farmers should thank Senator Harkin for their demise.

Health care, lawyers and insurance

During the past few months, many localities have seen the termination of emergency and other health care services as malpractice insurance premiums have escalated into the stratosphere.  Las Vegas emergency rooms were closed until the legislature undertook steps to solve the problem.  In areas of Virginia, West Virginia and Pennsylvania, surgeons have taken extended leave and left whole counties without doctors.  In many sections of the country like South Texas, it is almost impossible to find an OB/Gyn doctor.

The reason for the increased malpractice insurance premiums . . . awards for pain and suffering that are staggering, lawyers who want patients to believe that every outcome must be perfect, and state doctor review boards reluctant to discipline and revoke the licenses of physicians . . . are many.

But one of the contributing causes is simply that the concept of insurance has been divided and divided until the sub-sub-group is unable to pay the premiums in high risk specialties like OB/Gyn and neurosurgery.  Recently Ralph Nader made the comment that if all doctors were included in the risk pool, the cost of insurance would only be about $7,000 per year per doctor. 

However, the insurance industry remains driven by the profit motive and has adopted an insurance philosophy of specialty pricing rather than industry pricing.  The end result of that pricing policy is the loss of medical care.

An OB/Gyn who has never been sued in the Los Angeles area pays $250,000 per year in malpractice insurance premiums.  Is it any wonder that the cost delivering  a baby today is over $10,000 in some areas whereas 67 years ago, the doctor only charged $25.  A major portion of that increased cost is insurance.

Waiting for the Shoe to Drop

As we wait for either Saddam and his crony's to head to exile or for the start of hostilities, it might be useful to remember that the war will probably not be confined to territory within Iraq. The terrorist cells will probably be activated and areas outside of the Middle East will be affected.

Italy has just rounded up 28 individuals with links to al-Qaeda. Included in the roundup were pictures of airbases, embassies, dynamite, ammunition, and other items which could be used to create disruption and damage around Naples.

Should we be worried about Saddam's possible weapons of mass destruction when the Russian government has admitted that 28 suitcase nukes are missing from its inventory?

We do live in interesting times.   


This earth has seen conflicts throughout most of its history.  Today's events won't be the last. The old saying . . .  Power corrupts absolutely . . . has stood the test of time. 

The real question facing America is whether in its quest to extinguish terrorists will it lose its freedom.

But then - 'Tis Only My Opinion!

Fred Richards
February 2003

Corruptisima republica plurimae leges. [The more corrupt a republic, the more laws.] -- Tacitus, Annals III 27

This issue of 'Tis Only My Opinion was copyrighted by Adrich Corporation in 2003.
All rights reserved. Quotation with attribution is encouraged.
'Tis Only My Opinion is intended to provoke thinking, then dialogue among our readers.

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