ETERNAL VIGILANCE

What We Now Know

Week of 11/17/03
(Content slightly edited)

*** CAN THE U.S. WIN IN IRAQ? ***

Dissecting the U.S. deployment of 133,000 troops on the ground in Iraq, Edward Luttwak of the Center for Strategic and International Studies recently calculated that only 28,000 are actually in the field at any given time.1

To put that number in perspective, Luttwak points out that the New York City Police force has 37,000 police officers - yet U.S. Coalition forces are being asked to keep control over a nation of 28 million, including the urban hotspots of Baghdad with its 6 million inhabitants, Mosul with 1.7 million, Kirkuk with 800,000 and Fallujah, a Sunni stronghold with a population of 250,000.

That's just 28,000 soldiers to interdict insurgents and jihadists coming over the borders with Syria and Iran, to patrol all the cities, protect all the oil fields, pipelines, banks, and utility infrastructure... and to provide cover for the U.S. military bases, airfields and convoys.

It gets worse: the latest plan proposed by the administration cuts U.S. forces to just 104,000 troops, with an increasing share being National Guard and Army Reservists who, rather than playing their usual supporting role, are this time headed for the front line - because when it comes to Iraq, it's pretty much all front line.

To give you some sense of the danger, small arms are so abundant that $10 will buy you, retail from a street vendor, an AK-47 machine gun and all the ammunition you can carry.

Which brings us to the question addressed in this special WWNK feature, can the U.S. win in Iraq?

We ask the question for a couple of reasons, not the least of which is that it is very likely that, as the war in Iraq goes, so will the 2004 Presidential election. For another, it is our tens of billions of hard earned tax dollars being appropriated in the attempt to recast Iraq in our own image. Any chance of success? This feature will be longer than usual for this publication, because the issue at hand warrants it.

First, A Historical Benchmark

Every day now the news from Iraq tells of another 1, 2 or 17 U.S. soldiers killed, increasingly leading the media to make comparisons to U.S. war against Vietnam. We think a better comparison is the Soviet invasion of Afghanistan: while the Vietnam war started as a fight against guerrillas, it ended with set piece battles against the North Vietnamese army. In the case of the Soviet involvement with Afghanistan, other than some very limited initial engagements, it was all guerrillas, all the time.

So, how did the Soviet's make out? Over the ten year conflict approximately 15,000 Soviet soldiers were killed2 - an average of about 4 soldiers KIA per day. Subtract casualties related to illness, a very high number due to poor sanitation, and you come up with about 39,000 wounded in combat and sundry injuries (equipment crashes, etc.) or about 10.75 per day.

How does the U.S. involvement in Iraq compare so far?

As we write, the U.S. troops KIA in Iraq is at 417, an average of about 2 per day since the start of the war. So, we compare favorably by about half to the Soviets. However, when you look at the largely under-reported wounded in combat and other non-illness related injuries, we are already at 4,451, or about 19 per day -- a rate nearly twice that of the Soviets. Why is our KIA ratio so much better and our wounded ratio so much worse? Credit it to the high quality of personal protective gear (flak jackets and helmets) worn by the U.S. soldiers - otherwise our fatal and non-fatal casualties in Iraq would likely parallel those suffered by the Soviets. Not to put too fine a point on it, the war is not going well.

Is the sacrifice worth it? Put another way; is there a reasonable chance for a military or political success in Iraq - whatever that might mean?

Winning Against Insurgents

For help with the answer, we turn to a useful list of the conditions which must be present in order for an occupying army to succeed against an insurgency such as we are faced with in Iraq. The list was assembled for the Center for Aerospace Doctrine, Research and Education by General (Ret) Mohammad Yahya Nawroz, Army of Afghanistan & LTC (Ret) Lester W. Grau, U.S. Army. In the interest of space, we excerpt the list here, and include some commentary.

"A guerrilla war is not a war of technology versus peasantry. Rather, it is a contest of endurance and national will. The side with the greatest moral commitment (ideological, religious or patriotic) will hold the ground at the end of the conflict."

WWNK: In a recent survey of Iraq's population by Zogby International3, some 50% of those surveyed thought the U.S. would hurt more than help their country over the next five years, and some 43% had either a favorable or very favorable opinion of Osama bin Laden. Embedded in this segment of the population is a sizable minority who think the U.S. should go and, as witnessed by the suicide bombings, believe in their point quite strongly.

Because of the gross under-deployment of coalition forces and the constant attacks against those forces - up to 35 a day - U.S. soldiers are understandably reluctant to mingle with the population, which is generally sullen and uncooperative anyway. So winning hearts and minds is out of the question.

On the question of morale, while the insurgents and their philosophical allies are visibly cheered by each successful attack, U.S. morale is beginning to flag badly. Ask yourself the question, "If I, or a member of my family, was a U.S. soldier, whose stay in Iraq has likely been extended far beyond what was originally promised, how willing would I be to trade an arm, leg or even a life for victory in a war the purpose of which is now unclear?"

How would you answer that question when members of the Administration are beginning to waffle on the evening news about the duration of our commitment? Clearly, the morale, will power and commitment factors favor the insurgents.

"Secure logistics and secure lines of communication are essential for the guerrilla and non-guerrilla force. Security missions, however, can tie up most of a conventional force."

WWNK: With 28,000 soldiers in the field at any time, U.S. Coalition forces are hard pressed to protect themselves, let alone protect anything else. Point to the insurgents.

"Weapons systems, field gear, communications equipment and transport which are designed for conventional war will often work less effectively or fail completely on rugged terrain."

WWNK: The U.S. force has the world's best military equipment, bar none. But all of the smart bombs in the world will not do you any good against a lone Iraqi sneaking through the night with a Rocket-Propelled Grenade (RPG). Put another way, unless you are pursuing total war, which is something we are simply not prepared to do, nor should we be, all that high-tech weaponry is pretty much useless against guerrillas, as opposed to a conventional army. And fighting against well coordinated pockets of insurgents embedded in urban terrain is rugged terrain indeed. Again, point to the insurgents.

"Tactics for conventional war will not work against guerrillas. Forces need to be reequipped, restructured and retrained for fighting guerrillas or for fighting as guerrillas."

WWNK: In the opening stages of the Vietnam War, U.S. search and destroy squads were actually quite effective against the irregular Viet Cong, effectively defeating them as a fighting force before the entrance of the North Vietnamese regular army - coupled with political restrictions on the limits of our combat -ultimately lost the war there. In the case of Iraq, search and destroy missions by small and ruthless groups of anti-insurgents may be the only way to win this war militarily, but each incursion into the slums of Baghdad or other cities risks turning more of the population against us. That's not hard to do considering, according to the Zogby poll, 30% of Iraq's citizens said they had lost a family member, neighbor or friend in the U.S. attack. Of course, they lost a lot more to Saddam's thugs - the poll says 50% - but the memories from the U.S. war are still fresh.

Because of the under-deployment and the nature of the terrain, the odds of the U.S. using small groups of soldiers fighting guerrilla-style to successfully track down a significant number of insurgents are long indeed. That leaves us in more or less fixed positions, vulnerable to continued attacks at the time and choosing of the insurgents.

"Tanks have a limited utility for the counter-guerrilla force, but can serve as an effective reserve on the right terrain. Infantry fighting vehicles and helicopters can play an important role in mobility and fire support."

WWNK: In the case of Iraq, because U.S. forces are so widely dispersed, the helicopter is especially important. Unfortunately, in the words of a professor of military history at Washington's National Defense University, "Choppers are very vulnerable. They fly low and slow and they're excellent targets. They can be brought down by Stingers, RPGs and small arms fire." The Iraqi resistance obviously knows how to take out helicopters - and their success on that front to date limits the usefulness of this critical battlefield support component.

"Journalists and television cameramen are key players in guerrilla warfare. The successful struggle can be effectively aided when championed by a significant portion of the world's press."

WWNK: The world's press and increasingly our own, is almost entirely unified against the Iraq operation.

"Domination of the air is irrelevant unless airpower can be precisely targeted. Seizure of terrain can be advantageous, but is usually only of temporary value. Control of the cities can be a plus, but can also prove a detriment. Support of the population is essential for the winning side."

WWNK: Historically, success by occupying forces against insurgents occurs only if the insurgents can be geographically and/or politically isolated, and then systematically eliminated. Because the Iraqi insurgents are embedded in the cities, geographic isolation is unlikely, leaving political isolation the only hope.

The only way that is going to occur is if we publicly ally with the Shiite majority against the more troublesome Sunni minority - the feeding stock for the insurgency. This strategy would, in effect, call for deliberately creating a vicious religious war, the end result of which will almost certainly be an Iranian-style theocracy that will not thank the U.S. for its help, should it succeed. We would rate the odds of such strange bedfellows as Bush and the Ayatollahs to be slim to none and Slim just left town.

The bottom line: On virtually every point, the battle goes to the insurgents. Consequently, the signals now coming out of Washington that we are preparing to cut and run, painful as it may be from the perspective of national pride, makes sense. This is a war we cannot win.

As for the Iraqis and their smoldering cities -- their future will be up to them. If the U.S. invasion has provided them with nothing else, it has provided the country with a break from its totalitarian past and in so doing, an opportunity to take a new path. They can collectively choose to reconstruct a polite society from the ruins, or squander their future by rolling over for the next hard man that comes along, maybe even welcome back Saddam. They might also opt for a good old fashioned religious civil war. The reality is that Iraq was a human rights mess before the war, and its citizens can use the U.S. intervention to do better. Or, they can revert to oppression and hopelessness. That would be a damn shame, but not our damn shame.

*** BE HAPPY, PART II ***

There is a part of your brain called Broca's area, the purpose of which is to spot patterns. As long as you are experiencing the predictable, Broca's area remains "asleep." When you get up each morning at roughly the same time and do roughly the same things in roughly the same order, Broca's area remains dormant and life settles into a rut.

If you want to break out of your rut, it can be a simple matter of "surprising" Broca's area. If you are right handed, try brushing your teeth while holding your toothbrush with your left hand. Or, better still, instead of spending this evening in front of the television tonight, take a long walk on a dark road... or run out of the house, strip your clothes off and jump into an icy stream.

Do so and the Broca comes electrically alive and, like a klaxon horn in one of those old submarine movies, causes both your right and left brain to jump out of their respective bunks and hustle around trying to figure out what's going on. The result is that you feel alive again.

This weekly e-letter, "What We Now Know" is meant as a tool to help you and other readers break patterns because, on your behalf, we're constantly searching for new information and new ways of looking at the world. If you haven't done so already, subscribe now.

For you business owners, surprising Broca's area is also a pivotal concept: Amazon, Yahoo!, Google and similar companies built such strong brands overnight by adopting pattern-breaking names, catching the attention of the masses who then took the time to learn about the services offered. (Warning: nonsensical names are now part of the pattern, so you'll have to think of some other pattern-breaking approach to catching the attention of consumers.)

*** INFLATION NATION ***

After twenty years of low inflation, most Americans barely remember the higher variety. However, we now know that inflation is wired into our future for the same reason it last plagued us in the 1970's. Then as now, a protracted war and mounting social welfare obligations caused Uncle Sam to go dangerously into debt. The colossal $500 billion annual deficit, on top of total U.S. government debt that is closing in on $7 trillion, can only be paid off if the dollar is devalued. This is a time-proven strategy, used by governments in too many cases to recount, because even a 6% annual inflation rate reduces the real value of the debt by about 50% in just 11 years.

Of course, as inflation heads higher, the marketplace quickly compensates for the cheaper money by raising prices and interest rates.

This time around, inflation could be far worse than it was following the Viet Nam war. In addition to the open-ended costs connected to our global adventures in Iraq and elsewhere overseas, we have immense Social Security, Medicare and Medicaid burdens that are set to soar even larger as the baby boomers retire. The net present value of such unfunded liabilities collectively adds another $10 trillion or so to the problem.

In addition, the private sector has become heavily indebted from the long mortgage boom and mad-cap sales of automobiles and other big-ticket items. As with the federal debt, the only way private obligations can be serviced to prevent widespread bankruptcies - and an economic meltdown - is to flood the country with cheap money.

Although rising prices and interest rates create many problems, inflation can also be used to your advantage. The classic strategy is to borrow money - at fixed interest rates - for your home or business just before inflation begins, and pay it back later with much cheaper money. In effect, you will get everything you buy at a deep discount. Inflation will also push up the prices of whatever real assets you purchase. The combination of the two benefits -big discounts and soaring prices- has created many fortunes in the past, and it will do so again.

Consider putting inflation to work by converting your adjustable rate mortgage to a fixed rate one and by purchasing goods that will appreciate as long as the cycle lasts. Proven winners from past inflationary periods include precious metals, commodities, high-quality works of art and similar tangibles. Mining, energy, chemical, real estate and machinery stocks also do well when inflation takes off. In general, you can expect good performance from investments that are directly linked to the production of real assets.






On the other hand, bonds and other fixed interest rate securities do very poorly during inflationary periods. Instead, put your liquid assets in money market funds because their changing interest rates keep pace with inflation.

The bottom line for investors is clear - you must reverse your financial thinking to profit from inflation. During the recent disinflationary period it was wise to stay out of debt and save increasingly valuable dollars. However, when dollars start to go down in value it will be smart to spend them, and borrow even more, not for frivolous toys that lose the bulk of their value the minute you walk out of the store, but to purchase solid assets. As in the natural world, the ability to adapt to radically different conditions will be your key to survival.

While in future issues we will comment further on tangible assets you may want to own, check out the Digital Liberty Dollar instead. GoldMoney offers a remarkably inexpensive and secure way to own gold held in a depository, so you don't have to deal with bullion dealers and worry about storing the stuff. In addition, they have set up simple processes that give you near immediate liquidity for your gold holding, which saves a lot of hassle. We have known Jim Turk and other members of the GoldMoney team for decades and know them to be extremely intelligent, dedicated and trustworthy individuals.






*** TIME TO LIVE? ***

With some hesitation we introduce you to www.deathclock.com - a clever site that, using actuarial tables, is happy to tell you the exact day of your pending death.

The good news is that the underlying assumptions are based on current actuarial tables, which are likely to be adjusted upwards as medical science continues to make impressive gains. Point in fact, over the last century, life expectancy in the U.S. improved by about 50%.

But perhaps the message of www.deathclock.com can serve a higher purpose. Let it remind you to stuff just a little more life in your life because, the last we checked, no one gets out alive and the clock is ticking.

*** A $38,000 GIFT ***

We first met investment analyst Michael Belkin some years ago at the annual Blanchard New Orleans investment conference, then felt his pain as he single-handedly forced - and mostly won - a medical debate on the wisdom of giving babies the Hepatitis B vaccine which he believes, with considerable evidence, caused the death of his infant child.

A recent article by Jon Markman from MSN Money paid tribute to Belkin's remarkable trend calling ability. Using relatively simple models based upon 200 week and 200 month moving averages, Belkin has made some incredible calls, including...

In mid-1999 he told his clients to buy into the NASDAQ bubble. Then in March 2000, Belkin told clients to bail out of tech stocks and U.S. government bonds. If you had listened to him, you too could have scraped your dot.com profits off the table. Within a month of that call, the Nasdaq had fallen 1,000 points, but Belkin forecasted that it would continue down another 65% - which is almost exactly what happened. Finally, in November of 2003, after the NASDAQ had fallen by about 70%, he recommended his clients go heavily into the technology and gold stocks - a recommendation that has turned out to be a huge win.

So, what does Belkin see as next for the U.S. markets? A significant downturn, with home builders taking the biggest hit as the liquidity bubble caused by tax breaks and the refinancing boom is bled out of the system.

Markman's article contains the full story on Belkin, as well as a long list of picks for ways to profit that others pay $38,000 to see in his weekly newsletter... consider it Markman's $38,000 gift, which we pass along to you here. Read the full text at http://moneycentral.msn.com/content/P62345.asp.

A caveat: we have known many gurus over the year, and one of our founding members has been accused of being one, but it is the rare one that continually gets it right, year after year. So far, only Buffett seems to be bullet proof, but Belkin's nipping at his tail.

*** END QUOTES ***

"very positive news..." VP Cheney commenting on the in-country poll taken by Zogby International to gauge the attitudes of the average Iraqi towards the U.S.

"It just doesn't smell good to me," said John Zogby, head of Zogby International commenting on the same poll.

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FOOTNOTES:
1 U.S. troop levels are insufficient to protect selves, let alone Iraq New York Times, 11/5/03

2 THE SOVIET WAR IN AFGHANISTAN: HISTORY AND HARBINGER OF FUTURE WAR? By General (Ret) Mohammad Yahya Nawroz, Army of Afghanistan & LTC (Ret) Lester W. Grau, U.S. Army

3 The First Scientific Poll of Current Iraqi Public Opinion, The American Enterprise, 12/03