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

Editor's Note:
FED UP with the government greenbacks? Check out NORFED alternate gold and silver Liberty Dollar.

What We Now Know

Week of 11/10/03
(Content slightly edited)

We have once again made a special arrangement to present you with "What We Now Know" the fascinating weekly e-letter from the editors, researchers and world travelers of The Explorer's League. Hope you enjoy it as much as we did. Pass it along!

*** THE NEXT BIG THREAT ***

Some years ago savvy traders in the Egyptian souk came up with a rating scale for the dates they sell during the Muslim holy month of Ramadan. The dates on offer are named after public figures, with the highest quality dates named after the most popular individuals. This year the best and most expensive dates are named after French President Jacques Chirac and sell for $3.2 dollars a kilo, joining a best date alumni that includes none other than Osama bin Laden. The second best dates this year are the "Yassar Arafat" - which sell for up to $2.43 per kilo.

So, what names do you think would be assigned to the poorest quality dates? You'd be right if you guessed the "Bush," which sells for a lousy 24 cents per kilo, or the "Sharon," which comes in dead last at a near giveaway 16 cents per kilo.

Notice a trend here? We do, and it points to the next big headache for those in the U.S. government who seem addicted to meddling in the Middle East. The headache has a name, and it is Egypt. The place seems to be a powder keg nobody is looking at, like Iran was in the last days of the Shah.

For many years, we've liked to keep an eye on events in Egypt. There's not much about the country in the popular press; since they arrived at an accommodation with the Israelis years ago, most people figure the place is healthy, happy, and friendly. Out of the news, out of mind. Problem solved. But we suspect that Americans are about to learn quite bit more, like it or not. And, chances are, it will be yet another unpleasant and expensive education. With the right catalyst, Egypt may be about to boil over.

The place is an accident waiting to happen. It has an incredibly bureaucratic, centrally planned, stagnant, fascist economy. Since January, when the Egyptian pound was revalued, prices of even basic foodstuffs (including dates) have risen between 15% and 50%.

To make matters worse, the population of 70 million is growing at one of the fastest rates in the world, with massive unemployment among volatile young males (over 35% of the population is under 15). It is a hotbed of religious fervor. The average fellaheen is dirt poor, and totally ignorant.

Egypt's President Hosni Mubarak, like the Saud family across the Red Sea, is in an untenable position - trapped between the rock of a hostile, young and futureless populace that has been fed a steady diet of fundamentalism.... and the hard place represented by a desire to remain in power as a secular dictatorship.

In an attempt to satisfy the masses, Mubarak's government trots out the usual scapegoat, Israel, most recently pledging his support to Syria against what he termed "provocations" from that unwanted neighbor. Singing from the same song sheet, the Egyptian governmental daily al-Gumhuriya described a deadly October 4 Palestinian suicide attack in the northern Israeli city of Haifa as a "brave commando operation."

But there's a big difference between trash talking for the souk, and keeping in power by keeping the mullahs under control - something Mubarak no doubt had in mind when his security forces recently rounded up forty-three Islamists and accused them of planning attacks on Western interests in Egypt.

The tightrope that Mubarak and his thugs are walking on is fraying a little more each day and, within the decade, will almost certainly snap... making the mess that is the Middle East that much worse for whomever is named after bad dates at the time.

**** BE HAPPY - PART ONE ****

"What We Now Know" is the weekly look at the world we live in for members and guests of The Explorer's League, a new organization with the motto "Live Before You Die."

The League has been founded by a group of individuals with varied interests that range from playing polo to writing books... from extreme travel to the in-depth study of the human mind... from race car driving to analyzing technology trends and much, much more.

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Start by subscribing to "What We Now Know".

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Back to the title of this section: In recent weeks, researchers at Ohio State University have confirmed the theory first postulated in 1884 by psychologist William James that your physical expressions dictate your attitude. To put it simply, smile more and your outlook on life will tend toward the upbeat and happy. Sound too easy? Put the research data to the test - make a concentrated effort at smiling more over the next week and see if it works for you.

In next week's edition, we'll tell you another, even more potent way to put life back into your life. As a bonus, it also happens to be one of the most important secrets to succeeding in business as well.

*** MAKE YOUR OWN CRUISE MISSLE ***

We attempt to keep up with advances in aviation technology and know that this field is on the same trend as computers, biotech and, indeed, most areas of technology: everything is becoming vastly cheaper, smaller, and more available.

This fact was recently hammered home by the October rocket attack on Iraq's Al Rasheed Hotel, temporary home to civilian and military personnel associated with the U.S.-led Coalition Provisional Authority and, at the time, deputy defense secretary Paul Wolfowitz. The rocket used with such global effect turns out to have been a homemade affair, described by officials on the scene as a "science project."

Which brings to mind Bruce Simpson, a resident of New Zealand we recently learned about who has decided he can make his own cruise missile for about US$5000... and is on his way to completing it-- including the manufacture of his own jet engine. Simpson has a web site, www.interestingprojects.com, where interested parties can monitor his progress, and we shudder to think who that may be.

The implications: in a world when absolutely anybody can launch a successful attack in retaliation - with low-tech weapons options that range from human bombs to, potentially, personal cruise missiles, governments are going to have to be far more careful when picking a fight.

*** GOLD BULL, NO BULL? ***

For years, no, make that decades, the gold bulls have prematurely exclaimed "gold is soaring, gold is soaring." This time around they may have it right. The reason is a trifecta of three factors that collectively create a seemingly perfect storm for gold. The first is the pending launch of Gold ETFs (Exchange Traded Funds): investment shares backed by 1/10th of an ounce of gold stored in a secure vault. Gold ETFs were supposed to be available in 2003 but, this being the U.S., a lawsuit arose that caused a delay. Now that the lawyers have been paid, Gold ETFs are again set to appear on the major U.S. stock exchanges in early 2004.

The intent of the Gold ETF is to facilitate the buying and selling of gold by eliminating the hassle of having to physically take delivery. While the retail market for Gold ETF shares will be interesting, it is the deep-pocketed institutional buyers, looking for non-correlated assets (def. investments that don't track the stock market) which could drive demand through the roof and, with it, provide a serious boost to the underlying gold price.

As a point of reference, a Gold ETF was launched on the Australian market earlier this year. Despite the gold price moving down in local currency terms, these have scraped 230,000 ounces off the table so far. Roughly extrapolating that number to the far larger U.S. market, the amount of gold removed from circulation could be roughly equivalent to all the new mine supply from Newmont, the world's largest producer. While this is not enough to cause supply shock, it is a significant development nonetheless.

Far more important is the symbolism that comes from turning gold into an easily tradable asset, as this marks the entry of gold into the world of modern global finance. Gold is money once more. This is especially relevant when considering the second factor in the gold trifecta, the decline of the U.S. dollar. Read on...






*** WHERE ARE YOU KEEPING YOUR BILLIONS? ***

Since the June 1986 creation of the Dollar Index-a basket made up of the currencies of six major trading partners-the data clearly shows that the value of the U.S. dollar has been eroding by a fairly steady rate of about 1% a year. And why not? Each year the U.S. Treasury Department prints money shamelessly to fund our out of control deficits. How shamelessly? If you were to place the physical currency notes printed by the U.S. Treasury each year end to end, they would circle the globe more than 30 times!

While the dollar trend is one of steady decline, there are periods embedded within that trend when the decline accelerates significantly. We are in such a period now. Beginning in February of 2002 the dollar has lost more than 23%. Importantly, once in motion, these dollar trends tend to remain in motion for periods of 5 to 9 years. As we are under the two year mark as you read this, we are still quite early on.

What does this have to do with gold? Everything.

Inflation Proof Money is now available at a discount from NORFED.

That's because of foreign investors, who collectively own securities and U.S. government bonds worth untold billions of eroding U.S. dollars. It is these investors who are poked in the chin most painfully by the dollar's fall. Put yourself in their shoes. If you had a billion or so dollars (and we hope you do!) in U.S. Treasury bonds that would lose big if U.S. interest rates rise... AND... the currency in which your bonds are denominated was eroding by ~10% a year, as they have been lately... AND you were only earning a paltry 2.01% yield to accept all this risk and pain - how long would YOU hang on?

We believe that the answer is fairly obvious. But where to invest? At least for some percentage of your billions, the answer may well be the "new" global currency, gold. It is the only currency that cannot be created willy nilly, but rather must be laboriously hacked from the earth.

Which delivers us nicely to the front door of the third factor in our trifecta... China. They are one of those foreign investors watching their considerable U.S. dollar assets erode.

*** THE DRAGON LIKES GOLD ***

Two developments in China catch our attention. The first is that, for the first time in 40 years, in December of last year it became legal for the 1.3 billion mainland Chinese to buy physical gold in bar form. As the Chinese have long viewed gold as a primary savings vehicle, this has the potential to open up a serious new source of demand. Case in point, a recent national survey showed that approximately 20% of the population was willing to invest between 10 and 30% of their savings in gold. The Dragon likes gold.

It is too early to properly gauge the impact, but we found the following data of interest: in 2002, due largely to the restrictions on private gold purchases, mainland Chinese purchases amounted to just .16 grams per person. In Hong Kong, however, the per capita purchases over the same period were approximately 2.7 grams - a better than 16 fold increase. We don't think the increase in demand from the mainland will be quite that dramatic in the near term - keep in mind that the Hong Kong Chinese are far wealthier than their mainland cousins - but a doubling or tripling from current levels is certainly a possibility.

The second development out of China is indicated by comments from a Bank of China executive who recently said that it would be "safe and feasible" for China to swap some foreign exchange reserves for gold. Confirming comments from another representative of the Chinese Central Bank came shortly thereafter, when he said "Reducing reliance on the dollar and maintaining greater diversification in foreign exchange reserves is the only way to reduce the risk... As a result, an increase in our country's gold reserves is necessary."

Of course, this could well be China's way of telling the U.S. to back off on its demands that China revalue it's currency, but the option of increasing the gold component of it's $400 billion in foreign reserves is not at all unlikely.

What does the gold trifecta add up to?

The estimates are all over the place, with one wild-eyed pundit calling for the gold market to lose as much as 31,000 tons from the market, about 14 years worth of global production. We think that is too optimistic by a multiple.

We do, however, believe in making the trend your friend: Get the trend right and your underlying investments are far more likely to work out. And, when it comes to gold, we believe the trend is decidedly up, with a break through the $500 per ounce level over the next 12 to 18 months likely. For the record, today's gold price is in the area of $383.

Whether you like your gold straight, in bullion or, soon, in a Gold ETF... or go for the leverage offered by the gold stocks, it should be a very interesting asset class over the next two years, and worth spending time learning about now, not later. One Web site you may find useful is www.kitco.com.

*** DOORBELL FROM HELL ***

Americans have been led to believe Iraqi insurgents use sophisticated devices to detonate their deadly roadside bombs when U.S. troops pass by. Not so. According to Powell, our technology correspondent, most such bombs are controlled by ordinary wireless doorbell kits which can be purchased in any hardware store for under $20. The buzzer unit is hooked up to the bomb which is subsequently triggered by the hidden attacker using a signal from the small door switch. Lengthened antennas are attached to the two devices which allow them to be located as much as 100 yards apart.

Word has it that the National Security Agency plans to cure the problem by blanketing Iraq with frequent doorbell signals sent from its overhead satellites. The signals will set off the wireless devices and blow the bombers up when they insert the batteries. In effect, Uncle Sam's message will be, "Ding Dong, You're Dead."

*** COMING NEXT WEEK ***

The following are stories we are working on, but we reserve the right to change our minds - and often do - based on developments within the week ahead. With that caveat, here's what we are working on.

Afghan Ugly... Money Mega-Trend... Be Happy - Part II... Credit, Credit Everywhere... Do YOU Know Where Hoffa is Buried?... Return of the Bounty Hunters... Book and web site recommendations... and more. Keep informed and (we hope) entertained ... Subscribe today, it's FREE!

*** END QUOTE ***

Regardless of your views on the current war in Iraq, you should find the following quote of interest - especially considering its source. We certainly did.

"Of course the people don't want war. But after all, it's the leaders of the country who determine the policy, and it's always a simple matter to drag the people along whether it's a democracy, a fascist dictatorship, or a parliament, or a communist dictatorship. Voice or no voice, the people can always be brought to the bidding of the leaders. That is easy. All you have to do is tell them they are being attacked, and denounce the pacifists for lack of patriotism, and exposing the country to greater danger."

-- Herman Goering at the Nuremberg trials

STRATFOR
The Cuban Missile Crisis: Parallels in History
Oct 20, 2003

Summary

The Cuban missile crisis under President John F. Kennedy holds some apt parallels to the challenges currently facing U.S. President George W. Bush.

Analysis

October always reminds us of the Cuban missile crisis. This is the 41st autumn since the defining moment that ended the first phase of the Cold War. In 2003, the memory of the missile crisis is, we believe, particularly apropos. Americans in general tend to think that everything the country is facing at a particular moment is unprecedented. Americans tend to think in extremes. Everything is either worse or better than ever before. Leaders are more corrupt, more perfect, more brilliant or more stupid than they have ever been. Americans lack nothing more than a sense of proportion. It is therefore interesting to look at what historian Barbara Tuchman called a distant mirror to compare the current situation with circumstances the United States faced in the past. This is not intended to either praise or condemn the current administration or the Kennedy administration. It is meant simply to gain some perspective on the current state of affairs.

The Cuban missile crisis started in a series of intelligence blunders that began under one administration and continued into the next. U.S. intelligence under Dwight Eisenhower misunderstood the nature of Fidel Castro's insurgency and miscalculated the likelihood of his victory. Eisenhower responded by initiating a covert war against Castro that suffered from Eisenhower's desire that it not only work, but that the war be completely deniable.

The result was the Bay of Pigs plan, which had little chance of working in the first place and no chance of working once U.S. President John F. Kennedy tinkered with it. The entire plan was based on a misreading of the mood of the Cuban people. It was based on the assumption that Cubans would welcome an invasion and that, in addition, they would be in a position to rise up against Castro. Whatever the true reason for the failure of the Cubans to rise, U.S. intelligence was wrong: There was no rising.

Intelligence under Kennedy also miscalculated the Soviet Union's intentions toward Cuba. That was an intelligence failure, but it was also a failure on Kennedy's part to appreciate how Soviet leaders viewed him. Kennedy came to power in part over his persistent claim that the Soviets were ahead of the United States in strategic nuclear capability -- what was called the missile gap. In fact, the strategic balance heavily favored the United States, and Kennedy knew it. He hammered the issue because it was a strong plank in his electoral platform.

From Soviet leader Nikita Khrushchev's point of view, however, the victory of a man who did not seem to grasp the realities of the nuclear balance opened up interesting possibilities. Khrushchev's meeting with Kennedy in Vienna left him with the conclusion that Kennedy was inexperienced, poorly informed and timid. The Bay of Pigs fiasco simply confirmed to Khrushchev that Kennedy was out of his league. Indeed, years of hagiography notwithstanding, Kennedy had little grasp of the international reality when he took office or in the following year.

Khrushchev understood what he thought Kennedy did not, which was that the United States, with missiles in Germany and Turkey and a large intercontinental bomber fleet, could devastate the Soviet Union. The Soviets, on the other hand, could hardly touch the United States. Khrushchev's decision to put missiles into Cuba was a desperate attempt to rectify the balance of power. He assumed, based on Kennedy's abysmal performance to date, that U.S. intelligence might miss the missiles until after they were operational and that, even if they were detected, Kennedy would not have the nerve to take decisive action.

Three things led to the Cuban missile crisis:

1. Consistently poor U.S. intelligence.

2. A prior administration that failed to react to the threat in a timely fashion and in essence passed on the Cuban problem to its successor.

3. A new administration whose president struck his adversaries -- and allies -- as a deer frozen in the headlights.

We will allow our readers to draw the obvious parallels to the current situation.

In spite of these defects, Kennedy recognized that the Soviet move represented a fundamental challenge to U.S. security. He understood that it was much preferable, from the U.S. point of view, for American nuclear weapons to be menacing the Soviet Union rather than have Soviet missiles threatening the United States. While ethically shaky -- if we assume that the basis of ethics is equal treatment -- the view was practically sound for an American president. Thus, in spite of global criticism that he was threatening nuclear war, Kennedy understood that geopolitically he had no choice.

It is interesting to recall that Kennedy -- caught between those who wanted an invasion of Cuba and those who wanted to take no action that might trigger a nuclear war -- chose a compromise path in which the United States announced its commitment through a quarantine policy, without unleashing an invasion. It is also interesting to note that there was a tremendous global uproar over Kennedy's actions. Many allied governments, while publicly supportive, were privately appalled by what they saw as an overreaction. Crowds in European cities -- not to mention the communist world -- demonstrated against U.S. aggression and portrayed Kennedy as a simplistic cowboy, irresponsibly playing with the lives of millions.

Khrushchev's perception was quite different. Realizing that he had miscalculated, he sought a line of retreat. Khrushchev realized too late that however unsophisticated Kennedy might have appeared in Vienna and Berlin and during the Cuban missile crisis, there was no escaping the physical threat that Soviet missiles in Cuba posed to the United States. The physical danger to the United States, more than any other factor, focused Kennedy's mind. Kennedy knew that there was room for error on everything but the physical security of the country. He understood that, geopolitics aside, Khrushchev had crossed a threshold when he introduced the threat, and crossing that threshold changed the entire equation. That Europeans thought him a cowboy was immaterial once the direct security of the United States was at stake.

Kennedy's actions were seen as extreme and disproportionate to the threat. He struck many in the world as reckless and incautious. Countries worldwide pointed at the nuclear threat the United States posed to the Soviet Union and argued that the Soviets were simply balancing things. Kennedy didn't want the threat to be balanced. He wanted the Soviets to remain at risk and the Americans to be safe. As he famously said in connection to other matters, "Life is unfair." It wasn't great philosophy, but it made sense to Americans.

The United States threatened overwhelming force but actually used very little. In the end, Kennedy negotiated a settlement with Khrushchev and then lied about it. In a private deal with the Soviets, the United States agreed to exchange its missiles in Turkey for the Soviet missiles in Cuba. Kennedy's rationale for this was sound. The missiles were obsolete. However, he also understood that -- given his record of weakness in foreign affairs -- he needed to appear to win even if he only tied. Therefore, holding open the possibility of invasion and even nuclear war as the threat, he extracted a concession from the Soviets that made the withdrawal of the Turkish missiles a secret part of the agreement, which would be void if it were publicly revealed.

In other words, Kennedy lied about the letter and nature of the agreement. He lied explicitly when he asserted that there had been no quid pro quo over the missiles. He then lied in spirit when he made it appear that the Soviets had capitulated in the face of his resolute courage. In fact, there had been a quid pro quo and -- though the United States certainly came out ahead in the immediate deal -- Washington had to give up its own missiles and guarantee that it would not support attempts to overthrow Castro. The United States stopped the missiles. The Soviets secured Cuban communism.

It is interesting to see these parallels:

1. Both Kennedy and current U.S. President George W. Bush were widely perceived as inexperienced in foreign affairs. Their foes perceived them both as bunglers.

2. Both focused intensely on anything that physically threatened the United States.

3. The rest of the world regarded both presidents as overreacting and as cowboys, risking world security on minor provocation.

4. Both were casual with the truth when it suited the national -- or their political -- interests.

It is not clear how much deeper these parallels run.

Kennedy's missile crisis ended in a temporary stalemate. It also triggered a massive Soviet commitment to increase its strategic nuclear capabilities and led to the construction of a massive ICBM force able to threaten the United States from within the Soviet Union. By the end of the decade, the Soviets achieved the strategic nuclear parity they had sought in Cuba. In that sense, Kennedy simply bought a few years -- which was not trivial, but not decisive.

However, Kennedy's next decision -- to increase the U.S. commitment to Vietnam while supporting the overthrow of the Diem government -- proved disastrous. Some claim that Kennedy wanted to withdraw from Vietnam. Perhaps, but we note two facts. No withdrawal took place while he was alive and, more important, it was Kennedy's foreign policy team (including Dean Rusk, Robert McNamara and McGeorge Bundy) who engineered the Vietnam War under Lyndon Baines Johnson. Kennedy could have fired them all and built a new team, but we suspect he also would have retained them and followed their advice. They were the winning team in Cuba, after all.

At the decisive moment, Kennedy set the stage for the decline in the second phase of the Cold War. Cuba represented a push. It was a punctuation mark, not a definitive solution to anything. On the contrary, it was an intermediate peak to which the United States would not return until the end of the Cold War. Bush has not yet had his Cuban missile crisis. He has not yet been able to maneuver the war to its decisive moment. He is facing an adversary that is committed to avoiding any decisive moment. However, the danger that a Cuban missile crisis poses is that of an illusory solution.

All of that is intended to be thoughtful and deep. The point of this essay is simpler however. Americans tend to think of each moment as extraordinarily unique and the present leaders as particularly incompetent. Those who opposed President Bill Clinton thought he was particularly venal, and those who oppose Bush think him uniquely incompetent. It is useful to look back on moments like the Cuban missile crisis, which we tend to see through the prism of time as a particular moment of U.S. courage and decisiveness. Like the current circumstance, it was a moment born of failure, ineptitude and dishonesty, and it ultimately gave rise to the things it was intended to prevent. The president that presided over the crisis is revered today. There are few who were alive in September 1962 who would have thought that Kennedy would be remembered for his strategic acumen. And there are many historians who still wonder what the shouting was about.

Bush's critics should take note of this. And Bush should remember that the kind of victory he gains -- if he gains one at all -- is as important as the victory itself.