THE ENTERPRISE--HOW FIGURES LIE AND LIARS FIGURE
BEWARE OF COMPARISONS
The headlines are full of news, some good, some bad. Nearly every piece of economic and business news contains a comparison, usually of the most recent time period to either the one immediately preceding it, or the comparable period last year. During the boom times that continued up until mid-2008, the comparisons were predominantly positive. Well, that's not quite true; housing has been heading down for more than a year, almost two years in some places. But even with that dragging down comparisons, the trend was up. Then it wasn't up any more. It was down, down, down, often to levels lower than recorded in recent decades. We may be at or near the "bottom" but that doesn't mean we are "headed up" yet. It's too soon, and too much still has to be cleared up, cleaned up, and written off.
A RECOVERY BY ANY OTHER NAME
As we wait for the recovery, it is important to recall that sometime in the next few months, comparisons will be against last years dramatic decline. It should be no cause for joy if the 4Q beats last year by a meager few percentage points, because that quarter was down more than 6 points from the year before. Unless the 4Q 2009 beats last year by 7%, it will still be lower than the 4Q of 2008, two years prior. Thus corporate earnings, which may also show favorable comparisons. Another point to recall is that many companies were just catching up with commodity driven price increases in most of 2008. These increases have largely remained in place which means that while dollar denominated results may show favorable comparisons to a year ago, actual unit sales are still down noticeably.
THE GOVERNMENT'S STATS ARE DATED, FLAWED AND ALWAYS WRONG (AT FIRST ANYWAY)
If you are planning on using government statistics upon which to base your plans, forget it. Nearly every major government stat-employment, GDP growth, balance of trade, etc. are subsequently revised very substantially. Thus, basing your personal or business plans on those initial gov't releases would be the height of foolishness. Don't do it. Wait for revisions, and still be suspicious. Jobs data (one of the most watched) is notoriously flawed since there is no reliable way to gauge small business job creation. They just guess at it, based on past history. Anyone who knows forecasting knows how risky that is. I called the BLS a couple of years ago and inquired about these big errors/revisions. The answer was "we're working on it." When I asked when or if they expected any improvements, the answer was, "we really can't say." Great. At least that is internally consistent. They don't know, and admit it. In recent years, revisions have been suspiciously one directional too--but that is another issue entirely--some people think it could be just "noise", or others wonder if it could be a "plot." Who knows. Just view these widely publicized metrics with great skepticism.
WHEN THE TRUCKS AND TRAINS ARE ROLLING, THE ECONOMY IS ROLLING
Some months ago, I wrote in here about the huge number of railroad cars sitting empty and idle on sidings across America. My recollection is that about 200,000 of them, or 30% of the railroads "fleet" of cars was idle There are fewer trucks on the road too; and ocean containers are less numerous. A sure way to identify a recovery is when the "rolling stock" of the USA starts rolling again. Until then, it will be an anemic, and artificial recovery--sort of like the one the stock market has been showing. Wall Street, in the opinion of some of the best sources I can find, is in a secular bear market rally, which could end, reverse itself or must stagnate at any time. So, put away the fireworks until July 4, and then (assuming we are still independent) we can celebrate that. Watch for the word from firms like UPS, to see when traffic picks up. That is a good indicator that a recovery is underway. Until then, hang tight.
CHINA EXPORTS WERE DOWN
The most recent reports from China reflected the global nature of this recession. Its exports were down 22.6% from a year ago (in addition to a 17.1% drop in March), and this is a cause of great concern for the Chinese government. Economic woes in China can turn quickly to social unrest, and that is the most frightening prospect for the Chinese central government. When you have 1-1.5 billion people, if any significant group of them become "very upset" it becomes a "very big problem"--no matter how large your Army is (and China's is large). An economist at a government think tank said, "Government investment along won't be enough to support a recover. The market has to do the job. Otherwise it's unsustainable." China's central bank also warned that there isn't yet a firm foundation for an economic recovery, in spite of its huge government stimulus package.
THE U.S. ECONOMY IS BY FAR THE WORLD'S LARGEST; CHINA IS #2 (OR SOON WILL BE)
But China's is staged to surpass Japan's as number two. When the top two are interdependent as we are with the Chinese, it's easy to see why a recession afflicts both. Then consider the inventory reduction efforts of American importers, especially large retailers, and you'll see the other cause of this problem. Until American consumers feel safe, secure and financially sound again, they will spend sparingly--and that is bad new for China--and for any nascent recovery. Right now, American consumers are paying their bills and saving what they can, instead of bingeing on unnecessary "stuff." The real threat is when the Chinese are convinced that what they are saying about their economy is also true for ours--and they quit buying our Treasury Bonds. Who else will?
POLITICS WILL DRAMATICALLY AFFECT BUSINESSES--AND EVERYONE--SOONER RATHER THAN LATER
It appears that some form of national health care reform is coming fast. With a Democratically controlled Congress, President Obama will be pushing hard to make this priority happen. If he doesn't feel he can get everything he wants, the new system will contain "placeholders" where the door is wedged open, and further centralization, government control and more will be coming along. At least Obama flip-flopped wisely recently, when he decided to NOT release a large group of photos that supposedly contained evidence of torture and other bad behaviors. It would have done great harm to the US by inflaming our enemies everywhere--and that is something Obama really doesn't want--so this was both a pragmatic and politically astute decision. I keep hoping that President Obama will learn (fast) about the error of his plans and policies, and as he does, he will modify his (campaign) positions and make better decisions. (e.g., CIA photos, Military Tribunals, Iraq forces withdrawal to name just three.) This is another "tiny glimmer of hope" amidst too much "darkness"--up until now. (Could he actually be learning about how he was wrong?)
COLOR HER GONE AS SPEAKER OF THE HOUSE
And now, we have House Speaker Pelosi, who seems to have "forgotten" about being in briefings about what is now regarded as torture (regardless of what PC name is applied). Of course she was there. Of course she heard/saw the briefing. Unless she was asleep or brain dead (possible?), she is flatly lying when she says she "didn't know and wasn't told." Also, she "was told" by staffers too--but that doesn't count as "being briefed." Sure. Pelosi narrowly defeated Steny Hoyer in the vote for House Speaker. Of course the GOP is apoplectic. But what's new about that? Now watch Hoyer's supporters rise up along with all those Pelosi has offended (a large club) to help drive her out as speaker and replace her with Hoyer. The Obama administration will distance itself as far as possible from this one, but Pelosi has dug too big a hole to get out of. You know the old rule, "when you have dug yourself into a hole, at least be smart enough to stop digging." She will ultimately go quietly. Good riddance. Even if Hoyer is not much better, he can't possibly be worse (can he?). How long will it take for President Obama and the Democrats in the House to move her aside? Weeks--at most--probably before the summer recess.
AFGHANISTAN--EXACTLY WHAT IS OUR OBJECTIVE
Many of you know I read the writings of George Friedman of Stratfor, and find him to be a very well-informed, competent, and relatively unbiased observer of the current global scene. In one of Friedman's recent papers, he pondered and questioned what, exactly, the USA hopes to achieve in Afghanistan. He also reflected that it was a quite different situation than Iraq, and because of that difference, everything else about it also differs. Before we commit US lives and money to a protracted struggle in a far-away land for a vague and ill-defined purpose, shouldn't we--THE AMERICAN PEOPLE--demand of our leaders that they answer this question. I think we should. I am posting Friedman's analysis below for those who want to read it. It is very insightful. It will make you think. (So if you don't want to ponder such imponderables, don't start reading it!)
IRAQ WASN'T VIET NAM, BUT AFGHANISTAN MIGHT BE
There are few things worse than becoming involved in a conflict without a clear goal, and an exit strategy. Ask the Russians, who were ultimately beaten and humiliated by the Afghanistanis, but only after a long, bloody and expensive struggle. Get a topographical map of Afghanistan, and you will start to see the problem. Unlike Iraq which was miles and miles of flat, sandy plain, Afghanistan is some of the most tortuous and unfriendly terrain on earth. And that works to the advantage of the "natives" (Taliban) who know it, know how to use it, and have done this for years. With Pakistan perilously perched on the edge of anarchy or revolution, and unable to police their own territory (some of which is as rugged as Afghanistan) we should be worried about terrorists getting their hands on Pakistan's nukes. President Obama says they are secure; but I don't believe that. I've read that they various "pieces" are distributed, so seizing them are harder.
This all gives me little comfort. I wish I knew a solution. I don't. But the first of the two-step problem solving process is to "1) understand and define the problem." Then you can start to "2) solve the problem." I wonder if anyone has done step one yet.
MEANWHILE THE IRRESPONSIBLE SPENDING GOES ON
And wealth redistribution in many insidious forms continues. Arlen Specter is back on the Democratic side of the aisle trying to "modify" the Employee Free Choice Act to please his new party cohorts. Some little known facts about the current administration and Unions. There have been two actions to block the legally called for reporting of how unions spend members' dues. The Landrum-Griffin Act, passed fifty years ago spelled it out, and Obama appointees are anxiously trying to block transparency it calls for. Why? Perhaps there is something to hide. One union "disclosed" that it spent $62 million on "Contributions, gifts, and grants to local affiliates." Wow. That's informative. Between 2001 and 2008, the Labor Department secured more than 1000 union fraud indictments, and 929 convictions. (Source: Elaine Chao, former secretary of labor from 2001-2009)
Remember, the government's only meaningful source of income is in taxes levied on its citizens and businesses derived from the wealth they generated by their enterprise and hard work. The government cannot create wealth. It can only seize it and use it to its own ends. I contend that Abraham Lincoln was right when he ended the Gettysburg Address with the statement about assuring that "this government of the people, by the people and for the people, shall not perish from the earth." The government is supposed to work for us; we are not supposed to work for it.
Best, John
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THIS WEEK''S HUMOROUS ADVICE:
If you are bothered by occasional or frequent constipation, look in the mirror and repeat the following phrase three times in succession when symptoms occur: "My financial and personal well being and the future of our country is in the hands of Barack Obama, Joe Biden, Harry Reid, Nancy Pelosi, Tim Geithner, Rahm Emmanuel, Barney Frank, Chris Dodd, et. al, and even Al Gore." If that doesn't scare the shit out of you, then nothing will. No need to thank me for this advice; I'm just doing a public service.
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By George Friedman
After U.S. airstrikes killed scores of civilians in western Afghanistan this past week, White House National Security Adviser Gen. James L. Jones said the United States would continue with the airstrikes and would not tie the hands of U.S. generals fighting in Afghanistan. At the same time, U.S. Central Command chief Gen. David Petraeus has cautioned against using tactics that undermine strategic U.S. goals in Afghanistan -- raising the question of what exactly are the U.S. strategic goals in Afghanistan. A debate inside the U.S. camp has emerged over this very question, the outcome of which is likely to determine the future of the region.
On one side are President Barack Obama, Defense Secretary Robert Gates and a substantial amount of the U.S. Army leadership. On the other side are Petraeus -- the architect of U.S. strategy in Iraq after 2006 -- and his staff and supporters. An Army general -- even one with four stars -- is unlikely to overcome a president and a defense secretary; even the five-star Gen. Douglas MacArthur couldn't pull that off. But the Afghan debate is important, and it provides us with a sense of future U.S. strategy in the region.
Petraeus and U.S. Strategy in Iraq
Petraeus took over effective command of coalition forces in Iraq in 2006. Two things framed his strategy. One was the Republican defeat in the 2006 midterm congressional elections, which many saw as a referendum on the Iraq war. The second was the report by the Iraq Study Group, a bipartisan group of elder statesmen (including Gates) that recommended some fundamental changes in how the war was fought.
The expectation in November 2006 was that as U.S. President George W. Bush's strategy had been repudiated, his only option was to begin withdrawing troops. Even if Bush didn't begin this process, it was expected that his successor in two years certainly would have to do so. The situation was out of control, and U.S. forces did not seem able to assert control. The goals of the 2003 invasion, which were to create a pro-American regime in Baghdad, redefine the political order of Iraq and use Iraq as a base of operations against hostile regimes in the region, were unattainable. It did not seem possible to create any coherent regime in Baghdad at all, given that a complex civil war was under way that the United States did not seem able to contain.
Most important, groups in Iraq believed that the United States would be leaving. Therefore, political alliance with the United States made no sense, as U.S. guarantees would be made moot by withdrawal. The expectation of an American withdrawal sapped U.S. political influence, while the breadth of the civil war and its complexity exhausted the U.S. Army. Defeat had been psychologically locked in.
Bush's decision to launch a surge of forces in Iraq was less a military event than a psychological one. Militarily, the quantity of forces to be inserted -- some 30,000 on top of a force of 120,000 -- did not change the basic metrics of war in a country of about 29 million. Moreover, the insertion of additional troops was far from a surge; they trickled in over many months. Psychologically, however, it was stunning. Rather than commence withdrawals as so many expected, the United States was actually increasing its forces. The issue was not whether the United States could defeat all of the insurgents and militias; that was not possible. The issue was that because the United States was not leaving, the United States was not irrelevant. If the United States was not irrelevant, then at least some American guarantees could have meaning. And that made the United States a political actor in Iraq.
Petraeus combined the redeployment of some troops with an active political program. At the heart of this program was reaching out to the Sunni insurgents, who had been among the most violent opponents of the United States during 2003-2006. The Sunni insurgents represented the traditional leadership of the mainstream Sunni tribes, clans and villages. The U.S. policy of stripping the Sunnis of all power in 2003 and apparently leaving a vacuum to be filled by the Shia had left the Sunnis in a desperate situation, and they had moved to resistance as guerrillas.
The Sunnis actually were trapped by three forces. First, there were the Americans, always pressing on the Sunnis even if they could not crush them. Second, there were the militias of the Shia, a group that the Sunni Saddam Hussein had repressed and that now was suspicious of all Sunnis. Third, there were the jihadists, a foreign legion of Sunni fighters drawn to Iraq under the banner of al Qaeda. In many ways, the jihadists posed the greatest threat to the mainstream Sunnis, since they wanted to seize leadership of the Sunni communities and radicalize them.
U.S. policy under former Defense Secretary Donald Rumsfeld had been unbending hostility to the Sunni insurgency. The policy under Gates and Petraeus after 2006 -- and it must be understood that they developed this strategy jointly -- was to offer the Sunnis a way out of their three-pronged trap. Because the United States would be staying in Iraq, it could offer the Sunnis protection against both the jihadists and the Shia. And because the surge convinced the Sunnis that the United States was not going to withdraw, they took the deal. Petraeus' great achievement was presiding over the U.S.-Sunni negotiations and eventual understanding, and then using that to pressure the Shiite militias with the implicit threat of a U.S.-Sunni entente. The Shia subsequently and painfully shifted their position to accepting a coalition government, the mainstream Sunnis helped break the back of the jihadists and the civil war subsided, allowing the United States to stage a withdrawal under much more favorable circumstances.
This was a much better outcome than most would have thought possible in 2006. It was, however, an outcome that fell far short of American strategic goals of 2003. The current government in Baghdad is far from pro-American and is unlikely to be an ally of the United States; keeping it from becoming an Iranian tool would be the best outcome for the United States at this point. The United States certainly is not about to reshape Iraqi society, and Iraq is not likely to be a long-term base for U.S. offensive operations in the region.
Gates and Petraeus produced what was likely the best possible outcome under the circumstances. They created the framework for a U.S. withdrawal in a context other than a chaotic civil war, they created a coalition government, and they appear to have blocked Iranian influence in Iraq. But these achievements remain uncertain. The civil war could resume. The coalition government might collapse. The Iranians might become the dominant force in Baghdad. But these unknowns are enormously better than the outcomes expected in 2006. At the same time, snatching uncertainty from the jaws of defeat is not the same as victory.
Afghanistan and Lessons from Iraq
Petraeus is arguing that the strategy pursued in Iraq should be used as a blueprint in Afghanistan, and it appears that Obama and Gates have raised a number of important questions in response. Is the Iraqi solution really so desirable? If it is desirable, can it be replicated in Afghanistan? What level of U.S. commitment would be required in Afghanistan, and what would this cost in terms of vulnerabilities elsewhere in the world? And finally, what exactly is the U.S. goal in Afghanistan?
In Iraq, Gates and Petraeus sought to create a coalition government that, regardless of its nature, would facilitate a U.S. withdrawal. Obama and Gates have stated that the goal in Afghanistan is the defeat of al Qaeda and the denial of bases for the group in Afghanistan. This is a very different strategic goal than in Iraq, because this goal does not require a coalition government or a reconciliation of political elements. Rather, it requires an agreement with one entity: the Taliban. If the Taliban agree to block al Qaeda operations in Afghanistan, the United States will have achieved its goal. Therefore, the challenge in Afghanistan is using U.S. power to give the Taliban what they want -- a return to power -- in exchange for a settlement on the al Qaeda question.
In Iraq, the Shia, Sunnis and Kurds all held genuine political and military power. In Afghanistan, the Americans and the Taliban have this power, though many other players have derivative power from the United States. Afghan President Hamid Karzai is not Iraqi Prime Minister Nouri al-Maliki; where al-Maliki had his own substantial political base, Karzai is someone the Americans invented to become a focus for power in the future. But the future has not come. The complexities of Iraq made a coalition government possible there, but in many ways, Afghanistan is both simpler and more complex. The country has a multiplicity of groups, but in the end only one insurgency that counts.
Petraeus argues that the U.S. strategic goal -- blocking al Qaeda in Afghanistan -- cannot be achieved simply through an agreement with the Taliban. In this view, the Taliban are not nearly as divided as some argue, and therefore their factions cannot be played against each other. Moreover, the Taliban cannot be trusted to keep their word even if they give it, which is not likely.
From Petraeus' view, Gates and Obama are creating the situation that existed in pre-surge Iraq. Rather than stunning Afghanistan psychologically with the idea that the United States is staying, thereby causing all the parties to reconsider their positions, Obama and Gates have done the opposite. They have made it clear that Washington has placed severe limits on its willingness to invest in Afghanistan, and made it appear that the United States is overly eager to make a deal with the one group that does not need a deal: the Taliban.
Gates and Obama have pointed out that there is a factor in Afghanistan for which there was no parallel in Iraq -- namely, Pakistan. While Iran was a factor in the Iraqi civil war, the Taliban are as much a Pakistani phenomenon as an Afghan one, and the Pakistanis are neither willing nor able to deny the Taliban sanctuary and lines of supply. So long as Pakistan is in the condition it is in -- and Pakistan likely will stay that way for a long time -- the Taliban have time on their side and no reason to split, and are likely to negotiate only on their terms.
There is also a military fear. Petraeus brought U.S. troops closer to the population in Iraq, and he is doing this in Afghanistan as well. U.S. forces in Afghanistan are deployed in firebases. These relatively isolated positions are vulnerable to massed Taliban forces. U.S. airpower can destroy these concentrations, so long as they are detected in time and attacked before they close in on the firebases. Ominously for the United States, the Taliban do not seem to have committed anywhere near the majority of their forces to the campaign.
This military concern is combined with real questions about the endgame. Gates and Obama are not convinced that the endgame in Iraq, perhaps the best outcome that was possible there, is actually all that desirable for Afghanistan. In Afghanistan, this outcome would leave the Taliban in power in the end. No amount of U.S. troops could match the Taliban's superior intelligence capability, their knowledge of the countryside and their willingness to take casualties in pursuing their ends, and every Afghan security force would be filled with Taliban agents.
And there is a deeper issue yet that Gates has referred to: the Russian experience in Afghanistan. The Petraeus camp is vehement that there is no parallel between the Russian and American experience; in this view, the Russians tried to crush the insurgents, while the Americans are trying to win them over and end the insurgency by convincing the Taliban's supporters and reaching a political accommodation with their leaders. Obama and Gates are less sanguine about the distinction -- such distinctions were made in Vietnam in response to the question of why the United States would fare better in Southeast Asia than the French did. From the Obama and Gates point of view, a political settlement would call for either a constellation of forces in Afghanistan favoring some accommodation with the Americans, or sufficient American power to compel accommodation. But it is not clear to Obama and Gates that either could exist in Afghanistan.
Ultimately, Petraeus is charging that Obama and Gates are missing the chance to repeat what was done in Iraq, while Obama and Gates are afraid Petraeus is confusing success in Iraq with a universal counterinsurgency model. To put it differently, they feel that while Petraeus benefited from fortuitous circumstances in Iraq, he quickly could find himself hopelessly bogged down in Afghanistan. The Pentagon on May 11 announced that U.S. commander in Afghanistan Gen. David McKiernan would be replaced, less than a year after he took over, with Lt. Gen. Stan McChrystal. McKiernan's removal could pave the way for a broader reshuffling of Afghan strategy by the Obama administration.
The most important issues concern the extent to which Obama wants to stake his presidency on Petraeus' vision in Afghanistan, and how important Afghanistan is to U.S. grand strategy. Petraeus has conceded that al Qaeda is in Pakistan. Getting the group out of Pakistan requires surgical strikes. Occupation and regime change in Pakistan are way beyond American abilities. The question of what the United States expects to win in Afghanistan -- assuming it can win anything there -- remains.
In the end, there is never a debate between U.S. presidents and generals. Even MacArthur discovered that. It is becoming clear that Obama is not going to bet all in Afghanistan, and that he sees Afghanistan as not worth the fight. Petraeus is a soldier in a fight, and he wants to win. But in the end, as Clausewitz said, war is an extension of politics by other means. As such, generals tend to not get their way.
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Copyright 2009 Stratfor.
