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--- Begin Message ----Caveat Lector- Gary North's REALITY CHECKIssue 346 May 25, 2004 ABU GHRAIB AND THE DOW As an investor, I look at politics as a major factor in altering the value of capital. Taxation, deficit spending, the rate of monetary inflation, and regulation all affect people's assessment of the future value of capital. That assessmewnt affects the present value of capital. If your money is in the stock market, you would be wise to ask yourself this question: "What if Kerry is elected, and both houses of Congress return to the Democrats?" I think this scenario is increasingly likely. The Republican majority in the Senate is nip and tuck already. The Republicans' margin is too thin when one- third of the Senators are up for re-election. Because Republicans have controlled a majority of state legislatures since 2000, when the new census figures came out, they have designed Congressional districts to favor Republicans. The procedure is called Gerrymandering. The legislatures draw the lines for Congressional districts so that lots of Democrats wind up in a few districts. This siphons off Democrats from districts in which there are small Republican majorities. Those Democrats in the House whose districts have been protected are happy with the outcome. Those who are unhappy don't have anything to say about it. So, it is much more difficult to change the majority party in the House than in the Senate. One estimate of swing districts is that there are as few as 30 out of 435. The Republicans enjoy a 229-205-1 advantage. It would take a major political event to lose this majority. The Democrats may now have such an event. By its very nature, the Republicans are not in a position to challenge the Democrats. PHOTOS ARE IRRESISTIBLE FOR THE MEDIA The photos of Abu Ghraib are now having a negative effect on public opinion regarding the handling of the Iraq war. These photos have only just begun to erode Republican support. There is a drip-drip-drip effect over time. As more photos are released, Republican voters get discouraged. Democrats, meanwhile, smell blood. The polls now indicate falling support for the war in Iraq. But the President is running as a war candidate: war on terrorism, war in Iraq. (Afghanistan is off the radar these days.) He is not going to change course, no matter what happens. What protects him is the fact that Kerry thinks we should send over more troops. Kerry is avoiding Iraq like a hot potato. He is not making an issue of the war. But his followers are. Democrats own the major newspapers. They own the electronic media. They will keep running Abu Ghraib photos for as long as subscriptions aren't hurt or Nielsen ratings don't fall. The public may say, "We're tired of those photos," but readers and viewers seem insatiable for more. It's a scandal, and scandal sells newspapers and raises ratings. The network that doesn't run the latest photos will lose market share. This is what the political game is all about. From the looks of things, this summer is going to be filled with stories about the Iraq prison scandals. DECEIVING CONGRESS By keeping Congress in the dark about Abu Gharib until the photos ran on "60 Minutes II," Donald Rumsfeld made a huge tactical mistake. Congress usually defends its turf from the Executive, and being pushed out of the loop really makes Representatives and Senators angry. They were caught flat-footed back home by the scandal and made to look like afterthoughts in the process of governing. This is one reason why Congressional Republicans are not going to put a lid on the prison scandal story. They know that the folks back home are embarrassed by it as Americans. This is an election year. To play footsie with Rumsfeld, and therefore indirectly with the President, on the prisoner abuse issue will seem partisan. On anything perceived as a moral issue, being seen as partisan will backfire. The hearings will continue. Anyone who says, "Don't you know there's a war on?" will suffer at the polls. In an election year, incumbent Republicans want to protect themselves from their opponents. If the photos start affecting their poll numbers back home, which seems likely, they must find a way to position themselves as defenders of justice in Iraq. Rumsfeld has handed them a golden opportunity to assert their independence. He hid the truth from them until the scandal broke on TV. If there is one thing that politicians don't like, it is to be blind-sided by the Executive's unsuccessful attempt to keep the lid on a scandal that can affect their careers. This is why Congressional Republicans are not forming a protective circle around the Administration. MORE BAD NEWS The Pentagon now admits that 37 people have died in Afghan and Iraqi prisons. So far, there are no photos, but Congress will probably have to hold hearings. The story is getting publicity all over the world. It is a foreign policy issue. Here is the Associated Press account, run on CNN. WASHINGTON (AP) -- The U.S. Army has investigated the deaths of 37 prisoners held by U.S. forces in Iraq and Afghanistan since August 2002, Pentagon officials revealed Friday. Among the prisoner deaths, nine are still being investigated as possible homicides, eight by the military and at least one by the Justice Department because it apparently involved only CIA personnel. In a 10th case, a soldier was punished and dismissed from the Army for using excessive force after shooting to death a man in Iraq who was throwing rocks at him in September 2003. The rest are attributed to natural causes or considered justifiable homicides, in which a soldier had reason to use deadly force on a dangerously violent prisoner, officials said. Eight deaths, in four incidents in Iraq, were considered justified. Even as the investigation into the abuse and humiliation of prisoners in Iraq goes forward, similar criminal inquiries are under way into the circumstances of prisoners who died. . . . Also, for the first time Friday, the Justice Department acknowledged that it has opened a criminal investigation into allegations of prisoner abuse in Iraq. Justice spokesman Mark Corallo said the probe involved an unidentified civilian contractor working for the Defense Department. It was unclear if the case being investigated by the Justice Department involved a death. . . . No further details were provided. The Justice Department has also received at least three referrals for possible prosecution from the CIA related to prisoner abuse allegations, but has not announced a full criminal investigation into those cases. Whitman, the Pentagon spokesman, said records are still be examined, and that the number of cases could rise. http://tinyurl.com/28889 Because these cases go back two years, it becomes clear that the Pentagon, like any bureaucracy, put the lid on these stories. It no longer can. The original assumption that Abu Ghraib's incidents were not representative now appears to be wishful thinking. There have been no deaths reported from that first batch of photos. The new reports indicate far more serious matters. --- Advertisement --- Powerful New Super Stocks are Wall Street's Newest Wealth Generator A new kind of investment, aptly called "Super Stocks" are taking the markets by storm... already generating gains of 70%, 84% and 113% for a select group. Their secret has finally been revealed in a special report... ind out how super stocks could triple your money in the next 90 days... or less... http://www.agora-inc.com/reports/STA/super503/ ----------------------- HEARINGS PROVIDE LOTS OF NEWS BITES There will be hearings. I think they will go on all summer. Every military-related Congressional or Senate Committee will want to get in on the act. Every elected official will want to offer his two-cents' worth for the folks back home to see on TV. These people are politicians. They want air time. They want to be perceived as decision-makers. There is nothing like a scandal in the Executive to get their juices flowing. Something else: politicians in both parties supported both wars. As the war in Iraq has gone badly, and now threatens to get much worse this summer, Congressmen and Senators are looking for ways to get the "rubber stamp" image out of their political lives. The prison scandals are perfect for this. Every politician can position himself as a critic of the Administration's handling of this aspect of the war. This, no one voted for. But it goes beyond politics. Americans want to see this war as a force for good in the world. The prison abuse scandal is now undermining Americans' self-image. It makes them look bad. It makes the country look bad. On "60 Minutes," the normally curmudgeonly Andy Rooney pulled off the kid gloves on Sunday night. He is a World War II vet, and shares the intense patriotism of that generation -- my father's generation. I have never seen him this angry. The segment was called "Our Darkest Days Are Here." The day the world learned that American soldiers had tortured Iraqi prisoners belongs high on the list of worst things that ever happened to our country. It's a black mark that will be in the history books in a hundred languages for as long as there are history books. I hate to think of it. The image of one bad young woman with a naked man on a leash did more to damage America's reputation than all the good things we've done over the years ever helped our reputation. . . . Where were your officers? If someone told you to do it, tell us who told you. If your officers were told -- we should know who told them. One general said our guards were "untrained." Well, untrained at what? Being human beings? Did the man who chopped off Nicholas Berg's head do it because he was untrained? The guards who tortured prisoners are faced with a year in prison. Well, great. A year for destroying our reputation as decent people. . . . In the history of the world, several great civilizations that seemed immortal have deteriorated and died. I don't want to seem dramatic tonight, but I've lived a long while, and for the first time in my life, I have this faint, faraway fear that it could happen to us here in America as it happened to the Greek and Roman civilizations. Too many Americans don't understand what we have here, or how to keep it. I worry for my grandchildren, my great-grandchildren. I want them to have what I've had, and I sense it slipping away. http://tinyurl.com/2et3j Here is his lament: "A year for destroying our reputation as decent people." This crime, he takes personally as an American. I don't think he was faking it. At age 85, he is too old to bother to fake it, except to get a few laughs. He was not going for laughs this time. I phoned my father to get his assessment. He is in a unique position to offer one. In World War II, he was in the military police, stationed in Egypt. In his post-war career, he was an FBI agent. Very few men had a dual career like this. I asked him if he had heard of anything like Abu Gharib. He said no. "It's unbelievable, except that it looks like it happened." His overall assessment: "Those guards are beasts." I have not heard him speak of anyone like this. He is irate. I think a lot of retired military vets are equally irate. This event reflects badly on them, and they resent it. There is a sense of betrayal out there. I don't think the mass of voters will blame the President, but the Republican faithful will suffer attrition in their ranks because embarrassed Republicans will stay home in November. My pastor, an Army chaplain for a decade, said Sunday, "I am tired of seeing these photos." He also compared what went on in Abu Ghraib with tyranny. He does not often comment from the pulpit on politics. He does not see this event as politics. But it will have political ramifications. This election is now Kerry's to lose. Kerry need only sit tight and say nothing specific. This is what he is doing. A site devoted to monitoring political stories in the media, Media Tenor, reported on May 24, The latest report from Media Tenor, an independent institute examining the presidential election media coverage, shows that in the last week, 60% of all reports on George W. Bush's performance both in polls and in the election horse race were negative. The networks' extensive coverage of recent poll results creates an added challenge for Bush's campaign. Horse race and poll coverage have a potentially larger impact than other news coverage, as a bandwagon-effect often sways public opinion, engendering further swings in voter-preference. Meanwhile, John Kerry's presence on the evening news would be negligible if not for his campaign efforts and political advertising. Almost half of Kerry's coverage consisted of news on his campaign efforts and appearances. The only actual policy-related issue Kerry had any say on in the news in mid-May was foreign policy. His statements on foreign policy, however, were eclipsed by the president's, which outnumbered Kerry's six to one. Network reports on Rumsfeld actually exceeded reports on Kerry in the week of May 17-20. I contend that this is good news for Kerry. TV coverage on Bush was 5 to 1 against him (report, p. 10). This comes as no surprise. The only "good" news is that there has been a decline of bad news coverage (p. 11). http://tinyurl.com/365c9 In a campaign in which the headlines and photos are turning the voters against the incumbent, the challenger need only have name identification. THE GENERALS CHIME IN The public was not told how many senior military officers opposed the Administration's war plans. Now, these high-ranking officers -- retired -- are coming in front of the cameras to tell the story of how civilian political operatives, generally called neo-conservatives or neo-cons, underestimated the number of troops needed in Iraq and dismissed senior officers' estimates as far too large. There are turf issues here, but it goes beyond turf. Ronald Reagan's appointee to head the National Security Agency, Lt. Gen. William Odom, has been the loudest of the critics. On April 29, he appeared on "The Today Show." This interview took place before the scandal broke. The question is, whether you can bring together a political situation in Iraq that's going to be stable and will be pro-US. I don't think an effective Iraqi leader can gain wide support there if he is pro-US. And I don't think we can expect a liberal democracy to be brought about any time soon. Therefore, if we are getting into a long term commitment, it just doesn't make sense for us. I think our military strategy and the use of military force is becoming unhinged from our political strategy not only for Iraq, but for the larger region, and also for fighting what in my view is a far more important campaign, and that's against al-Qaeda. We have diverted our forces enormously from al-Qaeda. Things don't look all that good in Afghanistan. . . . Then furthermore, in no Arab state has there been any tradition of constitutional regime that could be properly called a successful liberal democracy. We do have one example of a Muslim society with a liberal democracy, which still has trouble, and that's Turkey. But that took... 40 or 50 years... .So to expect that we're going to have a liberal democratic regime that's pro-Western in Iraq any time soon, one can never say it won't happen, but it would defy all odds of anything we know about how liberal regimes come about. We have already failed. Staying in longer makes us fail worse. If we were a small power, we might have to worry about our so-called credibility. I don't think that's the issue. The issue is how effective we were going to use our power. The longer we st... if we blindly say we should stick to it, we're misusing our power and we're making it worse. Let me put it more bluntly. Let's suppose you murdered somebody, and you suddenly look and say, 'We can't afford to have murdered this person, so therefore let's save him.' I think we've passed the chances to not fail. And now we are in a situation where we have to limit the damage. And the issue is just how much we are going to pay before we decide to limit the damage, not rescue ourselves by throwing good money after bad. http://tinyurl.com/2472k Retired Marine Corps 4-star general Anthony Zinni appeared on Sunday night on "60 Minutes." Zinni in 1997- 2000 served as Commander-in-Chief of the Central Command, which encompasses the Middle East. Here is his assessment. "There has been poor strategic thinking in this. There has been poor operational planning and execution on the ground. And to think that we are going to 'stay the course,' the course is headed over Niagara Falls. I think it's time to change course a little bit, or at least hold somebody responsible for putting you on this course. Because it's been a failure." . . . "In the lead up to the Iraq war and its later conduct, I saw at a minimum, true dereliction, negligence and irresponsibility, at worse, lying, incompetence and corruption." "I think there was dereliction in insufficient forces being put on the ground and fully understanding the military dimensions of the plan. I think there was dereliction in lack of planning. . . . The president is owed the finest strategic thinking. He is owed the finest operational planning. He is owed the finest tactical execution on the ground. . . . He got the latter. He didn't get the first two." . . . http://tinyurl.com/yr2bq Zinni in a previous interview said that he has been accused of being a traitor and a turncoat. http://tinyurl.com/2tb4r That Zinni's critics would make such an accusation against a 4-star Marine general indicates that the critics are desperate to keep the lid on public criticism of the war, even by senior military men. But this strategy is hopeless in the face of the photos from Abu Ghraib. The toothpaste is out of the tube. It's also on the tube . . . and the front pages. CONCLUSION If the Democrats sweep Congress, Bush's tax cuts will not be rolled over. They will be repealed. We can expect higher taxes. As for the national deficit, there is not much hope. If Kerry pulls our troops out of Iraq, which is doubtful if his words mean anything, Federal spending will not drop. The Democrats will take the money allocated for war and spend it on welfare projects inside the U.S. It is surely not the policy of Congress to cut spending. So, the war has ratcheted up government spending. Spending will not be cut. Taxes will be raised if Kerry wins. All of this is bad news for stocks. Predicting the outcome of an election when the candidates are in a dead heat is a high-risk business. But, as investors, we have to make forecasts. I think Kerry will win and the Senate will go back to the Democrats. I have not made up my mind about the House, but I think the news from Iraq will be bad enough, and constant enough, to erode support by Republicans. Enough of them will stay home in November to lose the swing districts in Congress. If the Republicans can retain control of the House, the government will go into gridlock. Gridlock is about the best any voter can hope for these days. It keeps the Federal government from growing faster than normal, as it has since 2001. But if there is a clean sweep by the Democrats, it will be bad for the stock market. The market's discounting process will start rolling before summer is over. My advice: avoid the rush. ------------- -- Been to the Daily Reckoning Marketplace Yet? -- If not, you ought to see what you've been missing. Want to read more from our regular contributors? This is the place to find it. We've collected some of the best financial advice and commentary available anywhere and presented it to you all in one place. 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