[Posted 7:00 AM ET]
North Korea’s Nuclear Test Announcement
“The field of scientific research in the DPRK (Democratic
People’s Republic of Korea) successfully conducted an
underground nuclear test under secure conditions on October 9,
2006, at a stirring time when all the people of the country are
making a great leap forward in the building of a great,
prosperous, powerful socialist nation.
“It has been confirmed that there was no such danger as
radioactive emission in the course of the nuclear test as it was
carried out under scientific consideration and careful calculation.
“The nuclear test was conducted with indigenous wisdom and
technology 100 percent. It marks a historic event as it greatly
encouraged and pleased the KPA (Korean People’s Army) and
people that have wished to have powerful self-reliant defense
capability.
“It will contribute to defending the peace and stability on the
Korean Peninsula and in the area around it.”
Following is first reaction, representing all sides of the political
spectrum.
Editorial / Wall Street Journal
“With great danger comes great clarity. By ordering his
country’s first-ever nuclear weapons test, Kim Jong-il lay bare
this generation’s greatest challenge: How far will the world go to
impose order on rogue states intent on acquiring weapons of
mass destruction?
“History offers cold comfort. Only nine nations in the post-
Soviet era possess nuclear weapons, but many more, including
Tehran’s mullahs, are seeking them. The U.S. and other
responsible democracies have persuaded a few nations –
Ukraine, South Africa, Libya – to disarm or abandon their
weapons programs. In our globalized world, however, WMD
proliferation is a potent threat, as proven by Pakistan’s former
nuclear-secrets merchant, A.Q. Khan.
“Pyongyang, like Iran today, never hid its ambitions. For over a
decade, the North has built up the world’s fourth-largest military,
threatened its neighbors and engaged in drug dealing,
counterfeiting and WMD proliferation – with little rebuke. At
one point, the Hermit Kingdom threatened to turn Seoul into a
‘sea of fire.’ In 2002, Pyongyang announced it had nuclear
weapons….
“South Korea shoulders much of the blame. By sticking to its
‘sunshine policy,’ Seoul undermined every diplomatic effort to
exert non-violent pressure on the North. Two-way trade between
North and South Korea passed $1 billion last year…a huge
chunk of the North’s total income. By tolerating Pyongyang’s
proliferation ambitions, President Roh Moo Hyun and his foreign
minister, Ban Ki Moon [ed. the new UN Secretary General],
have allowed the current crisis to explode on its doorstep….
“Yesterday’s test marks a new reality that will change security
calculations in Asia and the world. We’re about to find out how
responsible an actor China wants to be on the world stage, or if it
prefers having one of its clients creating trouble for the U.S. and
Japan. At the very least Kim Jong-il has to know, and will have
to be told, that any use of nuclear weapons by his regime or by
anyone who can be traced to North Korea will result in his
government’s annihilation. U.S. Assistant Secretary of State
Christopher Hill said the other day that North Korea ‘can have a
future or it can have these weapons.’
“There will be renewed calls for bilateral talks between
Washington and Pyongyang. This would be a mistake. Putting
new money on the table and pulling sanctions off would be seen
by Pyongyang and all others as a reward for defying the world
and building a bomb. The next ‘development’ will be another
nuclear nation, starting with Iran.
“Kim has opened a Pandora’s box. Closing it won’t be easy.
The effort needs to be made to avoid the alternative: a new world
disorder.”
Editorial / Times of London
“Kim Jong-il has gone for broke. North Korea’s claim to have
conducted its first nuclear test has yet to be fully verified. It is
still unclear whether the country is years, or perhaps only
months, away from developing a missile-delivered nuclear
warhead. But by declaring itself to be set on being a nuclear-
armed power, North Korea has gone past the point of
brinkmanship, leaving no shred of doubt about its intentions –
and no room for ambiguity in the international response.
“As the new Japanese Prime Minister Shinzo Abe grimly
observed yesterday, Asia’s most untrustworthy regime has
launched the region into ‘a new, dangerous nuclear age.’ North
Korea could not have been more sternly warned that if it went
ahead with the test, it would find itself in a break-hold from
which it could not escape. The regime has escaped total isolation
until now, mainly because of the petulance of China, North
Korea’s economic lifeline and ultimate protector, to admit to, or
use, its considerable economic and political leverage. But even
China’s patience has been wearing thin. It pointedly declared at
the UN last week that ‘no one is going to protect…bad behavior.’
To underline that message, Beijing told Pyongyang that it might
drop the ‘automatic intervention’ clause in the friendship treaty
that commits China to come to the regime’s defense….
“The generals must be given fresh reasons for discontent. There
will be members of the elite whose stomach is turned by Korean
suffering and the crass Kim personality cult. China knows who
these leaders are. Beijing would balk at ‘regime change,’ but
perhaps not as edging out the Dear Leader in favor of pragmatists
ready to risk accommodation and cautious reform. Mr. Kim’s
departure is the neatest way out of crisis. He may have hastened
the forced exit he is desperate to prevent.”
Editorial / New York Times
“Let us all agree: North Korea’s government is too erratic, too
brutal, and too willing to sell what it has built to have a nuclear
bomb. There is also no military solution, not least because
intelligence experts haven’t a clue where Pyongyang has hidden
its weapons labs or its stock of plutonium.
“So after years of temporizing and denial, the world’s leaders
need to figure out how to force this terrible genie back into the
bottle. It is a truism that no country that has tested a nuclear
weapon has ever been pressured or cajoled into giving it up. But
neither has any nuclear postulant been as vulnerable to outside
pressure and bribery as this regime.
“The Bush administration seems to want to impose limited
sanctions on North Korea – and inspections of all cargo going
into and out of the country – until it agrees to abandon its entire
weapons program. We fear that won’t be enough to quickly
change Pyongyang’s mind – while key players like China won’t
sign on to never-ending punishments….
“In practice, the North Koreans are likely to back down only if
China chokes off their oil supply and other essential trade. Until
now Beijing has refused to use its enormous leverage, fearing
that too much pressure could topple the North Korean
government and unleash a mass of refugees over its border.
When told they were enabling their neighbor’s nuclear
ambitions, Chinese diplomats blithely insisted that the North was
likely bluffing about having a weapon. Now, Washington,
Tokyo, Moscow and others have to make clear that China will be
judged by its willingness to confront this problem….
“The administration has indulged in its own denial and
temporizing. Last year, Secretary of State Condoleezza Rice
dismissed the North’s declaration that it had nuclear weapons as
a bid for attention. ‘I do think the North Koreans have been,
frankly, a little bit disappointed that people are not jumping up
and down and running around with their hair on fire,’ she told
The Wall Street Journal.
“Since then, United States policy has whipsawed between
negotiations and posturing, incentives and sanctions. It has been
months since negotiators even sat down at the table.
Administration hawks suggested last week that perhaps the best
thing would be for the North to test, so the world would know
exactly what it was dealing with. The hawks appear to have
gotten their way. So why don’t we feel safer?”
Editorial / Washington Post
“North Korea’s objective in the aftermath of its reported nuclear
test will undoubtedly be to force its neighbors and the world to
accept it as an established nuclear power. India and Pakistan
succeeded in riding out sanctions and winning acceptance as
‘strategic partners’ of the United States after their bomb tests.
Kim Jong-il will try to repeat that history. Whether he succeeds
will depend, above all, on the outcome of what we hope will be
some serious rethinking by the governments of South Korea and
China.
“North Korea’s neighbors, and not the United States, bear the
burden of the North’s decision to proceed with what it said was a
nuclear explosion – the small yield raised questions yesterday
about whether the test could have been a flop or a fake. Beijing
and Seoul have propped up Mr. Kim’s despotic regime with
heavy subsidies of fuel and food, reasoning that keeping it alive
was better than a collapse that could flood their countries with
refugees. The underlying logic was that the North’s nuclear
program was little more than a bargaining chip with the United
States and did not pose a genuine military threat.
“Both countries have to recalculate now. Is an outlaw
dictatorship with nuclear weapons on the border really tolerable?
Is the possibility that Japan or Taiwan will respond by building
nuclear weapons less of a threat than a tide of refugees? What
poses a greater risk of war: the possible collapse of the Kim
regime, or an attempt by that regime to use its new weapon either
to extort concessions from the South or to achieve its stated goal
of conquering the whole Korean Peninsula? Most important: If
subsidies and bribes have failed to moderate North Korean
behavior over the past few years, is it reasonable to bet that they
will do so in the future?”
Editorial / Washington Times
“Promise, agreement, ultimatum, transgression, failure,
threatened catastrophe. Repeat. This, the all-too-familiar pattern
of North Korean diplomacy, has now permitted one of the
world’s most dangerous regimes to declare that it has gone
nuclear. Whether the test deep in the mountainous northeast of
the hermit kingdom was successful is disputed. It may have
been, it may not have been. What is not disputed is this: Either
now or at some point in the foreseeable future, Pyongyang will
be able to threaten the United States and its allies, credibly, with
the world’s most destructive weapons.
“Pyongyang’s declaration to the world has many consequences.
The first is the emboldening of all seekers of nuclear weapons
who have been subjected to the same empty international –
community rhetoric as North Korea, which hereby flouts it all,
without much consequence. The international community’s
word – threats, warnings, lines drawn in the sand – is now made
to appear in the eyes of Iranian mullahs, Syrian autocrats,
terrorists and others as a few dozen sternly worded letters utterly
devoid of consequence. The North Korean regime’s negotiating
postures could only have taken clear account of this; they were
designed to stall and buy time until a weapon could be
completed. Other malefactors are undoubtedly taking note: ‘Six-
party talks’ and their equivalent are a ticket to the nuclear club.
“Words must have consequences if they are to have meaning;
ours clearly did not. ‘I will not wait on events, while dangers
gather. I will not stand by, as perils draw closer and closer,’
President Bush said in his famous ‘Axis of Evil’ address in 2002.
‘The United States of America will not permit the world’s most
dangerous regimes to threaten us with the world’s most
destructive weapons.’ Imagine the conclusions our enemies
draw when North Korea openly flouts such promises….
“Speculation mounted yesterday as to whether this apparent
nuclear test is the product of an internal policy struggle between
dictator Kim Jong-il and senior military leaders. Certainly it
made little strategic sense: North Korea’s hand is now stripped of
its last worthwhile card short of direct military escalation.
“About the only positive that could conceivably emerge here
would be the opportunity, the strongest yet, for the affected
nations – the United States, Japan, South Korea, China, Russia,
Taiwan and surrounding countries – to speak as one. Sanctions
must go forward at the United Nations. China must stop playing
both sides. The evidence for tough action is indisputably here, if
only the world community would wake to it.
Jon B. Wolfsthal, Op-Ed / Los Angeles Times
“The United States must ensure that North Korea’s leaders
understand the full force of our commitment to defend our Asian
allies. President Bush’s statement that the United States will
hold North Korea accountable for its actions is a good first step.
However, it took the United States years of face-to-face talks
with the Soviet Union and China to work out a stable relationship
based on mutual deterrence. Washington will have to find ways
to ensure that Pyongyang does not overreach or miscalculate
with its nuclear capability.
“However distasteful the Bush administration finds direct talks
with North Korea, the president should nonetheless dispatch a
personal envoy to Pyongyang with a clear message: Any attempt
to use its nuclear arsenal offensively will bring immediate,
disastrous and possibly nuclear consequences. Further, Kim
needs to understand that any future North Korean missile tests
that are not announced or that are aimed at or over U.S., South
Korean or Japanese territory might warrant a U.S. nuclear
response. That’s because it would be impossible for any
American leader to be sure that such ‘tests’ were not the first
signs of a nuclear attack.
“This envoy would not be empowered to negotiate. The six-
party talks were moribund before and should be declared dead.
The envoy’s job would be merely to deliver an unambiguous,
sober message about Pyongyang’s new responsibilities. The
Bush administration will undoubtedly try to step up the economic
and political pressure on Pyongyang to disarm. But the naval
blockade that it is contemplating is unlikely to succeed either in
forcing North Korea to reverse course or in preventing it from
exporting its nuclear weapons should it choose to do so.”
David Frum, Op-Ed / New York Times
“The North Korean nuclear test – if that indeed is what it was –
signals the catastrophic collapse of a dozen years of American
policy. Over that period, two of the world’s most dangerous
regimes, Pakistan and North Korea, have developed nuclear
weapons and the missiles to launch them. Iran, arguably the
most dangerous of them all, will surely follow, unless some
dramatic action is soon taken.
“It is, alas, an iron law of modern diplomacy that the failure of
any diplomatic process only proves the need for more of the
process that has just failed. Thus those who have long supported
negotiating with North Korea are now calling for the Bush
administration to begin direct talks with the Kim Jong-il regime.
Sorry, but all this would accomplish would be to reward an
actual proliferator in order to preserve the illusion that the world
still has a meaningful nonproliferation regime.
“Some even suggest, in worried tones, that the North Korean test
might provoke Japan to go nuclear, as if the worst possible
consequence of nuclear weapons in the hands of one of
America’s direst enemies would be the acquisition of nuclear
weapons by one of America’s best friends.
“A new approach is needed. America has three key strategic
goals in the wake of the North Korean nuclear test. The first is to
enhance the security of those American allies most directly
threatened by North Korean nuclear weapons: Japan and South
Korea.
“The second is to exact a price from North Korea for its nuclear
program severe enough to frighten Iran and any other rogue
regimes considering following the North Korean path.
“The last is to punish China. North Korea could not have
completed its bomb if China, which provides the country an
immense amount of food and energy aid, had strongly opposed
it. Apparently, Beijing sees some potential gain in the
uncertainty that North Korea’s status brings. If China can
engage in such conduct cost-free, what will deter Russia from
aiding the Iranian nuclear program, or Pakistan someday aiding a
Saudi or Egyptian one?”
At President Bush’s press conference the other day, I was
waiting for a reporter to ask the following.
“Mr. President, why is it that after six years of your
administration, China (and Russia) continues to play the United
States for chumps?”
As I go to post, it does not appear likely that the UN Security
Council will approve tough sanctions on North Korea. Both
China and South Korea have different reasons for not
cooperating with the desires of both the United States and Japan
on items such as inspection of all cargo going in and out of the
North. While China and South Korea do both agree on mild
sanctions, China calls military action “unimaginable,” even
though the U.S. is not advocating an attack, and Seoul doesn’t
want to abandon its policy of engagement. As for Russia, it’s
just backing China as the two jerk the U.S. around, similar to the
case of Iran, like two tag team titleholders.
When it comes to Pyongyang, however, there are many
unanswered questions, including:
“Has Kim just given up on negotiations?” “Who are the generals
behind him?” “Has Kim told China the truth about his nuclear
program and its capabilities?”
As for President Bush there has been a lot of talk, such as that
above, about the administration’s obvious failure in preventing
Kim from taking the step he did. But my opinion is the failure is
not as much about the lack of direct talks, though I would go
along with that, but rather the president’s inability to make any
headway with Beijing. It’s long time we played hardball, but our
leverage is severely limited these days.
There is one winner thus far in the North Korean crisis, Japan’s
new Prime Minister Shinzo Abe. Kim Jong-il’s intransigence
has played into Abe’s goals of a stronger military and more
patriotism at home.
Russia
Hours after posting last Saturday’s column, I learned of the
assassination of Russia’s leading journalist and Putin critic, Anna
Politkovskaya. Politkovskaya had been most involved over the
past few years in exposing torture and abuse by Russian
authorities in Chechnya and she was about to produce further
evidence, including videos; snippets of which were then released
following her death by the paper she worked for.
Former President Mikhail Gorbachev called the killing “a savage
crime (and) a blow to the entire democratic, independent press.
It is a grave crime against the country, all of us.”
All eyes immediately turned to President Vladimir Putin, as well
as his handpicked prime minister in Chechnya, Ramon Kadyrov.
Putin was initially silent, then he termed the murder “tragic” and
vowed to pursue the killers.
But Putin later inferred that he was the one most damaged by
Politkovskaya’s death and that those wishing a Ukraine-style
“Orange Revolution” had ordered her killing in order to advance
their cause. Politkovskaya’s supporters were outraged.
Anne Applebaum, Op-Ed / Washington Post
“Of course if this murder follows the usual pattern in Russia, no
suspect will ever be found and no assassin will ever come to trial.
But in the longer term, the criminal investigation isn’t what
matters most. After all, whoever pulled the trigger – or paid
someone to pay someone to pull the trigger – has already won a
major victory. As Russian (and Eastern European) history well
demonstrates, it isn’t always necessary to kill millions of people
to frighten all the others: A few choice assassinations, in the right
time and place, usually suffice. Since the arrest of oil magnate
Mikhail Khodorkovsky in 2003, no other Russian oligarchs have
attempted even to sound politically independent. After the
assassination of Politkovskaya on Saturday, it’s hard to imagine
many Russian journalists following in her footsteps to Grozny,
either.
“There are jitters already: A few hours after news of
Politkovskaya’s death became public, a worried friend sent me a
link to an eerie Russian Web site that displays photographs of
‘enemies of the people’ – all Russian journalists and human
rights activists, some quite well known. Above the pictures is
each person’s birth date and a blank space where, it is implied,
the dates of their deaths will soon be marked. That sort of thing
will make many, and probably most, Russians think twice before
criticizing the Kremlin about anything.”
Garry Kasparov, Op-Ed / Wall Street Journal
“This brutal episode cannot be taken outside the context of recent
events in Russia. The forces in control here are facing an
impending crisis and fault lines are beginning to appear in the
Kremlin’s vertical power structure. The authoritarian structure
that Mr. Putin has built in Russia has been very profitable for his
circle of friends and supporters. Income is siphoned off from
every region of the country. Business and politics have been
combined into a streamlined process for bleeding the nation dry.
Now, however, Mr. Putin and his associates are approaching a
dilemma. The president’s term of office ends in 2008 and this
efficient machine is threatening to explode. Should Mr. Putin
stay or should he go?
“The chaos that will surely occur if Mr. Putin leaves office is
relatively easy to understand. Any mafia-like structure is based
on the authority of the top man. If he leaves, or appears weak,
there is a bloody scramble for his position. Whoever wins that
battle must then eliminate the others to consolidate his grip, so
the fighting is fierce. Perhaps only 10 percent of the combatants
will pay in blood or incarceration and ruin, but nobody knows
who will be in that 10 percent.
“To avoid that dangerous uncertainty, some of Mr. Putin’s
closest lieutenants are dedicated to making sure the top man
stays right where he is. The problem with this plan is that Mr.
Putin is constitutionally prevented from staying in office beyond
the end of his term in 2008. The main obstacle is not the
Constitution, which can be easily adjusted to the Kremlin’s
requirements; the obstacle is that, after he has made so many
statements about his intent to step down in 2008, Mr. Putin
would lose almost all his legitimacy in the West if he exercised
this option. Of course, his regime has never shown concern for
the voices of America and Europe, and feeble indeed those
voices have been. But the money his associates have become so
adept at squeezing from Russian assets resides almost entirely in
Western banks. If the Russian government loses its veneer of
legitimacy, these accounts could begin to receive an unpleasant
amount of scrutiny.
“So what can the ruling elite do to avoid both the chaos of
succession and the loss of easy relations with Europe and the
U.S.? The answer is becoming clearer every day if you read the
headlines and look at the big picture. The Kremlin is
exaggerating and fabricating one crisis after another, all
combining to create an image of imminent peril. Those who
believe they have burned every bridge and cannot afford to see
Mr. Putin step down are trying to build a case that he is the only
alternative to anarchy.”
I’ve said all along that Putin will still be in power come 2009.
Last week I was writing of the standoff between Russia and
Georgia and the Kremlin’s ongoing threats. Since then over 130
Georgians in Moscow were deported and authorities demanded
schools provide them with lists of students with Georgian-
sounding last names so the papers of their parents could be
checked out. Putin has been drumming up anti-Georgia hysteria
and the West has said little.
As Georgian President Mikhail Saakashvili noted in a Journal
op-ed:
“The essential question confronting the international community
is this: is Moscow reacting to a specific, unique threat it
perceives from Georgia? Or is Georgia a target of opportunity, a
chimerical foil created by some politicians for domestic
purposes? Put another way, does the malignancy reside in
Georgia, or Russia? A misdiagnosis could have dire
consequences for Western security. Because if the international
community downplays the current rift – or worse, if it pressures
Georgia to back down on all counts, shunting aside its hard-
earned principles and values – then the problem will simply
metastasize to another place.
“Russia’s vital place in the international order is secure. It is a
veto-wielding member of the UN Security Council. Its natural
resources fuel the European and global economy. It owns a
fierce nuclear force. No one, let alone Georgia, should ever call
for isolating Russia in the manner of a North Korea or
Zimbabwe. At the same time, however, we must not turn a blind
eye to what is happening to human rights and the norms of
international behavior.”
But I’m reading a Washington Post story on negotiations taking
place at the UN concerning North Korea, when I spot this
disturbing line.
“(Security Council) diplomats said Russia softened its opposition
(to sanctions) after (Sec. of State) Rice agreed in a phone
conversation with Foreign Minister Sergei Lavrov to drop U.S.
opposition to a Russian-backed resolution criticizing its neighbor
Georgia, which recently detained seven Russian soldiers who
were accused of spying.”
There you go; the White House selling out its friend, Georgia.
Lastly, Putin and his KGB buddies continue to build up their
own OPEC on the oil and gas front. In what was described as a
“shocking” move, natural gas monopoly Gazprom rejected all
five foreign bidders who sought to participate in the development
of the giant Shtokman gas field and would use foreign companies
as contractors only, not partners.
In addition, the gas is to be sent mostly to Europe, rather than
being shipped as liquefied natural gas to the United States as
originally planned.
Gazprom CEO Alexei Miller said the export switch was “an
additional reliability guarantee for the long-term supply of
Russian gas to Europe and proof that the European market is the
most important for the company,” adding, “The foreign
companies were unable to provide the assets that would
correspond, by the size and quality, to the reserves of the
Shtokman field.” [Moscow Times] What a crock.
The five bidders were the United States’ Chevron and
ConocoPhillips, Norway’s Statoil and Norsk Hydro, and
France’s Total.
So it’s not just a blow to the U.S. and its energy needs, but of
course this helps put the screws to Europe as Russia, barrel by
barrel, pipeline by pipeline, gains the ability to totally control the
Continent’s energy supply and play around with the valves when
the Kremlin’s interests are being threatened. Remember the G-8
summit in St. Petersburg and the agenda item of energy security?
This is just another huge step backwards.
Iraq
What more can happen? Try an Iraqi police brigade having their
food poisoned (there were fatalities), a vice president had a third
sibling gunned down, Britain’s head of the Army, General Sir
Richard Dannatt, directly contradicted his prime minister in
urging his country’s troops be withdrawn, the staff of a fledgling
television station was massacred, scores more were mutilated,
and ethnic cleansing is taking place on a massive scale.
Retired Army officer Ralph Peters has been as rabid a supporter
of the war as you’ll find, and for the most part my own opinion
has dovetailed his. Here are some of his latest thoughts,
however, from his column in the New York Post.
“With 26 American troops dead in Iraq in the first nine days of
October, the combination of bad news and pre-election politics
has those on one bench arguing for bailing out immediately and
those on the other bench frantic to pile on.
“Neither position is realistic. We’re not going to pull out of Iraq
overnight – no matter what happens in November. The ‘bring
the troops home now’ voices always blended arch political
cynicism with willful naivete – it’s always been about Bush, not
Iraq.
“But remaining in Baghdad requires a new sense of reality.
‘Stay the course’ is meaningless when you don’t have a course –
and the truth is that the administration still has no strategy, just a
jumble of programs, slogans and jittery improvisations.
“Our Army and Marine Corps urgently need increases in
personnel strength. They’ve been stripped to the strategic and
tactical bone. We need more boots. But not on the ground in
Iraq.
“Sending more troops wouldn’t help and can’t be done. It’s too
late. We’ve reached the point where Iraqis must fight for their
own future. If they won’t, nothing we can do will bring success.
“As this column stressed months ago, the test for whether we
should remain in Iraq is straightforward: Will Iraqis fight in
decisive numbers for their own elected, constitutional
government? The insurgents, militiamen and foreign terrorists
are willing to die for their causes. If ‘our’ Iraqis won’t match
that strength of will, Iraq will fail.
“If Iraq’s leaders stop squabbling and lead, and if Iraq’s soldiers
and police fight resolutely for their constitutional state, we
should be willing to stay ‘as long as it takes.’ But if they
continue to wallow in ethnic and religious partisanship while
doing as little as possible for their own country, we need to leave
and let them face the consequences.
“Give them one more year. And that’s it….
“A Victorian-era cliché ran that the saddest words in the English
language are ‘if only.’ Well, if only Secretary Rumsfeld had
permitted detailed planning for an occupation, sent enough
troops when it would’ve made a difference, allowed our
commanders to enforce the rule of law when they reached
Baghdad…and so on, for a hundred other pigheaded mistakes.
“Well, you face the future with the Iraq you’ve got, not the Iraq
you’d like to have. We owe the Iraqis one last chance, and it’s
up to them to take it.
“But no more U.S. troops. Make the Iraqis fight for their own
country. If they won’t, we need to accept that a noble endeavor
failed.
“People get the government they earn. Those of us who believed
that the situation in the Middle East required desperate measures
may have to accept that the cynics were right when they insisted
that Arabs can’t govern themselves democratically. What if it
doesn’t take a village? What if it takes a Saddam?
“If Iraq does fail, the cold truth is that the United States will do
fine. We’ll honor our dead, salve the wounds to our vanity and
march on stronger than ever (with the world’s most powerful and
most experienced military). But the Middle East will have
revealed itself as hopeless.”
This is Ralph Peters’ Cronkite moment, you might say. I agree
with much of the above, sadly, even as Peters has been far too
easy on President Bush for his own culpability since the
beginning. But today, as Newsweek’s Fareed Zakaria wrote, Mr.
Zakaria having been another supporter of the war, the goal is to
“limit failure.”
—
Wall Street
Here’s the deal. If there had been just one Category 3 hurricane
in the Gulf of Mexico and/or if the Western world had put Iran’s
back up against the wall when it snubbed its nose at the UN
Security Council, we wouldn’t be talking about Dow 12000…it’s
just that simple.
The markets, and the global economy, caught a huge break the
past few months in falling oil and gas prices and it’s obvious
consumers have been taking advantage of the extra cash.
And despite the significant slowdown in real estate, the spillover
effect has not as yet impacted employment on a broad scale.
Some of us think that day is still coming, but it isn’t here yet.
So what’s not to like? Stocks aren’t excessively valued if you
believe earnings growth will continue, the Federal Reserve
may hold the line, if not lower interest rates, and most folks have
simply chosen to ignore the implications of a nuclear-armed
North Korea and soon to be Iran. We’ve already seen for three
plus years now how the war in Iraq has had zero impact on share
prices, even if it will at the polls in a few weeks’ time.
We also now know from past experience that when it comes to
the terror front, only something huge and catastrophic is likely to
shock world markets, and that’s a good thing. The evil ones
have to come up with something better than bombing a few trains
or resorts (as insensitive as that might sound) before breaking the
backs of those of us who choose to go on with our lives. You
couldn’t have made this statement just two years ago, but the
world is growing up in some respects and for their part the
terrorists know it; which makes their quest for weapons of
mass destruction and dirty bombs all the more urgent.
But I’ll always be extra cautious, as long-time readers have
learned, not in how I lead my life and where I go, but in the
threats that could at a moment’s notice derail the Clueless
Express we sometimes all climb aboard.
For now, though, enjoy the fact North Korea appears to have a
ways to go on the nuclear weapons front and that Iran as an issue
is more often than not buried on page A16, even though it is
more of a threat today than it was just a few months ago when it
dominated the headlines. These respites are to be cherished,
especially if you’re nimble enough to get out at the top.
Me? I’m not that good. I’ll pick my spots for aggressive, single
company bets, while continuing to keep most of my assets in
cash. I’ll largely miss the occasional bull run, that I’ll admit, but
I’ll probably sleep a little better….except I already told you I
can’t help but keep one eye open. You understand.
As for the economic news of the week, third quarter earnings
trickled in (the deluge begins next week), and with few
exceptions such as Alcoa’s they were largely positive. The likes
of Costco and McDonald’s provided the impetus, which isn’t all
bad, but at the same time you had General Electric, barometer for
world economic health, issue a so-so report. In other words,
we’re not going to hell in a handbasket but the economy is
slowing down nonetheless.
The Federal Reserve issued its minutes from the September
meeting and they showed that members are still concerned about
inflation, but reiterate that the slowing economy should help in
this regard. More than a few Fed officials have actually issued
fairly hawkish comments on price pressures, so the Street can’t
really count on any cuts in the funds rate the rest of the year.
As for our favorite topic of real estate, the Fed’s survey of
regional economic activity (the Beige Book) is painting a
gloomier picture with each update; this time finally
acknowledging “widespread cooling.”
Housing sales continue to plummet; off 28 percent in Southern
California (35 percent in San Diego County alone) and similar
evidence is emerging in once white-hot markets.
But as Josh P. and I were musing, two other things are
happening. First, you may see inventory levels actually decline
in some regions, as is the case in parts of Southern California,
simply because folks are taking their homes off the market after
having to cut the price so precipitously and still having no
response. Those looking for a quick rebound, however, will be
sadly mistaken.
Second, it’s just taking a while for the housing slump to play into
consumer sentiment. As I’ve been writing, oil trumps housing, at
least for now.
Finally, on a different topic, former Federal Reserve Chairman
Paul Volcker wrote an op-ed in last Saturday’s Wall Street
Journal warning of the dark implications behind the September
assassination of Russian central banker Andrei Koslov. The
murder, Volcker says, “defines the battle lines for all of us. It’s
a battle that all those supporting economic development and the
rule of law cannot afford to lose. And, appropriately, it is
international institutions that are placed front and center in that
battle.”
Volcker then comments on one of my favorite topics, corruption.
“I think it is now generally recognized and accepted that
corruption is an obstacle – and in some countries the major
obstacle – to effective economic development…..
“Failure to deal with corruption undercuts development. It will
limit, and likely will more than offset, any value added in new
lending.
“Of course, that’s easy to say. Much more difficult is what can
be effectively done in combating corruption. The key to dealing
with corruption is leadership – leadership at the multilateral
institutions, but also in lending countries, in borrowing countries,
in private companies and in nongovernmental organizations. A
consistent message really needs to come from the top….
“A reasonable starting point might be to take a leaf from Nancy
Reagan, with her old anti-drug slogan: ‘Just Say No.’ After all,
corruption is a kind of addictive drug….
“My impression is that the corruption problem may be getting
worse. Whether or not that is the case, it plainly needs priority
attention.”
On a related topic, ethics, this week Berkshire Hathaway
Chairman Warren Buffett ordered his top managers to redouble
their efforts to crack down on unethical behavior.
While saying that some “bad behavior” is inevitable, Buffett
wrote in a memo “we can have a huge effect in minimizing such
activities by jumping on anything immediately when there is the
slightest odor of impropriety…Berkshire’s reputation is in your
hands.”
Then he added, in reference to the stock options backdating
scandal, “The five most dangerous words in business may be
‘everybody else is doing it.’” Buffett’s thoughts should bolster
the case of federal regulators investigating the options mess.
And so this week executives from at least five companies
resigned over their roles in backdating options, including CEOs
at two tech outfits, McAfee and CNET. Even long-time
defenders such as the Journal’s Holman Jenkins Jr. are beginning
to cave.
It’s always been about fraud, pure and simple. If you fail to
disclose material news that means investors are making decisions
on fraudulent information. There is no defending that. Throw in
the fact that in many cases companies weren’t paying proper
taxes and you can see why so many of these characters deserve
to be in prison…or they flee to Namibia, as we’ve found, in an
attempt to avoid it.
As for Jenkins, he had these thoughts on Apple’s Steve Jobs.
“Apple’s mea culpa on backdating last week was eloquently
incomplete, and all the more intriguing because the gaps seemed
almost Socratically mapped to invite the media to fill in the holes
by asking obvious questions. The big joke here is that the logic
of the witch hunt will stop the media from asking the obvious
questions, not least because CEO Steve Jobs is a hero to much of
the press and there’s little appetite for bringing him down.
“Don’t misunderstand. We believe it would be a gross injustice
if he were defenestrated over backdating, just as we have serious
doubts about the prosecutions launched against other backdating
CEOs. And Apple’s likely purpose in issuing its statement,
naturally, was not lexical comprehensiveness but saving Mr.
Jobs’ job.
“Here’s what Apple said: ‘In a few instances, Apple CEO Steve
Jobs was aware that favorable grant dates had been selected, but
he did not receive or otherwise benefit from these grants and was
unaware of the accounting implications.’”
Jenkins goes on to defend backdating again, as he has ever since
it became an issue, but then he adds:
“”Mr. Jobs is not an accountant, but Apple’s claim that he didn’t
understand the accounting implications of backdating should test
our credulity for an obvious reason: Then why not just issue ‘in
the money’ options? Why adopt the baroque artifice of selecting
a past date when the share price was lower?….
“Is Apple simply saying he didn’t understand that backdating
was an improper way of making sure these options received the
accounting treatment prescribed for ‘at the money’ options? If
so, his defense is the likely defense of several CEOs already in
the dock. Luckily for him, we have signals from prosecutors that
they intend to focus on ‘egregious’ cases – read ‘small
companies without celebrity CEOs.’”
Barron’s Thomas G. Donlan weighed in on the topic.
“Perhaps an even better example of shareholders’ concern – or
lack of it – can be found at Apple Computer, where the stock has
risen nearly 40 percent since falling 6 percent on news that it was
investigating backdating of options. Apple investors should be
leery of anything that could implicate CEO Steve Jobs, but it
appears that corporate results count for more than options
shenanigans.
“The idea of stock options is to align managers’ interests with
those of the shareholders. The more the managers want to see
the stock go up, the harder they will work to make it so, the more
the stock will go up and the happier the shareholders will be.
“Experience has shown several weaknesses in this proposition:
“Stock prices don’t go up only because executives work hard.
They can go up because the CEO and his close associates fiddle
with the books. They can go up because there’s a temporary
bullish mania in the broader market, or a bullish enthusiasm for a
particular industry. Worst of all, stocks can go down. If the
theory is that executives work harder in order to make millions of
dollars in the stock market, how hard will they work if their stock
options are underwater? The answer includes backdating,
repricing and other mechanical adjustments, disclosed or not.
“Some executives will keep working hard, but only to float their
own boats.”
Of course the above discussion is also but one reason why
President Bush has trouble getting credit for the economy these
days. ‘How’s that?’ I’m sure you’re musing.
It’s about the issue of excessive executive pay and the
stupendous gap between those at the top of our largest
corporations and the average worker.
The Wall Street Journal had a piece this week on soaring
compensation and decades of failed restraints. Here are just two
factoids.
“In his 1936 State of the Union address, President Franklin D.
Roosevelt railed against ‘entrenched greed’ at American
corporations. At the time, the average compensation for the top
executive of a big company was about $95,000, according to
MIT’s Ms. Frydman, equivalent to $1.4 million in today’s
dollars.”
Today the average CEO’s pay is 369 times as much as the
average earned by a worker last year, compared with 131 times
in 1993 and 36 times in 1976. Throw in the fact that the average
worker’s paycheck has barely kept pace with inflation (even as
healthcare and other costs skyrocket) and you have a problem;
one that as a society we’re going to have to work on, through
moral suasion as well as the tax code. Don’t worry, my fellow
capitalists; regarding this last bit it’s about closing some stock
option loopholes that have helped lead to the abuse.
Street Bytes
–The three-week winning streak has resulted in one record for
the Dow Jones after another; Friday’s closing figure of 11960
being the new benchmark. Nasdaq had another outstanding
stretch, up 2.5 percent to 2357, while the year to date returns
across the board are certainly nothing to sneeze at, as noted
below.
–U.S. Treasury Yields
6-mo. 5.13% 2-yr. 4.86% 10-yr. 4.80% 30-yr. 4.93%
Tough week for bonds as traders chose to focus on statements
from the inflation hawks at the Fed, as well as strong retail sales
for September, up 0.8 percent when you strip out autos and
gasoline sales. Ergo, further evidence the Fed isn’t likely to ease
anytime soon.
–The U.S. reported a record trade deficit for August, $69.9
billion. As they used to say on ‘Hee Haw,’ “Saa-luuute!” Then
again, it really isn’t much to be proud of, I guess, and on the
other side of the world, China’s trade surplus for the first nine
months of the year is already larger than all of last year. Exports
in September were up 31 percent ($91.5 billion) and imports rose
22 percent ($76 billion), so about $15.5 billion to the black. The
surplus with the U.S. for the month of August, incidentally, was
$22 billion. [Notice how China is also a month ahead of us.]
–The Bush administration did have legitimate cause to crow this
week as the budget deficit for fiscal 2006 (ending 9/30) was just
$248 billion, or only 1.9 percent of GDP, to use a common
measurement. The biggest reason is corporate tax receipts rose
27 percent, but as I noted recently those complaining about
Big Oil and its profits should understand the vast majority of the
pick-up in corporate taxes is a result of those paid by the oil
companies.
–The National Weather Service is calling for a mild winter (tell
that to the residents of Buffalo!), with those using natural gas to
heat their homes possibly seeing bills 13 percent lower than last
year.
–On the oil front, OPEC is still attempting to reach consensus on
a production cut, while it’s laughable that President Bush is
claiming credit for the slide in prices at the pump.
–In another blow to Big Oil, Indonesia announced it was
terminating an agreement with Exxon Mobil to develop a natural
gas field and instead sought a new one with better terms for
Jakarta. Exxon says the old deal should stand, while all foreign
investors in Indonesia’s considerable natural resources will think
twice before plunging in unless contracts are honored.
–Everyone is talking about Google’s acquisition of YouTube for
$1.65 billion. Who the heck knows if this is a good price? Steve
Ballmer, CEO of Microsoft, said “If you believe it’s the future of
television, it’s clearly worth $1.6 billion. If you believe
something else, you could write down maybe it’s not worth much
at all.” Certainly Google now faces significant copyright issues,
but one thing is for sure; 20-something co-founders Chad Hurley
and Steve Chen are now worth an estimated $250 million apiece.
–Wheat prices are at 10-year highs as fears build over the global
drought and stockpiles that are at 25-year lows. The wheat
harvest in Australia, for example, is expected to be down almost
60 percent this year and if the drought continues in producer
nations in 2007, there could be rationing. Corn futures have also
been rising on both reduced crop estimates and the growing share
going towards ethanol, which is expected to account for about
35 percent of next year’s supply in the U.S.
–In a big move, Bank of America is offering free online trading
for accounts with as little as $25,000 in deposit. Shares in
competitors such as Ameritrade and Charles Schwab were hit
hard on the news as it’s the dollar threshold that really shakes
things up. Schwab, for example, is at $9.95 per trade, but you
need household assets of $1 million to qualify. BofA in turn is
looking to leverage its 5,700 branches and suck up more business
in mortgages, CDs and other lines. To me it’s a brilliant move,
but as I told my rep at Schwab the day the news hit (I have my
account there these days), it’s also still about service.
–My portfolio: Even though they were Jan. ’08 puts, I jettisoned
my financial services / mortgage originator play, taking a small
loss. Analysts have been consistently downgrading the company
due to its housing exposure, but the stock wasn’t responding the
way I wanted it to. I also sold another underperformer (a small
position) and I’m close to the 80 percent cash, 20 percent stocks
that I have been predicting would beat the market all year. [I’m
still only about five percent behind the S&P, in actuality.]
–Talk about hype. Virtually every newspaper I read on Friday
had a story on Coca-Cola’s new Enviga tea-based drink that
claims to burn calories; 60 to 100 if you drink 3 cans a day.
Geezuz, just take a walk now and then.
–Delta Air Lines announced it was expanding its international
service, including direct flights to Bucharest, Romania……….
…………..I was there first!
Foreign Affairs
Iraq, part II: Just a further note on British General Dannatt, who
backtracked furiously on Friday after the following comments
from an interview were published.
Sir Richard said the continuing presence in Iraq of 7,200 British
troops was “exacerbating the security problems” and they should
come home soon.
“We are in a Muslim country and Muslims’ views of foreigners
in their country are quite clear. As a foreigner you can be
welcomed by being invited in a country but we weren’t invited,
certainly by those in Iraq at the time. The military campaign we
fought in 2003 effectively kicked the door in….
“I don’t say that the difficulties we are experiencing around the
world are caused by our presence in Iraq but undoubtedly our
presence in Iraq exacerbates them.”
The general made it clear the planning for the post-war phase
was “poor, probably based more on optimism than sound
planning,” adding, “The original intention was that we put in
place a liberal democracy that was an exemplar for the region,
was pro-West and might have a beneficial effect on the balance
within the Middle East. That was the hope, whether that was a
sensible or naïve hope, history will judge.” [Daily Mail / The
Times of London]
Of course the general’s comments directly contradict the
argument made by both his boss, Tony Blair, and President Bush.
Lastly, Sir Richard weighed in on the state of affairs back home,
saying the failure to support Christian values in Britain “was
allowing a predatory Islamic vision to take hold,” as reported by
The Times.
Sir Richard:
“When I see the Islamist threat in this country I hope it doesn’t
make undue progress because there is a moral and spiritual
vacuum in this country.”
Separately, from an editorial in The Times concerning Jack
Straw’s efforts to have Muslim women remove their veils.
“Mr. Straw worries about the veil being a ‘visible statement of
separation and difference.’ This understates the matter. There
are numerous modes of attire – religious and secular from priests
to punks – that indicate separation or difference. What is unique
about the veil is that it precludes a basic form of human contact
in a way which the Sikh turban or the Buddhist robe or the
Christian Cross do not do. There is a subtle but crucial
distinction between separation and isolation. It would plainly be
inappropriate to legislate in this area. It would be even more
mistaken to pretend that the veil is simply another item of
clothing when lifting it might let in light.”
Turkey: You can forget about this country entering the European
Union, despite anything you hear to the contrary. Relations
between France and Turkey have been irreparably harmed by a
French parliament decision to approve a bill that makes it a crime
to deny that the 1915-17 massacres of Armenians at the hands of
Ottoman Turks constituted genocide. Turkey’s parliamentary
speaker called the decision “shameful.” Opposition in France to
Turkey’s EU application is stiff, while Turkey, which itself has
seen falling support for the EU among its own people, has
threatened economic reprisals.
China: The Central Committee established at a meeting this week
that it needs to address the growing gap between rich and poor
which is resulting in rising internal strife. It’s easy to forget the
Beijing Olympics are now just two years away. Unrest in the
major cities and pollution in the staging area are the major
concerns as the Commies gear up for their big opportunity to
showcase the China Miracle. Meanwhile, in Taiwan, protests
against President Chen Shui-bian continue amid the corruption
scandal here, though an effort by parliament to oust him failed.
Australia: Prime Minister John Howard has been a rock of
support for the Bush administration and he’s vowed to keep his
country’s 1,300 troops in Iraq, even though the people are
against it by a 59-36 margin. The comments from the British
general may complicate matters further, however.
Afghanistan: Two German journalists, working on a
documentary, were killed and there were a score of suicide
attacks this week.
Lebanon: In an interview with the Wall Street Journal, Prime
Minister Fouad Siniora said resolution of the Shebaa Farms issue
remains the first requirement for any permanent peace deal. Just
as I wrote before the war, Siniora wants to deny Hizbullah a
reason for pursuing its campaign of armed resistance.
Bolivia: So I’m reading the Santiago Times and I see a note that
Bolivia is in the process of building 24 military bases, paid for by
Venezuela and Hugo Chavez, on its borders with Peru, Brazil,
Paraguay, Argentina and Chile as a way of promoting Bolivian-
style revolution. Isn’t that super? It certainly has Chile’s
attention. Now what other conclusion can you draw by this news
if you believe the theory I’ve been throwing out the past few
months? Iran could eventually have advisors at the bases.
Random Musings
–President Bush’s approval rating declined anew, to 39 percent
in a poll for ABC News/Washington Post and 37 percent in a
USA Today/Gallup survey. The ABC numbers also showed that
by a 54-35 margin, voters believe Democrats are better able to
handle problems, while only 35 percent agree with Bush’s
handling of Iraq. In the USA Today poll, for the first time
Democrats were viewed as being better able to deal with
terrorism, 46-41.
So with only 3 ½ weeks left until Election Day, what can turn it
around for the Republicans? Bush received his little bounce in
September by stressing how America is safer, five years after
9/11, but he resumed his slide because of the deteriorating
situation in Iraq and the Mark Foley mess.
And note to my Republican friends, don’t waste your time trying
to tie reaction to Foley with 1983’s Gerry Studds (D-Ma.)
episode. Conservative commentator Charles Krauthammer did
just that in an opinion piece, concluding “Am I missing
something?” Yeah, it’s irrelevant.
As for the Democrats, clearly Senate Minority Leader Harry
Reid didn’t help their cause with the revelation he was probably
failing to properly disclose key elements of a real estate windfall
he garnered over the past few years in Las Vegas, but even here
it’s balanced off by news Senator George Allen (R-VA) hasn’t
been reporting some stock option gains.
So add it all up…Abramoff, Bob Ney, Foley, Reid, Allen…and
you know what model is looking better and better these days?
Thailand. Hey, their coup is going pretty smoothly, right?
[Don’t worry; I’m not advocating military action in Washington.
Our generals have proved to be a pretty sorry lot, after all.]
–Back to the Abramoff scandal, Republican Congressman Ney
pleaded guilty to bribery on Friday as a result of his relationship
with the scumbag lobbyist. So expect Democrats to take full
advantage of this in their campaign ads.
–I’m getting a kick out of the footage being shown on our
networks from the DMZ. Having been to all the places you’re
seeing, trust me, it’s not quite as dramatic as the reporters would
have you believe. The Peace or Freedom Bridge that you are
shown, for example, is within the 8-km “military exclusion
zone,” but it’s outside the 2-km DMZ [8 and 2 on each side.]
And those troops you see aren’t about to stop an invasion.
They’re there more to prevent someone from acting like a jerk.
And I was disappointed that NBC’s Andrea Mitchell told her
viewers that 37,000 U.S. troops “are stationed on the DMZ.” No
they aren’t. Most are now in Seoul or about 30 miles south of
there, as I confirmed in my trip this past spring in talking to some
American soldiers at a military museum.
–Homicides were up 4.2 percent in the first six months of 2006
for 55 cities across America. Critics say it’s a result of police
being distracted by anti-terrorism initiatives. Nah, it’s just 13-
year-olds being 13-year-olds.
–With all the data coming out concerning the U.S. population
hitting 300 million, one item that’s interesting is auto safety.
In 1915, when the population was 100 million, there were 35
deaths for every 100 million vehicle miles. Today the rate is
down to 1.5.
And in the field of education, back in 1915 only 13.5 percent of
the people had a high school diploma. Today it’s 85 percent.
As for race composition, today the population is 56.6 percent
white, 20.5 percent Hispanic, 15.3 percent Black, 3.9 percent
Asian, and 3.7 percent Martian. Well, maybe that last one isn’t
totally accurate, but you’ve all wondered about some of your
neighbors, haven’t you?
–As a Catholic who hasn’t been going to church much over the
past few years, I noted with interest that Pope Benedict XVI is
taking steps to revive the Latin Mass. Without getting too
personal, I’d welcome the move.
And it would give me an excuse to dust off my 8th grade Latin.
“Hic haec hoc…huius huius huius…”
–Since I wrote last week about diamonds, I can’t help but note
how actress Ellen Barkin, formerly married to billionaire dirtball
Ron Perelman, was able to sell the jewels he had given her over
the years for $20 million at Christie’s auction house. Good for
her.
–Did you see the news on Jupiter? One of the spots that was
once white is now red, but what I found fascinating is the “Great
Red Spot” is a constant storm with winds of 400 mph. Not a lot
of ball caps sold there by the Jupiterians, I imagine.
–And 77-year-old Arnold Palmer announced on Friday he had
played his last competitive golf.
“I’ve been doing this for a long time, and first of all, to stand out
there and not be able to make something happen is very
traumatic in my mind.”
—
Pray for the men and women of our armed forces.
God bless America.
—
Gold closed at $593
Oil, $58.57
Returns for the week 10/9-10/13
Dow Jones +0.9% [11960]
S&P 500 +1.2% [1365]
S&P MidCap +2.7%
Russell 2000 +3.1%
Nasdaq +2.5% [2357]
Returns for the period 1/1/06-10/13/06
Dow Jones +11.6%
S&P 500 +9.4%
S&P MidCap +6.3%
Russell 2000 +13.3%
Nasdaq +6.9%
Bulls 52.2
Bears 30.4 [Source: Chartcraft / Investors Intelligence…55-60 in
the bull camp is normally the sign of at least an intermediate top,
though the readings can persist for some time.]
The next three weeks I’ll be coming to you from Tucson,
Scottsbluff, Nebraska, and the Black Hills of South Dakota as I
drive a few thousand miles around America. I’ll be the guy
wearing a Wake Forest hat.
🙂 _]
Brian Trumbore
