Aftermath: Freedom Lives

Adam Hamilton    September 14, 2001    5036 Words


In only a few horrific hours Tuesday morning, the whole world shifted on its axis.  So unbelievably much has changed, so many lives and perceptions of reality shattered.  For all of us, there is much to talk about and much that needs to be said.


We could talk about tragedy and anguish.  Seeing the surreal images on television broke my heart.  Weeping spouses lined up like war refugees at New York hospitals, hopefully clutching pictures of their missing loved-ones to their own forever-scarred hearts.  Knowing that there are precious little children in thousands of American homes who are anxiously asking, “When is Mommy coming home?” or “I want to see my Daddy.”  Watching media pictures of parents wandering the hospital scene like the damned, courageously searching for their own missing children and refusing to let hope die.  I have shed many tears in the last few days and have many more yet to shed.


We could talk about heroism.  Seeing heroes like the American passengers aboard the jet that crashed in rural Pennsylvania who probably saved hundreds or thousands of more lives by fighting back against the terrorist butchers and preventing one hijacked jet from reaching its target.  Seeing the boundless courage of New York’s bravest and finest rushing into the jaws of a precarious maelstrom, willing to sacrifice their own lives if necessary to rescue others and move them to safety.  Jesus Christ himself said, “Greater love has no man than this, that a man lay down his life for his friends.”  Rescue personnel are going even further, selflessly willing to lay down their lives to rescue people they probably have never even met.


We could talk about injustice.  Those monstrous bastards murdered friends and colleagues of mine!  The innocent Americans working at the World Trade Center did not make US foreign policy and they did not antagonize other countries.  They were hard-working everyday folks, people zealously pursuing big dreams, taking care of their beloved families, and quietly going about their own business.  Yet the terrorist fanatics, presumably upset about US foreign policy, indefensibly decided to slay the innocent.


We could talk about rage.  Too many nation-states around the world have long been granted a free ride, as they have been shown that terrorism does pay because spineless politicians in the West lack the will and resolve to respond with overwhelming force.  If I was Commander and Chief of the US military, the government leaders of countries that have long supported and financed terrorism operations would soon no longer exist.  I would send in elite US commando units backed by the full military power and fury of the United States of America to mercilessly hunt down and capture or assassinate the actual leaders responsible for making pro-terrorist decisions in each of the rogue governments that have falsely claimed that terror is a legitimate political tactic.  Governments that openly finance and otherwise support terrorism and provide staging areas for terrorist operations should be systematically eradicated by the rest of civilization and sent back to the fiery pits of hell where they belong.


We could talk about terrorism.  Terrorists are godless cowards.  If they have a problem with the United States’ government’s foreign policy, why don’t the terrorist organizations pursue the actual political arms of governments that make that policy?  The terrorists think they are tough and brave, yet they continue to pursue soft civilian targets around the world.  Real warriors go out of their way to protect the innocent whenever possible.  Men who cold-heartedly set out to slaughter non-combatants are not warriors, but the worst kind of yellow-bellied cowards.


We could talk about attitudes.  For far too long the elite leftist politicians in the West have been trying with all their might to force nations besieged by terror like Israel to sit down and actually negotiate with these irrational terrorist madmen.  NO ONE in America who feels anger over what happened to thousands of innocent Americans on Tuesday, including our wishy-washy politicians, should ever criticize a government relentlessly terrorized by fanatics like Israel for hunting down and slaughtering terrorist swine.  Terrorists MUST be hunted down, must never be negotiated with, and must be made to realize with crystal clarity that there is no safe corner of the world in which to hide once they choose to declare war with civilized nation-states and shed innocent blood.


So many feelings, so much anguish, so much anger.  We all, including myself obviously, need time to work through our strong emotions and grieve for our lost friends and loved ones, both people we knew and people we had not yet had the privilege of meeting, their lives full of so much promise snuffed out by sniveling cowards who had a problem with the American government’s foreign policy, NOT the American people. 


Thankfully, even though terrorists can slay innocent lives, terrorists CANNOT destroy our freedom, only we Americans can do that.  The way we collectively react to the aftermath of this crisis as a great nation will determine whether the terrorists actually won or not.  I would like to briefly discuss a couple of many issues weighing heavily on my heart as I write this essay.  First, I would like to depart from the usual fare and offer some thoughts on terrorism, civil liberties, and freedom.  Then, I would like to muse a little on free markets and the potential financial market responses to this cruelly engineered catastrophe that has befallen America.


One of the most important base concepts for all investors to understand is risk.  Every single investment or speculation decision involves a careful analysis of the risk inherent in deploying a capital position.  EVERY investment has risk, even physical gold.  After all, physical gold, even though it has survived for millennia and is impervious to inflation, machinations of governments, and manias and panics, can still be stolen by common thieves from investors who own it.  EVERY single decision involving capital deployment faces many risks, some known and some unknown.  The prudent investor fully understands this rock-solid reality.


Life is a lot like investing.  EVERY single decision we all make in our everyday lives carries varying amounts of risk.  When we hop in our cars and head to the freeways, we are taking serious risks.  All kinds of low-probability events can occur unexpectedly no matter how vigilant and careful we are.  A catastrophic automobile mechanical failure can happen or a neighboring driver can sustain a heart-attack and unconsciously plow through traffic.  A huge number of different low-probability events that can lead to injury or death are always possible, regardless of how many precautions we take and how vigilant we are in living our lives.  When we eat a meal, there is always the low-probability possibility the food is bad and we risk contracting some terrible and rare illness.  When we slumber at night we risk not being alert and vigilant and a whole range of low-probability catastrophes can befall our homes while we sleep.


No matter how hard we try, we cannot live risk-free lives.  Everyday simple tasks can quickly turn dangerous or even lethal when inherently unpredictable low-probability non-linear events occur.  Investors, perhaps more than almost any other group of people living in non-violent first-world society, fully realize that life is full of risks.  We all work hard to minimize our risks, but they can never be eliminated.  Every conceivable activity on the planet carries risk and that can never fully be mitigated.


In the wake of the latest horrifying terrorist attacks in America, I am very concerned about the rising crescendo of voices of politicians and citizens alike saying things like “America MUST be made safe” and “we must make SURE that this can never happen again”.  There are already widespread discussions of serious curtailments of freedoms and liberties of our free society that are highly disturbing.  The media is reporting and helping to fan an upsurge of popular sentiment claiming it is acceptable for Americans to give up some of our freedoms for safety.  This argument is dangerous and false and can lead to a very slippery slope on which there is little hope for return.


Using one emotional and high-profile example of this current phenomenon, I would like to discuss air travel.  Because the terrorist cowards commandeered civilian Boeing jets to use as their massive missiles for the destruction of the innocent, people and politicians are lapsing into knee-jerk reactionary mode and planning on totally changing air travel in America.  While the police-state strategy may be comforting to the naive, it will have little or no long-term impact on terrorism.  Police-state security provides an illusion of safety, but there is simply no defense against those who are willing to die for their cause.


Before Y2k, I was flying 100,000 miles per year on consulting engagements.  I usually flew twice per week, 48+ weeks per year, and was one of those battle-hardened “road-warrior” businessmen that effectively lived out of airplanes and airports.  As an elite business traveler who has flown more in many single years than most people do in their entire lives, I feel I have an understanding of and legitimate business interest in smooth and secure air travel.


Tighter airport security will NOT ultimately make a difference in terrorism!  My statement may sound offensive to some at this emotional junction in American history, but please hear me out.


Terrorists are fanatics.  Some obviously have so much faith in their cause that they are willing to expend their own lives to achieve their goals, as we all saw in spades on Tuesday.  Terrorists are willing to spend years planning and training to execute missions.  They intricately understand some key military doctrines such as reconnaissance and are often prepared to spend a long time observing their targets in order to exploit any weaknesses.  Terrorists will simply adapt to higher airport security by improvising new means of infiltration or else attacking other abundant soft targets in our free society.


There is NO level of security in civilian facilities like airports that will make them IMMUNE to terrorist attacks.  It is an utterly impossible goal.  Very tight security will simply waste untold tens of billions of dollars worth of valuable time and scarce capital as the 99.99% of air travelers who are legitimate are forced to jump through even more flaming hoops to take a simple airplane ride to another city.  Terrorist fanatics will NOT be slowed or stopped by very high security, they will simply change their tactics and adapt.  If someone is actually willing to die carrying out a mission, there is virtually no possible way to for any facility that allows civilians onto its premises to stop the terrorist anyway.


Compared to the tragedy that happened in New York, the example of inconvenience of air travelers is obviously grossly trivial, but the principle I am trying to articulate is extremely important.  More and more in the coming days and weeks we Americans will hear the government and media tell us that it is necessary for us to surrender civil liberties for “safety”.  This is a lie and is absolutely not true.  No matter how many sacrifices a free society like ours is forced to make by our leaders, we will always be vulnerable to madmen.  It is impossible to defend against terrorist fanatics who are willing to die to further their twisted agendas.  There will always be significant risks involved in living in a free society, as our founding fathers understood.


Every single freedom we Americans allow our leaders to take from us in the aftermath is a huge victory for the men responsible for this cowardly attack on American innocents.  We do not want and do not need a police state.  Americans should not tolerate our political leaders mucking up our First Amendment Constitutional right of freedom of assembly and association, which makes the freedom to travel unmolested by government necessary.  It is pretty hard to assemble as Americans if traveling becomes a nightmare because some short-sighted bureaucrats are stuck in knee-jerk reactionary mode thanks to the vile actions of some irrational madmen. 


Along similar lines, Americans should not tolerate our political leaders suspending our Fourth Amendment rights protecting us from unreasonable searches and seizures.  We have a long, proud tradition and legal foundation in the United States of America of everyone being fully innocent until PROVEN guilty.  It is a dangerous, dangerous precedent to have heavily-armed and under-trained internal security forces milling about with a dark mindset that perceives everyone as a potential terrorist.  No amount of unconstitutional searching will stop a highly-motivated, dedicated, quasi-intelligent terrorist who has done his due diligence and researched his mission of terror.  We, as American people, must not let our political leaders lose sight of our freedoms and turn America into a police-state in a tragic reaction to a horrible terrorist act.


The United States of America, and indeed our very freedom, is founded on the true principle that certain inalienable rights are given by God to men.  These are not negotiable “privileges” that can be suspended at bureaucratic whim, but God-given RIGHTS that no man can take away from Americans.  The US government should never in any circumstances be allowed to take our essential Constitutional freedoms away from Americans. 


I strongly urge all my fellow Americans, especially in this time of high rage and fear, to dig out your copy of the Constitution of the United States of America and read it very carefully, especially the Bill of Rights.  If, God forbid, we have less freedoms one year from now than we had one year ago due to the barbaric terrorist attacks on our fellow Americans, the terrorists have WON.  We must not let our politicians usurp our God-given freedoms for false and empty promises of security.  Perfect security in a free country is impossible.


Like investing, life is full of risks.  If we choose to live in a free society, we must bear the burden of being exposed to occasional barbaric acts by terrorist madmen.  Terrorism will always be possible as long as deranged people are willing to sacrifice their own lives to kill innocents.  No amount of impositions on our critical freedoms and free society can ever eliminate that risk.  Our lives will always contain some risk, even that of being murdered, but we cannot allow the fear of that risk to unravel the very fabric of our society and take away our freedom.

As a nation we can and must allow our brave men and women in the military to ruthlessly hunt down, assassinate, and utterly annihilate terrorists, but we must never, ever allow our politicians to take away our crucial freedoms.  Without the critical and precious freedoms guaranteed by our Constitution, there is no United States of America.  We must cling to our Constitution in the aftermath and force our elected representatives to do the same, preserving our freedoms paid for by the priceless blood of so many brave Americans before us.


Freedom must prevail, not fear of terrorism!


One of the most important fruits of freedom is the free markets.  Free men and women in America are blessed with the wondrous opportunity to work hard, save a portion of the fruits of their labor for the future, and in doing so create wealth.  Free markets are one of the greatest expressions of freedom, as they show what mighty enterprises brave men and women can build in a society free of government suppression of God-given freedoms and how many obvious and inherently unquantifiable benefits to society accrue thanks to their tireless labors. 


Although I personally grieve for friends lost and for the devastated American families I never had the privilege of meeting, my mission in these essays has always been to help illuminate the markets from a contrarian perspective and try to spread financial truth.  As such, I would be grateful if you would allow me to muse a little bit on the potential financial market impact of these horrible terrorist atrocities.  Please realize I mean no disrespect and am certainly NOT trying to imply the financial markets are more important than human life.  On the contrary, a single human soul truly has far more value than all the wealth on planet earth.  But, it is my mission to analyze and write about markets and economies so that is exactly what I will continue to do even through this time of terrible turmoil.


One thing I have really been trying to do outside of the necessary time when I am working through my own strong personal emotions regarding the attack is to try and discern its potential impact on the US financial markets.  While everyone who has an interest in the markets is now forced to look into battle-scarred and smoky crystal balls that may prove to be useless, I think a few tentative strategic conclusions have a high probability of coming to pass.


Extreme volatility in the short-term is almost a given.  An earth-shattering event like the horrible attack on Tuesday causes different investors to react in different ways, and some of this reaction and emotion will spill over into the US markets in the coming days and weeks sparking potentially large swings in market prices.


In order to attempt to mitigate this volatility and potential selling pressure, the US government and Federal Reserve will pull out virtually all the stops in trying to stabilize the financial markets.  While I have argued tirelessly in the past about the evils of government manipulation of free markets and will continue to do so in the future, I certainly offer no criticism of the MOTIVES of intervention this time.  Extraordinary market times are believed by the officials to call for extraordinary market measures.  I still will never support government mucking about in free market processes as it creates all kinds of nasty problems in free markets, but I do believe it is with good intentions that officials are preparing to actively manipulate early trading.  Nevertheless, like any feeble human effort to control massive and unyielding economic forces, any impact from government and/or Federal Reserve operations to stabilize the US financial markets is likely to be short-lived and ethereal.


Before the Tuesday strikes, certain forces were acting powerfully to move US markets.  My colleagues and I have covered these forces extensively in our past Internet essays and private newsletters. 


Before our world was distorted by the madmen, US equities were massively overvalued on a historical and fundamental basis, corporate profits were imploding, hard-working Americans were being aggressively axed by corporations, the US economy was rapidly slowing, and the ugly consequences of a supercycle bubble bust were painfully unfolding.


After our world was distorted by the madmen, what is my outlook?  I strongly believe that US equities are massively overvalued on a historical and fundamental basis, that corporate profits are imploding, that hard-working Americans are being aggressively axed by corporations, that the US economy is rapidly slowing, and that the ugly consequences of a supercycle bust are painfully unfolding.


Net net, I do not believe that the terrorist spectacle changed any of the powerful underlying trends that were relentlessly acting upon the US markets Monday before our lives were forever changed and our hearts broken. 


In the coming weeks we could see huge volatility and a sharp sell-off as investors seek refuge from the chaotic financial markets.  Or, in the coming weeks we could see huge volatility and a super bear-market rally as Americans “rally” around their markets and a newfound collective optimism for freedom and the unbreakable resolve and faith in America takes hold.


In either eventuality, the market events of the next few weeks are highly unlikely to significantly alter long-term trends.  Serious structural economic problems existed in the US economy before this nightmare, and those same problems still exist now.  Government interventions in markets may temporarily dampen volatility and provide a short upside bias, but they will only have a temporary and fleeting effect and the underlying trends buffeting the US markets in 2001 prior to the terrorist strikes are likely to continue on their merry ways regardless of government wailing or investor gnashing of teeth.


While we believe that previously underlying strategic trends will remain in force, there are several potential negative wildcards that my partners and I have begun to discuss.  Like all other mere mortals trapped within the time domain, we have no idea exactly what will unfold in the markets in the near future, but these three areas bear watching closely.  Consumer confidence, air travel, and derivatives should be carefully monitored in coming weeks as we gauge the ultimate economic impact of the terrorist atrocity.


As we argued way ahead of the crowd in our “Consumers to Rescue Wall Street?” essay published in early April of 2001, the whole premise of the long-Wall Street prophesied (but perpetually delayed) miraculous economic recovery in the US is based on the faithful hope that US consumers will spend, spend, and spend.  Consumer spending accounts for 2/3 of the US economy and without strong consumer spending many businesses are helplessly watching their revenues and profits crater.  Unfortunately, US consumers are drowning in unprecedented debt that continues to ominously break various bad records each month.  If consumers want to spend, they will have to borrow more and push their futures even further in hock than they are now.  In order to borrow and literally mortgage their futures, US consumers need confidence that they can some day pay back their debts and hopefully come out ahead at some point in the future.


If the terrorist attack causes a rip in the fabric of US consumer confidence and generally pushes consumers from a debt-spending mode to a saving mode, the US economy and markets are in very serious trouble.  The government and Wall Street will do almost anything in the coming weeks to bolster consumer confidence and keep Americans from putting away our wallets, but we are concerned that those efforts may not prove successful.  If consumers slow down spending as their confidence in America and their futures is disturbed, the super-bear mauling the US equity markets in August and early September could get a lot worse.


As a related corollary, we are beginning to suspect that the longer the Bush Administration waits to respond militarily to avenge the deaths of innocent Americans, the more frail US consumer confidence will become and the harder it will be for many very upset Americans to move on with their lives in a quasi-normal fashion.


On the air travel front, most people who have not had professional experience doing business by air have no idea how absolutely crucial air travel is to our economy.  Even Information Age zealots like us who rely heavily on Internet technology to grow our fortunes fully recognize that some business deals can only be done face-to-face, some interactions or projects are only possible when work is done on-site.  Air travel is stupendously important for national and international commerce.  Each day in the US alone, hundreds of thousands of business travelers meet with their colleagues in far-away cities to make important decisions on moving business forward and growing free enterprise.  The overwhelming importance of air travel as a critical conduit for business cannot be easily overestimated.


Harkening back to my civil liberties comments above, my colleagues and I feel that any serious longer-term disruption in the ease of air travel and therefore the ease of assembly will severely hamper US commerce.  In this already economically perilous time even before the terrorist attacks, any government regulations that restrict the ease of face-to-face business facilitated by easy air travel could have potentially far-reaching negative impacts on the velocity of commerce and the ease at which deals are consummated and companies grow their businesses.  We believe investors should closely watch government restrictions and security theatrics imposed on airborne commerce.  If the general security noose in the name of “safety” becomes too tight and deters business traveling and hence deal-making, we could see a substantial and adverse impact on cross-country and international US commerce in general.  Not a good thing in a limping economy!


Third, as we have also discussed in various essays including last week’s extremely popular and controversial essay on derivatives (“The JPM Derivatives Monster”), derivatives are inherently highly-leveraged and very fragile and therefore hyper-sensitive to non-linear market events, just like this barbaric terrorist strike.  The fabulously sophisticated computer models used to engineer massive derivatives portfolios assume a certain level of market predictability based on past data.  They do not allow for huge non-linear and inherently unpredictable events like fully loaded civilian airliners being rammed into the financial district of New York City and reducing it to rubble.  This is a stellar non-linearity to the N-th power!


As the potentially enormous volatility buffets the markets in the coming weeks, we believe derivatives portfolios could face severe stress that could cause unforeseen problems cascading through the system.  We are NOT implying a system-wide derivatives crash is imminent, although that is certainly always a small and frightening possibility, even before Tuesday’s events, but we do believe that the intricate web of interlocking derivatives obligations could be placed under previously unimaginable stress.  Who knows what this will lead to, but all investors should keep their ears to the rail regarding derivatives problems in the coming weeks in hedge funds, US commercial banks, and other large derivatives market participants including investment banks.  If the terrorists have succeeded in setting in motion events that will ultimately greatly shake the $100+ TRILLION global derivatives pyramid in the coming weeks, the US markets are in serious trouble.


Finally, I offer a few more random market thoughts.  The US economy is huge.  The latest US Federal Reserve numbers show a US gross domestic product of over $10,200 BILLION dollars.  Some perma-bull Wall Street peacocks are already strutting on television saying the $20b to $40b the US will spend to rebuild is very bullish for the US economy in general.  Not likely!  Even if $100b is borrowed by the federal government and spent in the coming months to rebuild, it is only a trivial drop in the bucket compared to the entire US economy, less than 1% of the whole GDP.  The rebuilding of New York will no doubt help the local New York economy, but it is highly unlikely to stave off the rapid economic decay of the US as a whole.


Second, I have an unpleasant feeling that Wall Street will shamelessly use this terrible tragedy as an excuse to justify further market declines later this autumn.  As we and other contrarian analysts have painstakingly documented since the NASDAQ crash in March of 2000, the US economy and financial markets were in serious trouble on September 10 before the attack and were already headed much lower.  Brace yourselves for a huge Wall Street PR campaign blitz blaming the terrorists for everything bad that happens in the markets from now until a long time into the future.


Third, the Wall Street establishment and US media are beginning to claim it is our “patriotic duty” to buy stocks on Monday.  Hedge funds are also being pressured not to trade and short selling may be restricted.  These developments are also utter hogwash!  The folks brazenly trying to claim that buying overvalued stocks in a crisis is a patriotic duty ought to be ashamed of themselves!  It sure is not hard to guess whether they are long the US markets or not!


Every investor should aggressively protect his or her own capital next week and in the following weeks, and not be suckered into a hyper-dangerous market by emotional sentiment.  As this essay is being published, my partners and I are not planning on altering any of our previously existing long or short positions.  If you absolutely have to throw speculative money at the markets next week, we suspect that primary natural resource producers (like gold mines, oil drillers, etc) and defense stocks have the highest chance of mounting real, sustainable rallies.


My heart is broken for the shattered families that those bastard terrorist cowards destroyed.  My prayers and resources go out to help those affected in any way I am able.  I fervently pray that the Sovereign God of the Universe showers his mercy and blessings on those who lost loved ones and friends and I fervently pray he rains down his eternal vengeance on those who will slaughter innocents for their pet political causes. 


Compared to even one human life, one husband who lost the love and light of his life as the terrorists murdered his wife, one wife who lost her beloved soulmate and the father of her children as the terrorists murdered her husband, one loving parent who lost a priceless son or daughter, or one infinitely precious child who will never be able to hug his or her Mom or Dad again, the financial markets are worthless and meaningless.  Human life is infinitely more important than money, wealth, and investing ever will be. 


This feeble essay was very tough to write as nothing can be said that can comfort those whom the terrorists have destroyed.  I did not like writing about freedom and financial issues this week, as I do not want to remove the crucial focus from the comforting of the victims, the hunting down of the subhuman fanatics responsible for killing innocents, and the rebuilding of the fabric of our great nation.  Nevertheless, since analyzing and writing about markets is what I do, I made the decision to write this essay fully realizing I could never hope to articulate what needs to be said for the victims and the families of those who were directly affected.  Please forgive me.


God lives, Freedom lives, and America lives!  The cowardly terrorists cannot snuff us out! 


I would like to close with a Bible verse from the ancient Hebrew Scriptures that has personally comforted me immeasurably during earlier dark times in my own life… 


“Be strong and courageous. Do not be afraid or terrified because of them, for the Lord your God goes with you; he will never leave you nor forsake you.” - Deuteronomy 31:6


God bless you and God bless our great nation.


Adam Hamilton, CPA     September 14, 2001     Subscribe