By Richard Maybury
Copyright © 2001 by Henry Madison Research, Inc.
www.richardmaybury.com
1-800-509-5400, Fax 602-943-2363

"Investment advice that is not based on a sound understanding of military affairs, especially guerrilla war, is likely to be high risk."

On September 11, the world changed forever, and the investment markets especially so. Strategies that made perfect sense on September 10 have turned to ashes. Presumably you study more than EARLY WARNING REPORT and have already discovered a lot of investment analysis is stuck in the world that no longer exists. Here are some tips on how to find the best investment advice now.

"War changes flows of money."

First some background.

Osama bin Laden, the Taliban and the Bush administration have all promised a long war lasting years or decades. A prudent investor will take them at their word. Adopt an investment strategy that assumes a war economy from now on.

In a 1993 article in FOREIGN AFFAIRS magazine, Harvard historian Samuel P. Huntington predicted a "clash of civilizations," and he has turned out to be spectacularly right. As militants in the Islamic countries try to rally millions behind bin Laden and the Taliban, Christian militants in the US have started beating their war drums.

I recently heard a Christian leader, Dr. Robert Morey, interviewed on radio KDOV in Oregon. Dr. Morey told the radio audience that "there's about 10,000 terrorist cells in the United States and they're all related to Islamic centers and mosques." On his web site, www.faithdefenders.com, Dr. Morey leads with the statement, "We are grieved for all the families whose loved ones were murdered or injured in the name of the false god, Allah and his false prophet Mohammed."

"... analysis should start with a look at the war, especially a forecast for the direction the war is headed, then go to the effects of the war on the economy, then the way the economy will affect your investments."

Morey is not the only Christian leader headed down this road so, like it or not, Huntington was right. This is a clash of civilizations, a medieval religious war that has begun to stir all the passions typical of religious wars. The hatred will fester and grow.

This means the war will dominate the Federal Reserve's monetary policy, congressional fiscal policy, business and consumer confidence, business and consumer spending, money demand, velocity, and nearly every other important economic force.

Investors must study the war as carefully as any military analyst would. Investment advice that is not based on a sound understanding of military affairs, especially guerrilla war, is likely to be high risk. Before you accept anyone's analysis, examine it to determine if the analyst has this understanding.

The analysis should start with a look at the war, especially a forecast for the direction the war is headed, then go to the effects of the war on the economy, then the way the economy will affect your investments.

Here are red flags to watch for:

Red Flag #1. The analyst uses the words battleship and warship synonymously. I recently heard a news reporter say the US has two dozen battleships in the Persian Gulf. This has become a common mistake, and it is one of the most revealing red flags. The journalist should have said warships. The last battleships were decommissioned in the early 1990s. The word warship means any naval vessel that carries weapons. Battleships were, until World War II, the most powerful of all warships. In their day, battleships were the ultimate weapons, the most heavily gunned and armored vessels in history. An analyst who uses warship and battleship interchangeably probably knows very little about military affairs.

Red Flag #2. The analyst focuses on firepower instead of psychology and history. A war is won when the enemy is persuaded that his best option is to surrender. Firepower is a means to this end, but in most cases it is vastly overrated. The real war is fought in the hearts and minds of the participants, which is why leaders on both sides tell so many lies. In the Vietnam War, the US had overwhelming firepower but still lost the war. An investment advisor who tries to peer into the thinking of the leaders and their populations will have a much better understanding of the war's direction, and therefore the direction of investment markets, than one who focuses on military hardware.

Red Flag #3. When mentioning firepower, the analyst looks mostly at weapons and strategy instead of logistics. There is an old saying among generals: amateurs talk about strategy and professionals talk about logistics. Logistics is the ability to get bullets and beans to the troops, and no matter how brilliant your strategy, you cannot win if you run out of bullets and beans. A writer who can tell you everything about the F-18 jet fighter but knows little about the C-130 cargo plane is one that has only a sketchy understanding of war.

Red Flag #4. The analyst uses the government's propaganda words when talking about the enemy. Sloppy use of language causes sloppy thinking. The quickest way to lose a war is to underestimate the enemy, and the quickest way to do this is to use words that color one's view of him. A skilled military officer avoids words such as gooks, ragheads and terrorists, and uses neutral, objective terms such as "the enemy" or "the other side." This allows a cool, analytical approach that does not bias the judgement. An investment analyst should do the same.

To separate the wheat from the chaff, get into the habit of screening all investment articles for these four red flags. You will have a much better chance of finding analyses that minimize your risks and maximize your profits.

I wish you all the best!

Sincerely,
Richard Maybury
Editor, EARLY WARNING REPORT

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