First things first:

How can an investor who is not a military strategic planner make assertations of what can and will happen in the market place, when military strikes and counter-offenses by terrorists have the potential to roil the markets?

In other words, how do we do "Market Analyses in a time of terrorism?"

That's a valid question, and one that begs an answer if you are to have any sort of faith in my (or anyone else's) market analyses. So this market comment will track along two paths: What the market has been doing, and how that fits into the Strategic backdrop and the threat of terrorism.

The Big Picture: Just as the market finally re-opened on September 17, the Federal Reserve cut interest rates by half a point. At the next meeting (October 2), they cut another half point, bringing the Fed Funds rate to a level not seen since JFK was president 40 years ago.

I expect to see 1/4 point cuts at each of the next two meetings (November and December), bringing the Fed Fund rates to 2.0% -- levels we have not seen in better than half a century (I'll hunt down that the exact date we last saw this rate).

Longer term, this low monetary rate -- in concert with valuation levels and other factors -- will set the stage for the next multi-year Bull Market. I believe that we are about to start another cycle of increased production, economic growth, private investment and government spending. The irony of the situation is that when the US finishes its anti-terrorist mission, the World may ultimately be a much safer place.

The historical response of the US equity markets to past crises has been fairly consistent: we see temporary disruption to the prior trend, and then a resumption of those trends after the dust has settled. Prior to 9/11, we were at what I felt was a market nadir, and many of our favorite indicators were calling for an imminent reversal.

That was before the destruction of the World Trade Center, the damage to the Pentagon, and the newfound realization within the US of the innate vulnerability of an open and free society. Our predicted imminent reversal was put on hold. The markets instead suffered a brutal selloff. The Dow Jones Industrials, which had held up much better than the Nasdaq over the past 18 months, plummeted from 9600 to 8068, a 17% loss in less a week. Nasdaq dropped from 1800 to 1400, off 75% from their all time highs.

The September 21st low was a classic example of a panic selling capitulation. Indiscriminate, ugly, throw-the-baby-out-with-the-bath-water, anxiety-induced stock dumping. It eliminated many weak holders, put stock into the hands of owners with stronger constitutions. Lastly, it set the ground work for a strong move upwards. We were buyers into that mess on September 21, and laid out the reasons why on September 22 in our "Post 9/11 Market Reaction:"

"expect a snap back rally over the next week. It may be 5 or even 10%. A gradual grinding upwards to fill in the big gapdown. A lighter volume retest of last weeks lows shortly thereafter."

Still, it is possible to apply the same broad tools of Market Strategizing to other disciplines. I have written extensively on the intersection of politics and the economy - though I am hardly a "Political Expert." Last year, I discussed why I believed the winner of the popular vote in the US election would not win the Presidential election, and why regardless of who won, the US would be thrown into a recession (Popular Loss, Political Victory). These turned out to be (surprisingly) accurate predictions.

So I have put that same skill set to work here. Let us be so bold as to apply the same methodology to the present scenario. I have read extensively from every piece of intel and strategic ops reports I could get my intellectually greedy hands on. Everything from Jane’s Defense, to National Review to Strategic Forecasting to the Christian Science Monitor

As a strategist, I make the determination of how much weight to give to other people’s analyses -- As investors, you should too. In that light, I have taken the single most thoughtful, cogent and insightful military/strategic analysis I could find, and (because it is not available anywhere else online), I have posted it here, in a print friendly format.

At 1300 words, its too long too include in this mailer, but you can (and should) read it for yourself. This analysis played a key part in the development of my own opinions, and helped me reach my conclusions, vis-a-vis market analysis and terrorism.

And just what are those Conclusions?

"Radical Islamization" has become the new Communism of the 21st Century: Think of Kruschev banging his shoe on the podium of the United Nations, with his challenge to Capitalism: "We will bury you." That is exactly what the attack on the World Trade Center and Pentagon amounted to. It was a declaration of war, a dare to "find us and stop us."

This was a terrible strategic miscalculation on the part of the terrorists. They have been moved to the front and center of the world stage; They now find themselves under an utterly withering spotlight.

Fundamental Extremism used to be a shadowy thing, not well studied or understood, except by a handful of spooks; Post 9/11, it is a dogma in thorough disrepute. The terrorists have succeeded in not only uniting the West, but pulling in moderate Arab States as well as Muslim countries like Indonesia, and the Philippines on a joint effort. They helped the US mobilize not only NATO, but Russia, Pakistan, and others, to lead a Global War against terrorism.

That brutal act of September 11 also contained an enormously fatal socio-political miscalculation: The United States populace has never been this focused or resolved on a singel goal or target. Not in several generations, not since WWII. We were happily unaware in our domestic little cocoons. All we wanted was to sit over here on our side of the Atlantic, go to work, pay some bills. We wanted to surf the web, drive our SUVs, and tend our gardens. Watch some TV or go to a ball game or take in a movie; Even go to church or temple on occasion.

In short, we led lives of blissful ignorance.

Now, the terrorists have threatened that way of life. They have stirred up an angry hornet’s nest and infuriated us off like no one has ever done before -- not since the beginning of this country over 200 years ago. In the words of Japanese Admiral Yamamoto (who opposed the Pearl Harbor attack), they have "awoken a slumbering giant and filled him with a terrible resolve."

In short, the US has a new mission: To root out destroy terrorism where ever it lives.

Before this, the average American was disengaged from overseas affairs; Now we are utterly and completely immersed in them. The terrorists "claimed" to want less US involvement in the Middle East; Instead, they now have the US peering into every nook and cranny through out the region. The best forensic financial experts are rifling through financial records, freezing assets, hunting down the money trail.

No one here wanted any involvement with foreign affairs before this happened. Now, we are demanding total knowledge, complete information. This may ultimately lead to Western Democratization and political liberalization.

Not only that, but the terrorists have managed to utterly transform the presidency of George W. Bush for the better. In the past, I have derogatorily described our president as a lazy, drunken, slacker, frat boy; (it sure is nice having freedom of speech and a 1st Amendment). Now, GWB has risen to the occasion, becoming eloquent, forceful, earnest and "in command." Bin Laden's group has succeeded in the impossible: They have morphed a potential Dan Quayle-like President into a budding Winston Churchill. They have created a world leader.

Ironically, these organizations could have remained beneath the radar. With patience, al-Qaeda could have blown up embassies, damaged US warships, and funded political uprisings in Palestine and other hot spots for decades. To the US, they would have been an "overseas annoyance." Shrewder, less spotlight-hungry terrorists could have remained relatively unmolested, intact enough to cause disruptions, unrest, mayhem.

Instead, a very angry, yet deliberate United States is willing to spend hundreds of billions, if not trillions, to eradicate this threat. We know we will take casualties in this battle, but 6000 civilian deaths has "innoculated" us against the usual loss of political will that American body bags has caused in the past.

When this campaign is over, I believe that the world will be a safer, freer, more productive, more Democratic place.

Ask yourselves: Does the bin Laden organization, al-Qaeda, present the same threat to the world that Nazi Germany did? Do they have the capabilities, strategic arsenal, military might of Japan in 1942? It took the US, leading the rest of the world, 5 years to eliminate these two powerful and efficient foes at once. How long will bin Laden last?

Who can hide from a trillion dollars?

-Barry Ritholtz
October 5, 2001

Copyright © 2001 Barry L. Ritholtz, All Rights Reserved worldwide. May not be copied, stored or redistributed without prior, written permission. Home

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