Sideways Markets? Readings

Stock Volatility(Source: www.hussmanfunds.com)

Sideways Markets (Thanks VK) Sideways Markets

Readings……

http://www.hussmanfunds.com/wmc/wmc121210.htm   (financial Insanity)

http://www.hussmanfunds.com/wmc/wmc121217.htm

http://www.economicpolicyjournal.com/2012/12/peter-schiff-anyone-with-wealth-in.html#more

http://blog.marketpsych.com/2012/12/the-psychology-of-fiscal-cliff-bullying.html

http://www.miamiherald.com/2012/12/16/3142645/cubas-fatal-conceit-on-economic.html

M2 level

Required Reserves

Reserves weekly

Like a horror movie, you may not know when and exactly how it ends–just that it won’t end well.

 

Benjamin Graham on Growth Stock Investing

utopia

Ben Graham on Growth Stock Investing

We last studied Ben Graham’s thoughts on growth stock investing here: http://wp.me/p2OaYY-1se . I suggest studying the best mind in finance past or present. Think about how he approached investing problems, especially the most difficult paradox of all–how to value growth.

The complete chapter (Chapter 39) on growth stock investing by Graham in the 4th Edition of Security Analysis: Newer Methods for Valuing Growth Stocks_1962_Security AnalysisDouble-click on the link to download the documents.

For additional thoughts on valuing growth go here:Growth in 2nd Edition and Ben_Graham_and_the_Growth_Investor_Bryant_College_041008

A Method of Valuing Growth Stocks

Growth Stocks and the Petersburg Paradox

Growth what is it good for and ROIC

What you didn’t know about Value Investing_Skagen

Let me know what you learned………….

 

 

 

Solution to Earnings Quality CS; Reading Hayek; Learning

Scarlet LEtter

Solution to Earnings Quality Case Study (Manufactured Housing)

The case was introduced here:http://wp.me/p2OaYY-1y8. Try it now if you haven’t. What jumps out at you? Red flags should be flying when you read the chilling lines (at the bottom of this post so as to not give you the answer now.)

Stirling Momex Supplement and Enron Too Shall Pass and GAAP Games_Stirling Homex

Learn more about reading Hayek. What books you should focus on: http://www.econtalk.org/archives/2012/12/boudreaux_on_re.html

http://www.econlib.org/library/Topics/Guides/TenKeyIdeas.html

How to learn (Refine your questions)

Learning Begins From Within

by Butler Shaffer

Don’t ever let school interfere with your education.~ Mark Twain

Education is an ongoing confrontation between those who want to help children learn how to think, and those who want to teach them what to think. While there are numerous variations on these themes, the contrast can most clearly be found in the distinctions between child-centered Montessori systems, and teacher- and test-centered schools. Government schools usually fall into the latter category. Homeschooling, religious schools, un-schooling, and other forms tend to emphasize either the “how” or the “what” in their efforts with children.

Those who focus on learning how to think have in mind helping children develop their own methods of questioning and analyzing the world around them; to control their own inquiries and opinions; to the end of helping children become independent, self-directed persons. The role of the teacher in such a setting is to provide new learning situations (e.g., open up new subjects of inquiry when the student is ready to do so) and to facilitate the processes of questioning so as to help the students get to deeper levels of understanding.

People who have developed the capacity for epistemological independence are not easy to control for purposes that do not serve their interests. Institutions – which have purposes of their own that transcend those of individuals – require a mass-minded population that has been conditioned to accept outer-imposed definitions of “reality.” Any deviation from this systemic purpose – as would derive from students questioning how the arrangement would benefit them – would be fatal to all forms of institutionalism.

The established order has, from one culture and time period to another, insisted on educational systems that train young minds into what to think. “Truth” becomes a set of beliefs that conform to an institutional imperative, and it becomes the purpose of schools to inculcate such a mindset. Whereas “how to think” learning that finds its purpose and focus within the minds of self-directed, independent students, “what to think” education derives from outside the students’ experiences and analytical skills. As Ivan Illich so perceptively expressed it, “[s]chool is the advertising agency which makes you believe that you need the society as it is.”

To this end, the established order has helped generate – with eager assistance from academia – a belief that all understanding is a quality requiring phalanxes of self-styled “experts” who, by virtue of their prescribed status, enjoy monopolies to offer opinions about their respective fields of study. Plato’s designation of “philosopher kings” has been sub-franchised into categories of “experts” to be found in “history,” “physics,” “psychology,” “economics,” “law,” and seemingly endless sub-groupings that negate the role once respected for those who had received a “liberal arts” education.

Entry into the sanctum sanctorum of the upper floors of this pyramidal high-rise is determined by a process of certification usually reflected in a graduate school degree provided by those already recognized. Of course, given the logic of any vertically-structured system, there is a hierarchy of certifying agencies, wherein Ivy League universities are presumed more capable of identifying and recognizing expert genius, than would Boll Weevil State University. Nor is tolerance exhibited toward any interloper who might dare to offer an opinion outside his or her area of certification. (When my book, In Restraint of Trade was first published some fifteen years ago, one reviewer – from a history department at a highly-respected university – spent the bulk of his time criticizing not the substance of my book, but the fact that I taught in a law school!)

The assumption is often expressed that, in a complicated world we must rely on “experts” to navigate through the turbulence and uncertainties that abound. But the study of “chaos” and “complexity” challenge this thinking, reminding us that complex systems produce unpredictable outcomes; that the most effective action occurs when decision-making is decentralized closest to the source of such turbulence. In a world currently being destroyed by centralized state systems of “economic planning,” “military planning,” misnomered “intelligence agencies,” “health-care planning,” among others, it is increasingly evident to people that the certified “experts” tend to supply answers to problems that their epistemological arrogance has helped to generate.

Systems premised upon outer- rather than inner-directed learning – training students what to think rather than how to think – turn children’s minds into so much “mush” as to deplete their inherent creative energies. People become neutralized by a system that trains them to accept the inadequacy of their own minds to make empirical and analytical judgments about the world. The outer-directed approach, in which “truth” is presumed to be found within the opinions of the certified intelligentsia, is self-sustaining as long as students’ minds remain in the default mode. Expertism is a circular process that makes it difficult for people to break the circle unless they have a sufficiently independent mind.

The method of learning I have found essential for encouraging the inner-directed (i.e., how to think) approach is found in the use of the Socratic method, which used to be used in most law schools. My all-time favorite professor was Malcolm Sharp, a law professor at the University of Chicago, one of the loveliest persons I have ever known; but who frustrated most of his students with his insistence on getting us to keep refining the quality of our questions. This was done through an ever-deepening level of inquiry encouraged by the creative us of the word “why?”

To the proposition “government is necessary in order to protect the lives, property, and liberty of people” the following questions could be asked: “how is property being protected if the state must forcibly take property from people (taxation) in order to support its activities?” “Can liberty be protected if the state can compel people to act – or refrain from acting – in ways contrary to how they would otherwise choose to behave?” “How can lives be protected if the state is able to engage in deadly wars?” “If the war system generates restrictions on human action, including the forced conscription of people as soldiers, how is individual liberty being defended?” “If it is our purpose to protect the lives, liberty, and property of people, can such ends be served by a system that regularly contradicts such ends? Are there alternative ways to accomplish such purposes?” As each question is asked, the response might generate additional sub-questions to be explored (e.g., is it possible to support a system through voluntary payments? Is the marketplace an example of accomplishing these ends without violating them in the process?)

Most of my students experience frustration over my methods of providing them with cases and materials, and then playing around with hypotheticals – and the factual modification of hypotheticals – to explore the ramification of case holdings and rules of law. “I came to law school to get answers, one student raged, and all you’re giving me is more questions!” “How do you propose to deal with legal questions once you are in practice?” I asked him. “And if you think I am such a fount of understanding, how do you think I got that way; and do you think you might be able to develop such a skill?” It is encouraging to find some students who grasp, at the outset, that their success in the classroom and as lawyers depends upon this process of learning how to think. I often receive favorable responses from students years later. I had one student tell me “when I was a student of yours, I hated your guts. Now that I’ve been out in practice for ten years, I think I learned more from you than from anyone else.” Just a few months ago, a former student wrote me – thirteen years after graduation – to thank me for what she learned from my classes.

Perhaps the most pleasant experience I had with a first-year law student came on the first day of class a few years ago. We had discussed a particular case, and I began playing around with the facts to see how the students might follow the process of discovering the boundaries of legal concepts. At this stage, most students are able to give a one-line answer, but can go no further. This young woman, however, took the inquiry to greater depths: “how does this square with what the court said in the earlier case?,” and similar inquiries. I knew, at once, that she was a real “keeper;” that classes were going to be far more interesting with her ability to use the Socratic process to discover the kind of understanding one never gets from answers; that it is the endless pursuit and improvement of one’s questions that makes for real learning.

I asked this young woman about her educational background: “I was homeschooled up to high school,” she responded. “The best teachers I ever had were my parents.” I suspect that she was the beneficiary of parents who knew that how to think was of greater importance to a creative and successful life, than being conditioned into what to think! The former approach allows men and women to develop, within their own minds, the skills not only for understanding the nature of the world, but to act competently. The latter method reduces people to the task of seeking the opinions of others – particularly the “experts” – to be informed of what they are expected to know.

After working through a series of hypotheticals, I still get a few students who ask “but what is the answer?” “Who cares?,” I respond. “It is going through the process of constant questioning that is the purpose of what we are doing here? I don’t know how the courts would rule in this situation, but I do know what noises to make were I representing one of the parties.” The Socratic method helps students grasp the meaning of Milton Mayer’s observation that “the questions that can be answered aren’t worth asking.”

Our world is being torn apart by men and women who naively try to integrate into some manageable whole their confusions, contradictions, conflicts, lies, evasions, corrupt and violent dispositions, and other destructive behavior. We live at a time when people become righteously indignant over the heinous murder of another, but wave flags and cheer for those who conduct wars against the millions; when Nobel Peace Prize grantors cannot distinguish Mother Theresa from Henry Kissinger as worthy recipients of such an award. Perhaps when our well-organized, expertly-run world finally runs out of answers to the destructive conditions it has created, we may – as Malcolm Sharp urged – undertake the search for improved questions.

December 12, 2012

Copyright © 2012 by LewRockwell.com. Permission to reprint in whole or in part is gladly granted, provided full credit is given.

Butler Shaffer Archives

RED FLAG on Earnings Quality Case Study (Thanks to a reader)

Note 3 on receivables says revenues are recognized when units are
manufactured and assigned [at the company’s discretion] to specific
contracts. (What the F%^&!)  Then it says contracts provide for payment upon completion.  (Expect a massive difference between GAAP accruals and CASH FLOW–lots of room for funny stuff!) 

[not manufacture/assignment] and receipt of all approvals necessary
[which is not in Homex’s control]… Ergo revenues are booked when the
customer doesn’t even have to pay.   BINGO!

That note to the financials (Revenue Recognition) should have you reaching for the barf bag.

LESSON: READ THE NOTES TO THE FINANCIALS!

Another CASE STUDY on Accounting; Free Course on Behavioral Finance

Science of hitting Don’t Invest until you see the money lying there on the floor–Jim Rogers, Investor.

From the 1997 Berkshire Hathaway (BRKaShareholder Letter:

In his book The Science of Hitting, Ted explains that he carved the strike zone into 77 cells, each the size of a baseball. Swinging only at balls in his “best” cell, he knew, would allow him to bat .400; reaching for balls in his “worst” spot, the low outside corner of the strike zone, would reduce him to .230. In other words, waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors.

If they are in the strike zone at all, the business “pitches” we now see are just catching the lower outside corner. If we swing, we will be locked into low returns. But if we let all of today’s balls go by, therecan be no assurance that the next ones we see will be more to our liking. Perhaps the attractive prices of the past were the aberrations, not the full prices of today. Unlike Ted, we can’t be called out if we resist three pitches that are barely in the strike zone; nevertheless,just standing there, day after day, with my bat on my shoulder is not my idea of fun.

When the above was written, the party that ultimately led to the tech bubble era valuations* had already begun in the equity markets.

http://theinvestmentsblog.blogspot.com/2011/06/fat-pitch-ted-williams-science-of.html

And check out: www.theinvestmentsblog.blogspot.com/

Case Study on Earnings Qualithy

Our last case on earnings quality was National Electric found by going into the case study value vault found in the blog post in the following link: http://wp.me/p2OaYY-1ub    I promised to provide an answer. Before submitting my write-up on that case, perhaps the following case would be a good supplement to learn more about uncovering earnings quality.  This case should be pretty obvious. Don’t cheat! Just use the material provided in the link below and answer the three questions in the HBS Case Study.

 

John Chew shared a folder with you via YouSendIt.

Another Case Study Dec 2012
View this folder

If you get stuck, here is a hint: (don’t look until you have tried to solve the case on your own! http://youtu.be/l-O5IHVhWj0   With practice, certain figures and phrases in the notes to the financials should SCREAM OUT at you.  Whatever happened to the CFO?

A Christmas Vault with goodies for all will be posted if someone posts their solution.

Free Behavioral Finance Course! (Coursera)

I have signed up!

https://www.coursera.org/course/behavioralecon

Workload: 7-10 hours/week

About the Course

Behavioral economics and the closely related field of behavioral finance couple scientific research on the psychology of decision making with economic theory to better understand what motivates investors, employees, and consumers. This course will be based heavily on my own research. We will examine topics such as how emotion rather than cognition determines economic decisions, “irrational” patterns of thinking about money and investments, how expectations shape perceptions, economic and psychological analyses of dishonesty by presumably honest people, and how social and financial incentives combine to motivate labor by everyday workers and CEOs alike. This highly interdisciplinary course will be relevant to students with interests in General Management, Behavioral Finance, Entrepreneurship, Social Entrepreneurship, and Marketing.

This class has two main goals:

  1. To introduce you to the range of cases where people (consumers, investors, managers, and significant others) make decisions that are inconsistent with standard economic theory and the assumptions of rational decision making. This is the lens of behavioral economics.
  2. To help you think creatively about the applications of behavioral economic principles for the development of new products, technology based products, public policies, and to understand how business and social policy strategies could be modified with a deeper understanding of the effects these principles have on employees and customers.

About the Instructor(s)

Dan Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University, with appointments in the Fuqua School of Business, the Center for Cognitive Neuroscience, and the department of Economics. As one of the foremost leaders in psychology and behavioral economics, Dr. Ariely has published his research in top economic, medical and psychology journals and is the author of Predictably Irrational (2008), The Upside of Irrationality (2010), and The (Honest) Truth About Dishonesty (2012), three bestselling general audience books about research in behavioral economics. In addition, he is the founding member of The Center For Advanced Hindsight.  More information about Dan can be found at:  www.danariely.com

Take an MBA course on Buffett: http://cba.unomaha.edu/execmgmt/buffettgenius/

The Difference Between Mainstream Economics and Austrian Economics

http://www.fee.org/library/detail/the-foundational-difference-between-austrian-economics-and-the-mainstream#axzz2F3xyQj7U

BOOK LISTS

The 2012 Holiday Book Survey has been tallied and the results can be found here. I want to thank everyone who participated in the survey.

The biography & memoir genre continues to lead the survey (Steve Jobs – Walter Isaacson & new comer The Passage of Power – Robert Caro) with social science still having a strong showing (The Signal and the Noise – Nate Silver & Thinking, Fast and Slow – Daniel Kahneman). Atlas Shrugged continues to breach the top 5 although falling from its #2 spot in the last two years to #5. Overall, biography & memoir and business & finance showed the strongest growth.

I hope you enjoy this years’ book list and find something of interest to read or gift. If you have any suggestions on how to improve on the survey, please let me know.

All the best and happy holidays.


Barry Pasikov, Managing Member of HazeltonCapital Partners in Highland Park, IL 60035    Tel: 312-970-9202

 

 

Primer on Closed-End Funds (JOF)

Husbank finding

Closed-End Funds at a Discount is another Asset Class to Study.

A decent review of CEFs: CEFA_Brochure

I have found 15% discounts in relatively “cheap” markets can be attractive. Look at the history of premiums and discounts. http://www.cefa.com/FundSelector/fundcompare.fs?Search=jof

Of course, there is no hope for Japan, but now Japan’s Central Bank will be under pressure to join the reflation party.  There are plenty of reasons why Japan’s stocks will languish–poor corporate governance, declining population, massive inefficiencies in the domestic market due to protectionism, etc.

Brandes Believes (research)

Japan A New Dawn in the Land of the Rising Sun

saupload_0612-Japan

http://seekingalpha.com/article/671141-the-number-1-reason-that-i-m-still-bullish-on-japan

This is probably a very cheap value trap. You won’t get killed, but can you make your required return?

Perhaps…………

JOF

 

Corporate Buybacks; Macrofollies

Current Conditions

http://scottgrannis.blogspot.com/2012/12/things-are-bad-but-not-as-bad- signal.   (Less pessimism..........)

Corporate Treasurers Buy-Back Stock (from www.blog.yardeni.com)

Corporate treasurers have been driving the bull market in stocks, not retail and institutional investors. The Fed’s Flow of Funds data show that net issuance of corporate equities over the past year through Q3 was minus $274 billion. In other words, buybacks well exceeded gross issues. Nonfinancial corporations registered net buybacks of $419 billion, while the financial sector had net issuance of $119 billion and foreign corporations issued $25 billion, according to the Fed’s data.

The financial sector data include stock issuance by all ETFs, which rose to $174 billion over the latest four-quarter period. Excluding these ETFs, net issuance by financial corporations was minus $55 billion.

The Fed also compiles monthly data for total gross equity issuance. Over the past 12 months through October, corporations raised $152 billion. However, that was overshadowed by buybacks. Data available for the S&P 500 show that they totaled $406 billion over the past four quarters through Q2.

MACROFOLLIES

Hayek’s Gift

A Blog from a Self-Directed Investor

“There is a time in every man’s education when he arrives at the conviction that envy is ignorance; that imitation is suicide; that he must take himself for better for worse as his portion; that though the wide universe is full of good, no kernel of nourishing corn can come to him but through his toil bestowed on that plot of ground which is given to him to till. The power which resides in him is new in nature, and none but he knows what that is which he can do, nor does he know until he has tried. Not for nothing one face, one character, one fact makes much impression on him, and another none. This sculpture in the memory is not without preéstablishcd harmony. The eye was placed where one ray should fall, that it might testify of that particular ray. We but half express ourselves, and are ashamed of that divine idea which each of us represents. It may be safely trusted as proportionate and of good issues, so it be faithfully imparted, but God will not have his work made manifest by cowards. A man is relieved and gay when he has put his heart into his work and done his best; but what he has said or done otherwise shall give hint no peace. It is a deliverance which does not deliver. In the attempt his genius deserts him; no muse befriends; no invention, no hope.”  Ralph Waldo Emerson, Self-Reliance

Best Advice I Ever Got from Grandpa

 A Good Investing Blog

A good blog from an individual investor who has an attitude and philosophy that YOU should strive for–or at least that is what csinvesting.org HOPES you seek–independence.  Remember don’t mimic but learn.  My investments would be different from this blogger’s investments but our attitudes are similar. I just came across this blog this morning. Thumbs up!

http://reminiscencesofastockblogger.com/about/

http://reminiscencesofastockblogger.com/2012/09/01/the-community-banks-of-arbitar-partners/

Welcome to my blog

My name is Lsigurd and I plan to use this blog to share the research that I do for stocks that I am purchasing in my own accounts.  In the portfolio page I will keep track of my picks with an RBC practice account.

This is not my first attempt at a blog. I used to post regularly on stockhouse but I got tired of the spam on the site. I also have been posting regularly on Investors Village under the moniker of liverless.   I lost interest with the format of posting on a bulletin board, and I think its time for something new.

The RBC  account I will use to track my portfolio has been active since July 1st, 2011.  Performance from my accounts for earlier years can be viewed here.

Who am I?

I don’t think that investing acumen can be taught.  Everyone has to find their own investing personality, and the only way you can do that is by getting into the market and figuring out what works for you.  I made a conscious choice to bypass the route of an MBA or CFA  and to instead learn by experience.  I remain convinced that the best way to learn the market is by being in the market and making mistakes.

My educational background is in oil and gas, and so I started my market education by buying a number of oil and gas stocks based on what I saw as strong fundamentals and cheap valuations (my first being a little producer called Belair Petroleum for those that remember such names).  I quickly learned that in the oil and gas sector, cheap is another word for dead.  Valuation is about more than numbers, and I have learned that a good story and strong prospective growth is a better value proposition than a cheap cash flow multiple.

From the world of oil and gas I expanded my area of investment based on the thesis that China was going to keep growing and that the middle class in China would evolve into consumers of refrigerators, indoor plumbing and automobiles.  This thesis lead me to my first forays into base metal stocks (I owe much of my early success to the likes of Aur Resources and Hudbay Minerals), to gold (I own much of my early frustration to Apollo Gold!), and from there to soft commodities like potash (I was one of the original potash bulls on the VT.to board on Investors Village), and most recently pulp.

Lately I have expanded my investment landscape to regional banks and US REITS.  Why would I make the jump from commodity investing to basically real estate (regional banks are almost all highly leveraged to real estate loans)?  Because these stocks have been crushed and at some point a good value proposition is going to emerge.  It’s the same reason that I keep a close eye on lumber and forestry stocks, and have been in and out of them on occasion over the last couple of years.   The time for these stocks, banks, REITS and forestry, has not come yet (with the exception of a few special situation banks I am invested in) but it will and I want to be ready for that moment.

So what can you expect to read about here?

I don’t run anyone’s money but my own.  I have for 10 years and I’ve done it well.  I have returned to myself somewhere between 400-500% over the last 10 years, while the S&P has done nothing. I run my own portfolios and do a lot of due diligence on my stock purchases.  I buy mostly (but not exclusively) microcap stocks, primarily because the value most often lies in those stocks that are not followed by many others.  This can cause my portfolio to have a lot of volatility and it has led to more than a few sleep deprived nights, but such is life and I have had good success with my strategy.

I’ve had success looking for undervalued stocks in unloved but growing sectors.  A lot of my success has come from commodity stocks.  As this commodity bull market matures and opportunities become more scarce, I have found myself expanding to other areas; to buy some US REITs, some regional banks, and there are a few one-off special situation stocks that I have not yet bought but am looking closely at.

So what you can expect here is that I will write about the stocks I own, much as I did on the stockhouse blog I had, and much as I do on Investors Village.

Review of MCX and Past Case Study (IRDM); Arguing Clinic

Does the tooth fairy pay for capex–Warren Buffett

IRDM Maintenance Capital Expenditures Case Study

Time to check in on IRDM. Last post:http://wp.me/p2OaYY-zt

A hedge fund made a case for investing in IRDM’s growth, but we made the case that true capital expenditures were not being accounted for and thus true owner earnings were being overstated.  I repeat this case since the concept of true MCX is so important.  Look at the lost opportunity cost for this hedge fund.

A Thorough Discussion of MCX_Case Study and Capital Theory

IRDM Presentation and then Tilson on IRDM 4_11

Time to attend an argument Clinic

Greenwald Video on Recession (2012); Empirical Evidence for the Austrian BCT; What Does the Fed Do?

Greenwald on the Cyclical and Structural Recession (Nov 26, 2012)

http://www.youtube.com/watch?v=M3quayhKZ0M

Contrast the above with ABCT. Is there Empirical Evidence for the Austrian Business Cycle Theory

ABCT Analytical Evidence

ABCT_Empirical Evidence

Economic Science and trhe Austrian Method_Hoppe

Evidence for ABCT in Britain

Evidence from Scandinavia for ABCT

What Does the Fed Do?

Fiat Empire

James Grant on the Fed

Pearl Harbor


The video above shows the narrator speaking about Why the Japanese attack was expected.

Always seek out information that goes against what you know or think you know.

How FDR Provoked Japan into Attacking Pearl Harbor

322_Higgs    (Audio clip)   Is FDR just another meglamanic war monger?

from www.mises.org:

 

December 7, 2012

Mises Daily

How U.S. Economic Warfare Provoked Japan’s Attack on Pearl Harbor by Robert  Higgson December 7, 2012

[This talk was delivered at the 30th Anniversary Supporters Summit of the Ludwig von Mises Institute, Callaway Gardens, Georgia, on October 26, 2012. Click here to watch the video of this talk.]

Many people are misled by formalities. They assume, for example, that the United States went to war against Germany and Japan only after its declarations of war against these nations in December 1941. In truth, the United States had been at war for a long time before making these declarations. Its war making    took a variety of forms. For example, the U.S. navy conducted “shoot [Germans] on sight” convoys – convoys that might include British ships — in the North Atlantic along the greater part the shipping route from the United States to Great Britain, even though German U-boats had orders to refrain (and did    refrain) from initiating attacks on U.S. shipping.

The United States and Great Britain entered into arrangements to pool intelligence, combine weapons development, test military equipment jointly, and undertake other forms of war-related cooperation. The U.S. military actively cooperated with the British military in combat operations against the Germans, for example, by alerting the British navy of aerial or marine sightings of German submarines, which the British then attacked. The U.S. government undertook in countless ways to provide military and other supplies and assistance to the British, the French, and the Soviets, who were fighting the Germans. The U.S. government also provided military and other supplies and assistance, including warplanes and pilots, to the Chinese, who were at war with Japan.[1]

The U.S. military actively engaged in planning with the British, the British Commonwealth countries, and the Dutch East Indies for future combined combat operations against Japan. Most important, the U.S. government engaged in a series of increasingly stringent economic warfare measures that pushed the Japanese into a predicament that U.S. authorities well understood would probably provoke them to attack U.S. territories and forces in the Pacific region in a quest to secure essential raw materials that the Americans, British, and Dutch (government in exile) had embargoed.   (2]

Consider these summary statements by George Victor, by no means a Roosevelt basher, in his well documented book The Pearl Harbor Myth.

Roosevelt had already led the United States into war with Germany in the spring of 1941—into a shooting war on a small scale. From then on, he gradually increased U.S. military participation. Japan’s attack on December 7 enabled him to increase it further and to obtain a war declaration.  Pearl Harbor is more fully accounted for as the end of a long chain of events, with the U.S. contribution reflecting a strategy formulated after France fell. . . . In the eyes of Roosevelt and his advisers, the measures taken early in 1941 justified a German declaration of war on the United States—a declaration that did not come, to their disappointment. . . . Roosevelt told his ambassador to France, William Bullitt, that U.S. entry into war against Germany was certain but must wait for an “incident,” which he was “confident that the Germans would give us.” . . . Establishing a record in which the enemy fired the first shot was a theme that ran through Roosevelt’s tactics. . . . He seems [eventually] to have concluded—correctly as it turned out—that Japan would be easier to provoke into a major attack on the Unites States than Germany would be.   (3]

The claim that Japan attacked the United States without provocation was . . . typical rhetoric. It worked because the public did not know that the administration had expected Japan to respond with war to anti-Japanese measures it had taken in July 1941. . . . Expecting to lose a war with the United States—and lose it disastrously—Japan’s leaders had tried with growing desperation to negotiate. On this point, most historians have long agreed. Meanwhile, evidence has come out that Roosevelt and Hull persistently refused to negotiate. . . . Japan . . . offered compromises and concessions, which the United States countered with increasing demands. . . . It was after learning of Japan’s decision to go to war with the United States if the talks    “break down” that Roosevelt decided to break them off. . . . According to Attorney General Francis Biddle, Roosevelt said he hoped for an “incident” in the    Pacific to bring the United States into the European war.[4]

Morgenstern, George

These facts and numerous others that point in the same direction are for the most part anything but new; many of them have been available to the public    since the 1940s. As early as 1953, anyone might have read a collection of heavily documented essays on various aspects of U.S. foreign policy in the late    1930s and early 1940s, edited by Harry Elmer Barnes, that showed the numerous ways in which the U.S. government bore responsibility for the country’s    eventual engagement in World War II—showed, in short, that the Roosevelt administration wanted to get the country into the war and worked craftily along    various avenues to ensure that, sooner or later, it would get in, preferably in a way that would unite public opinion behind the war by making the United    States appear to have been the victim of an aggressor’s unprovoked attack.[5] As Secretary of War Henry Stimson testified after the war, “we needed the Japanese to commit the first overt act.”    [6]

At present, however, seventy years after these events, probably not one American in 1,000—nay, not one in 10,000—has an inkling of any of this history. So effective has been the pro-Roosevelt, pro-American, pro-World War II faction that in this country it has utterly dominated teaching and popular writing about U.S. engagement in the “Good War.”

In the late nineteenth century, Japan’s economy began to grow and to industrialize rapidly. Because Japan has few natural resources, many of its burgeoning industries had to rely on imported raw materials, such as coal, iron ore or steel scrap, tin, copper, bauxite, rubber, and petroleum. Without access to  such imports, many of which came from the United States or from European colonies in Southeast Asia, Japan’s industrial economy would have ground to a    halt. By engaging in international trade, however, the Japanese had built a moderately advanced industrial economy by 1941.

At the same time, they also built a military-industrial complex to support an increasingly powerful army and navy. These armed forces allowed Japan to    project its power into various places in the Pacific and East Asia, including Korea and northern China, much as the United States used its growing    industrial might to equip armed forces that projected U.S. power into the Caribbean, Latin America, and even as far away as the Philippine Islands.

Tansill, Charles Callan

When Franklin D. Roosevelt became president in 1933, the U.S. government fell under the control of a man who disliked the Japanese and harbored a romantic affection for the Chinese because, some writers have speculated, Roosevelt’s ancestors had made money in the China trade.  [7] Roosevelt also disliked the Germans in general and Adolf Hitler in particular, and he tended to favor the British in his personal relations and in world affairs. He did not pay much attention to foreign policy, however, until his New Deal began to peter out in 1937. Thereafter he relied heavily on foreign policy to fulfill his political ambitions, including his desire for reelection to an    unprecedented third term.

When Germany began to rearm and to seek Lebensraum aggressively in the late 1930s, the Roosevelt administration cooperated closely with the British and the French in measures to oppose German expansion. After World War II commenced in 1939, this U.S. assistance grew ever greater and included such measures as the so-called destroyer deal and the deceptively named Lend-Lease program. In anticipation of U.S. entry into the war, British and U.S. military staffs secretly formulated plans for joint operations. U.S. forces sought to create a war-justifying incident by cooperating with the British navy in attacks on German U-boats in the northern Atlantic, but Hitler refused to take the bait, thus denying Roosevelt the pretext he craved for making the United States a full-fledged, declared belligerent—a belligerence that the great majority of Americans opposed.

In June 1940, Henry L. Stimson, who had been secretary of war under William Howard Taft and secretary of state under Herbert Hoover, became secretary of    war again. Stimson was a lion of the Anglophile, northeastern upper crust and no friend of the Japanese. In support of the so-called Open Door Policy for China, Stimson favored the use of economic sanctions to obstruct Japan’s advance in Asia. Treasury Secretary Henry Morgenthau and Interior Secretary Harold    Ickes vigorously endorsed this policy. Roosevelt hoped that such sanctions would goad the Japanese into making a rash mistake by launching a war against the United States, which would bring in Germany because Japan and Germany were allied.

The Roosevelt administration, while curtly dismissing Japanese diplomatic overtures to harmonize relations, accordingly imposed a series of increasingly    stringent economic sanctions on Japan. In 1939, the United States terminated the 1911 commercial treaty with Japan. “On July 2, 1940, Roosevelt signed the    Export Control Act, authorizing the President to license or prohibit the export of essential defense materials.” Under this authority, “[o]n July 31, exports of aviation motor fuels and lubricants and No. 1 heavy melting iron and steel scrap were restricted.” Next, in a move aimed at Japan, Roosevelt slapped an embargo, effective October 16, “on all exports of scrap iron and steel to destinations other than Britain and the nations of the Western    Hemisphere.” Finally, on July 26, 1941, Roosevelt “froze Japanese assets in the United States, thus bringing commercial relations between the nations to an effective end. One week later Roosevelt embargoed the export of such grades of oil as still were in commercial flow to Japan.”  [8] The British and the Dutch followed suit, embargoing exports to Japan from their colonies in Southeast Asia.

Roosevelt and his subordinates knew they were putting Japan in an untenable position and that the Japanese government might well try to escape the    stranglehold by going to war. Having broken the Japanese diplomatic code, the American leaders knew, among many other things, what Foreign Minister Teijiro Toyoda had communicated to Ambassador Kichisaburo Nomura on July 31: “Commercial and economic relations between Japan and third countries, led by England and the United States, are gradually becoming so horribly strained that we cannot endure it much longer. Consequently, our Empire, to save its very life,  must take measures to secure the raw materials of the South Seas.”[9]

Greaves, Percy L. Jr.

Because American cryptographers had also broken the Japanese naval code, the leaders in Washington also knew that Japan’s “measures” would include an    attack on Pearl Harbor.[10] Yet they withheld this critical information from the    commanders in Hawaii, who might have headed off the attack or prepared themselves to defend against it. That Roosevelt and his chieftains did not ring the tocsin makes perfect sense: after all, the impending attack constituted precisely what they had been seeking for a long time. As Stimson confided to his  diary after a meeting of the War Cabinet on November 25, “The question was how we should maneuver them [the Japanese] into firing the first shot without allowing too much danger to ourselves.” After the attack, Stimson confessed that “my first feeling was of relief . . . that a crisis had come in a way which would unite all our people.”[11]

Robert Higgs is senior fellow in political economy for the Independent Institute and editor of The Independent Review. He is the 2007 recipient of the Gary G. Schlarbaum Prize for Lifetime Achievement in the Cause of Liberty. Send him mail.  See Robert  Higgs’s article archives.

Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

Notes

[1]            See “Flying Tigers,” Wikipedia. Available at: http://en.wikipedia.org/wiki/Flying_Tigers.

[2]            Robert Higgs, “How U.S. Economic Warfare Provoked Japan’s Attack on Pearl Harbor,” The Freeman 56 (May 2006): 36-37.

[3]            George Victor, The Pearl Harbor Myth: Rethinking the Unthinkable (Dulles, Va.: Potomac Books, 2007), pp. 179-80, 184, 185, emphasis added.

[4]Ibid            ., pp. 15, 202, 240.

[5]See Perpetual War for Perpetual Peace: A Critical Examination of the Foreign Policy of Franklin Delano Roosevelt and Its Aftermath,            edited by Harry Elmer Barnes (Caldwell, Id.: Caxton Printers, 1953).

[6]            Stimson as quoted in Victor, Pearl Harbor Myth, p. 105.

[7]Harry Elmer Barnes, “Summary and Conclusions,” in            Perpetual War for Perpetual Peace: A Critical Examination of the Foreign Policy of Franklin Delano Roosevelt and Its Aftermath, edited by            Harry Elmer Barnes (Caldwell, Idaho: Caxton Printers, 1953), 682-83.

[8]All quotations in this paragraph are from George Morgenstern, “The Actual Road to Pearl Harbor,” in Barnes, ed.,            Perpetual War for Perpetual Peace, 322-23, 327-28.

[9]            Quoted in Morgenstern, “The Actual Road to Pearl Harbor,” 329.

[10]            Robert B. Stinnett, Day of Deceit: The Truth About FDR and Pearl Harbor (New York: Free Press, 2000).

[11]            Quoted in Morgenstern, “The Actual Road to Pearl Harbor,” 343, 384.