| NO PARTICULAR DAY THE DAILY RECKONING OUZILLY, FRANCE WEDNESDAY, 3 NOVEMBER 1999
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In Today's Daily Reckoning: *** Dow down
*** A political suggestion…
*** The first Americans…
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*** Is that all there is? I refer to the brief bear market
rally. The Dow burst up more than 100 points
yesterday…but then sank. It closed down 66. Is the rally
over? *** The Nasdaq rose above 3,000 -- and made headlines. But
it closed below the magic number. *** The addition of Microsoft and other new stocks to the
Dow will reduce the index's already-feeble dividend yield.
Dividends don't matter when the stock market is going up.
But they become more important as stocks stabilize or fall.
People figure that if they are not earning capital
gains…at least they might get some income. *** That may have been in investors' minds yesterday…as
Utilities and Bonds rose. *** Gold rose ever-so-slightly. Gold is clearly waiting --
along with everyone else -- for something to happen. Either
stocks collapse…money disappears…and deflation holds
gold down. Or inflation notches upward, commodity prices
rise and bonds collapse…in which case, gold moves up
aggressively. *** Greenspan's Bubble. Why does he keeps it up? Some
ideas, below… *** GE is probably the most important stock on Wall Street.
Jack Welch is a legend. The earnings have been well
managed. But in the last couple of days…GE has been weak.
As GE goes, so goes the whole market. *** French stocks hit a record high following the
resignation of Finance Minister Dominique Strauss-Kahn
after allegations of impropriety. The favored corruption
technique in Europe is for public officials to take large
fees from private clients. It was something similar that
forced the resignation of Germany's top financial official.
Meanwhile, Edith Cresson, erstwhile president of Euroland,
combined sex with graft. She awarded a cushy sinecure to
her dentist…who also happened to be her live-in
boyfriend. *** The whole public sector in Britain has declared itself
"institutionally racist." Senior officials all got together
and agreed. If only Hitler, Himmler and the rest of the
crew had gotten together on something like this in `35.
They could have declared themselves genocidal maniacs. *** Politics, as I have said (and readers are free to quote
me), is all lies and brute force. George W. Bush
illustrated the mendacity half of the formula with his
remark about not balancing "their budget on the backs of
the poor." He's referring to the federal budget…which
barely touches the backs of the poor and doesn't get
balanced anyway. It is the rich who do the heavy
lifting…not the poor. This results not from a sense of
justice or fair play but merely the Willie Sutton insight.
When asked why he robbed banks, Sutton replied, "because
that's where the money is." *** As the quadrennial farce shifts into second gear, I
shift my own thinking towards the spirit of constructive
improvement. And I return to my earlier suggestion -- to
select representatives by lottery. Instead of selecting
those who want so fervently to take up the post in
Washington, let us select those with more reasonable and
less dangerous aspirations. People with real lives…and
real thoughts. Juries are chosen this way…by chance…and
against the will of those selected. If you are unlucky
enough to be chosen, you are given a pittance and forced to
sit through interminable, boring and irrelevant
proceedings, which usually end with some deal made behind
closed doors, having nothing at all to do with the merits
of the case, if there ever were any. In extreme cases, you
are warned not to discuss anything you see or hear during
the proceedings with the fortunate people outside the
courtroom doors. *** Let us fill Congress and the White House the same way.
By chance…rather than by fraud. And let us forbid our
representatives from uttering a single word in public. *** "If you've gotta have politicians," said my old friend,
Bob Kephart, "this is the kind we want." He was referring
to Alan Keyes, who enlivened the New Hampshire presidential
debate by declaring his opposition to the income tax and
the United Nations. He also accused reporters of racism for
not taking his campaign seriously. Keyes does not realize
the effect of Festivus on American politics. No serious
criticism of politics-as-usual is allowed. Reporter Jacob
Weisberg spoke for the entire Fourth Estate when he
declared Keyes "deranged." *** I'm grateful to DR readers. The name of the Canadian
academic I was trying to recall yesterday is J. Philippe
Rushton, author of "Race, Evolution and Behavior." And it
turns out that it is not only yahoos like me who have
criticized Jared Diamond's work. Diamond, you will recall,
asserts -- without evidence -- that New Guineans are
smarter than Europeans. Yet, on IQ tests, the New Guineans
score about 10 points lower than Europeans. One writer,
himself a professor at the University of Illinois, said
that Pulitzer Prize winner was an "embarrassment to the
scientific community." *** And here's an intriguing scientific development. A
skull found in Brazil 20 years ago has been dated to some
11,500 years ago. That's 2,000 years older than any other
human remains have ever been reliably dated. What's more,
the skull does not look like the skulls of most other human
remains in the pre-Columbian Americas. Could be that the
first Americans were replaced by later immigrants from
Asia…who themselves were largely replaced by Europeans
and Africans. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
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GREENSPAN'S BUBBLE It was almost three years ago that Alan Greenspan made his
famous remark about "irrational exuberance." The context
was his concern that inflation might need to be tracked in
asset prices as well as consumer prices. The reason for that was further exhibited yesterday as the
Fed chief described what has happened to housing prices.
They've gone up an average of $25,000 per house over the
last five years. The house itself is, more of less, the same house -- plus a
little for a new sundeck here or there…minus a little for
water stains and wear and tear. Why is it worth $25,000
more? Well…it isn't. It's inflation. And if the same house were
valued over a typical period in the last century, it would
not have increased in value. Because the Federal Reserve
had not yet been created…money was still backed by
gold…and inflation was negligible. But this is the 1990s…not the 1890s… and Greenspan is
running the Fed. And this is his Bubble. Not that there weren't bubbles in the last century. There
were several. Investors lost their heads, and their money,
on several occasions. The Railway Mania in Britain provides
a good example. Queen Victoria took her first trip on a
train in 1842…from Slough to Paddington. She reported
that it was rather pleasant. Soon thereafter a huge boom
began, chronicled by Edward Chancellor in "Devil Take the
Hindmost." Interest rates were at their lowest point in nearly a
century. Railway revenues were rising sharply. A
"groundswell of speculative interest," says Chancellor,
began to seize investors' imaginations. By January 1845,
there were 16 new railway projects in the works. By April,
there were more than 50 new companies registered. Promoters
released a few shares…carefully keeping the float
small…then hyped the shares before selling more. The
profits were vast. The media got into the spirit of the
times and began "puffing" the railway projects, grateful
for the many advertisements the boom created. Then, as now, policy chiefs debated how to curb the
speculative fever. The Bank of England…the Fed of the
time…considered a small rate rise. But it was
discouraged. "It would be the greatest folly of the Bank
Directors," argued "The Economist," "to disturb their
otherwise legitimate routine of business for any such vain
hope as deterring or checking such a mania." The mania continued. The poet William Wordsworth reported
that "the whole people are mad about railways," (As they
are today about the Internet.) And it was not long before
the railway projects…and hence investors'
expectations…exceeded the physical capacity of the nation
to realize them. By June 1845, plans for railways that
would quadruple the entire English rail system were already
under way…and new schemes appeared at the rate of over a
dozen a week, including railways all over the globe. But in the poetic fashion of markets, as new projects were
added to the list, the marginal additions were less and
less sound. And inevitably, the dreams of railway fortunes
yielded to the nightmare of the bankruptcy courts, debtors'
jails and other setbacks. Thomas Carlyle reported that
"Daughters delicately nurtured went out to seek their
bread." And as many as 200,000 Irish laborers…who
actually laid the timbers and rails…were soon out of
work. Bankruptcies are not without consequence. If debts are not
paid, the lenders suffer, too. Following the collapse of
the railway mania, the Bank of England, reeling from
millions of unpaid loans, was in trouble. Rates were raised
to 4%. The Bank Act was suspended and the nation narrowly
averted a total financial collapse. Today, Alan Greenspan represents the largest cartel of
bankers in the world's largest economy. He is concerned
that today's version of the Railway Mania has created
economic distortions as well as financial ones. Inflation
is a classic cause and symptom of distortion. It causes
people to make mistakes. In particular, Greenspan estimates that the increase in
housing prices has led to additional consumer spending of
5% of $25,000. Not a lot of money…but a lot for the
people upon whose backs Congress allegedly wants to balance
the budget. It has partly caused what the "Financial Times"
describes as "a sustained rise in the ratio of private
sector indebtedness to income." Greenspan called the process by which this happens "equity
extraction." People take a bit of the capital gains they
think they've made and spend them. What they are really
doing is spending money they don't have. Inflation creates
the illusion that the house is worth more…which leads the
homeowner to think that he's got a bit of money to spend. The same process of equity extraction is taking place in
the stock market, too. Since Greenspan spoke of irrational
exuberance, approximately $5 trillion in equity inflation
has been added to the nation's balance sheet. Greenspan
estimates that people spend about 4% of it. This is serious
money. About $200 billion…or $4,000 per stockholding
household. In addition, there is no telling what other
commitments and decisions have been made on the basis of
the stock market gains. We will only find out…as they did
in 1847…when the mania dies…and as Shakespeare reminds
us, "in death, all debts are paid." The bankers that control the Fed will survive. But who
knows at what cost. Bill Bonner P.S. I am still thinking about the Internet and the role it
plays in the stock market mania. As usual, I see more and
more evidence that the Internet is a whole lot less than
it's cracked up to be. But I don't want readers to miss out
entirely. So, tomorrow I will reveal two ideas I feel sure
could make you an Internet millionaire. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
GREAT PREDICTIONS BY EXPERTS "Computers in the future may weigh no more than 15 tons."
--"Popular Mechanics," forecasting the relentless march
of science, 1949.
----------------------------------------------------------- "I think there is a world market for maybe five computers."
--Thomas Watson, chairman of IBM, 1943.
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"I have traveled the length and breadth of this country and
talked with the best people, and I can assure you that data
processing is a fad that won't last out the year."
--The editor in charge of business books for Prentice Hall,
1957.
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"But what…is it good for?"
--Engineer at the Advanced Computing Systems Division of
IBM commenting on the microchip, 1968.
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"There is no reason anyone would want a computer in their
home."
--Ken Olson, president, chairman and founder of Digital
Equipment Corp., 1977
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"This `telephone' has too many shortcomings to be seriously
considered as a means of communication. The device is
inherently of no value to us."
-- Western Union internal memo, 1876.
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"The wireless music box has no imaginable commercial value.
Who would pay for a message sent to nobody in particular?"
--David Sarnoff's associates in response to his urgings for
investment in the radio in the 1920s.
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"The concept is interesting and well-formed, but in order
to earn better than a `C,' the idea must be feasible."
--A Yale University management professor in response to
Fred Smith's paper proposing reliable overnight delivery
service. (Smith went on to found Federal Express Corp.)
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Who the hell wants to hear actors talk?"
--Harry M. Warner, Warner Brothers, 1927.
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"I'm just glad it'll be Clark Gable who's falling on his
face and not Gary Cooper."
--Gary Cooper on his decision not to take the leading role
in "Gone with the Wind."
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"A cookie store is a bad idea. Besides, the market research
reports say America likes crispy cookies, not soft and
chewy cookies like you make."
-- Response to Debbi Fields' idea of starting her company,
Mrs. Fields' Cookies.
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"We don't like their sound, and guitar music is on the way
out."
--Decca Recording Co. rejecting the Beatles, 1962.
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"Heavier-than-air flying machines are impossible."
--Lord Kelvin, president, Royal Society, 1895.
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"If I had thought about it, I wouldn't have done the
experiment. The literature was full of examples that said
you can't do this."
--Spencer Silver on the work that led to the unique
adhesives or 3-M "Post-It" Notepads.
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"So we went to Atari and said, `Hey, we've got this amazing
thing, even built with some of your parts, and what do you
think about funding us? Or we'll give it to you. We just
want to do it. Pay our salary, we'll come work for you.'
And they said, `No.' So then we went to Hewlett-Packard,
and they said, `Hey, we don't need you; you haven't got
through college yet.'"
--Apple Computer Inc. founder Steve Jobs on attempts to get
Atari and H-P interested in his and Steve Wozniak's
personal computer.
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"Professor Goddard does not know the relation between
action and reaction and the need to have something better
than a vacuum against which to react. He seems to lack the
basic knowledge ladled out daily in high schools."
--New York Times editorial about Robert Goddard's
revolutionary rocket work, 1921.
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"You want to have consistent and uniform muscle development
across all of your muscles? It can't be done. It's just a
fact of life. You just have to accept inconsistent muscle
development as an unalterable condition of weight
training."
--Response to Arthur Jones, who solved the "unsolvable"
problem by inventing Nautilus.
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"Drill for oil? You mean drill into the ground to try and
find oil? You're crazy."
--Drillers who Edwin L. Drake tried to enlist to his
project to drill for oil in 1859.
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"Stocks have reached what looks like a permanently high
plateau."
--Irving Fisher, Professor of Economics, Yale University,
1929.
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"Airplanes are interesting toys but of no military value."
--Marechal Ferdinand Foch, Professor of Strategy, Ecole
Superieure de Guerre.
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"Everything that can be invented has been invented."
--Charles H. Duell, Commissioner, U.S. Office of Patents,
1899.
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"Louis Pasteur's theory of germs is ridiculous fiction".
--Pierre Pachet, Professor of Physiology at Toulouse, 1872.
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"The abdomen, the chest and the brain will forever be shut
from the intrusion of the wise and humane surgeon."
--Sir John Eric Ericksen, British surgeon, appointed
Surgeon-Extraordinary to Queen Victoria, 1873.
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"640k ought to be enough for anybody."
-- Bill Gates, 1981
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