| A POTATO BUBBLE THE DAILY RECKONING PARIS, FRANCE
TUESDAY, 30 NOVEMBER 1999 * * * * * * * * * * * * * * * * * * * * * * * * * * * *
In Today's Daily Reckoning: *** Dollar down against the yen…close to "triple whammy…"
*** Gold falls sharply
*** Chechens counterattack * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** Something went wrong…yesterday's letter didn't
get sent as it should. But it should have been
received by now. *** "Euro Slips Closer to Dollar" -- reads today's
headline in the "Herald Tribune." As
predicted…the three major currencies are nearing parity.
The euro is now virtually even with the
dollar…at $1.0091. *** And the dollar continues to fall against the yen…
despite the efforts of the BOJ. The yen is at
102.48 to the dollar. *** This is a dangerous situation. Bonds don't like to
see the dollar dropping against yen. But the
markets seem to be heading toward the "triple whammy"…
with the yen, euro and dollar lining up
together. *** U.S. stocks fell yesterday…but not as much as they
should have. They weren't paying attention
to the currency markets. Currencies are always leaders.
Then come the bonds. Then stocks. *** The Dow was down 40 points. Most other indices
were down, too -- including even the Nasdaq, which
needed a rest. *** "There are four ways of traditionally judging the market,"
said Jeremy Grantham at Jim Grant's
latest investment conference, "yield, price to replacement
cost, price to 10-year, rolling-average
real earnings, and market cap to GNP." By each of these
criteria, the stock market is overvalued by a
factor of at least two standard deviations…and would have
to fall by 60% to get back to normal. Dow
3,600. Coming soon. *** Gold fell sharply following yesterday's auction in London.
There were few bidders. December gold
fell $8 to $290. *** The fat lady is singing in North Ireland. George Mitchell
managed to get Catholics and
Protestants together…it can now be revealed…by talking
to them, informally, about opera! So
reports the "NY Times" …Mitchell broke the ice by
discussing "La Boheme." *** Someone should try the opera trick with the
Russians and Chechens. Yeltsin is back in the
hospital with pneumonia. And the Chechens are
counterattacking. Reports in the French press say
they've retaken two towns…where they discovered
that Russian troops had stolen everything -- even
the light switches. Chechen fighters are also said
to be infiltrating behind Russian lines and
causing trouble. They're good at causing trouble. *** I once witnessed an unintentionally comic opera in
Kiev. The fat lady was so fat…and the lead
male so skinny…that when he tried to carry her off stage,
his legs buckled under the weight. For a
long moment he swayed and staggered. Every head in
the audience leaned forward as he tried to remain
upright against the force of gravity… but it was no use.
Like a bear market, he crumbled. Stage
hands had to rush out and pick them both up off the
floor. *** Shed no tears for investors in Russia, though. James
Passin's fund…the Firebird New Russia,
managed by Harvey Sawikin, is up 36% since September. *** "There ought to be limits to freedom," said George W.
Bush, complaining about a site that
lampooned his campaign, evidently unaware that the press
is the last outpost of freedom in
America…a freedom it has preserved largely by not making
use of it. I can sympathize, though.
Someone sent me a satiric version of the "Daily Reckoning."
I got a chuckle out of it. *** "The Figaro" also reports that France's own Jose Bove,
on a fool's errand to protect people from
the freedom to eat what they want, is on the frontlines of the
protestors in Seattle. He led attacks
against McDonald's here in France. He'll find plenty of targets
in America. *** Finally, Rosa Parks has been granted a gold medal for
refusing to give up her seat on a bus to a
white man in 1955. I've always wondered what kind of cad
would have asked for her seat in the first
place. I asked my resident Southern white, Beirne, what
he thought. "I don't know," he said. "I
wasn't there."
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POTATO BUBBLE
You can pick up a rock, gaze at it…polish it…put it in
your pocket. Rocks give no trouble. But plants defend themselves. Vines often have prickly
thorns. Nuts use the armadillo technique…a
hard shell makes them hard to eat. Potatoes, in their natural state, poison you. Not deliberately,
of course. It is not premeditated. It
is evolutionary. The potatoes that were toxic enough to
survive being eaten…were not eaten. These
poisonous spuds reproduced as nature would permit…
until humans intervened. Homo sapiens…for there were no pre-humans in South
America…arrived on the pampas and Andes as
though from the brow of Zeus…fully formed and ready
for action. When he wasn't sacrificing young
maidens, or ripping out the hearts of his enemies…he
turned to, what else, breeding potatoes. And
he turned the potato's survival strategy upside down.
Over hundreds or thousands of years in South
America, humans selected the edible potatoes and
threw out those varieties that were too toxic. The
low-toxin potatoes had an evolutionary advantage they
never had before. But in breeding out the poisons, the South American
Mendels also bred out the plants' defenses
against disease. That is the background to the Great
Potato Famine I described in yesterday's letter. Every so often, the South American potato crop would
experience a failure. The potatoes would be
invaded by a bug, virus or fungus…and the potatoes
au human brains…or the human steak &
frites…at least the frites part…would be taken off the
menu. This was such a disappointment that
the Incas would offer sacrifices of their own young
children to appease the gods. Thank Francisco
Pizarro for ending this quaint, custom…by putting
practically the entire nation to the sword. Anthropologists may see the practice of killing infants
in times of famine as a population control
strategy. Moralists may see it as murder. However
you see it, infanticide was widely practiced
throughout the world. Even in our own time, the
Chinese, forbidden to have more than one child, let
female babies die so as to clear their quota for a
male one. As barbaric as it seems, is it really
any different…morally…from killing the baby before
it is born? No one likes abortion, but it is
regarded, by many people, even in our enlightened,
post-Catholic, post-industrial, post-capitalist,
post-modern…(is there anything we are not "post"?)
…age, as a legitimate means of population
control. My own observation is that children are both a cost
and a benefit. They are a pleasure when you are
bustling around preparing a large Thanksgiving dinner.
They are a pain when they are tired and you
are driving them back to the city in a crowded car. I have six children. I can afford them…barely. But I
have a number of friends with plenty of
money…a much higher carrying capacity than I have…
who have chosen to have few, or no, children.
Taken as a group…the people I know are barely
replacing themselves. They also tend to be
competitive…Type A…Alpha male-type guys.
Placed in a primitive tribe in the Amazon, you'd expect
that they'd be the ones to whom dozens of the tribe's
children traced their paternity. If there were
a "commons" -- where genetic material competes for
the light of day…these guys have dropped out of
the competition. So what gives? Having a passel of children is no longer a status
symbol. Just the opposite. It marks you as a
religious fanatic or as hopelessly accident-prone.
Children are almost irrelevant to success…and
usually a hindrance. (I am speaking tongue in cheek…
describing the Festivus attitude I see around
me.) Oh…one or two, carefully scrubbed by the nanny…
are useful props for the family Christmas
portrait…or when you are running for public office.
But, otherwise, children get in the way. Better
to abort a baby than have an "unwanted child." "Booms and busts determine everything," said Jeremy
Grantham, chief investment strategist at
Grantham, May, Van Otterloo & Co. Population
patterns generally follow the boom and bust of economic
cycles. Carrying capacity increases…and then shrinks. But it appears that that a New Era has arrived in the
developed world, where carrying capacity
increases…but birth rates decline. This raises the
most profound questions about the nature of man
and his future. Having eliminated the ecological
limits to reproduction…culture imposes new limits.
Why? I do not know. But this is not the first time.
The Romans had a similar problem. They stopped
reproducing. Birthrates fell…for no obvious reason..
People just stopped having children. The
population fell until it was refreshed by barbarian
invasions. The Irish, in the last century, when their potatoes
failed, could have put their children on spits
and roasted them. Jonathan Swift had suggested as
much in his "Modest Proposal" more than a century
earlier. He proposed that the Irish sell their children
to be eaten as delicacies by the rich. But the Irish were too sentimental for that. The
children starved along with the parents…or all
shipped out together. They arrived in droves in
New York, Baltimore, Boston and other ports. Sydney.
London. Toronto. Johannesburg. There were so
many in New York, being drafted to fight in a war in
which they had no interest…that they rioted.
Troops had to be brought in to control them. But the problem in Ireland was not really that
there were too many O'Tooles and McMurphys. The
problem was an economic bubble problem.
The McMurphys and O'Tooles thought they had the
capital…land, usually…necessary to support themselves.
But their assets had been mispriced by
many years of boom conditions. Risk had been ignored…
specifically, the risk of crop failure. Their
farms were too small and too specialized.
They could not survive a severe setback. The potato bubble came to an end…as most
bubbles do…sadly. People had to eat potato
soup…without the potatoes. The population shrank. Millions of American O'Tooles and McMurphys
now find themselves in a parallel situation. After years
of boom conditions, their assets are overpriced.
And though they have not loaded up on children as
their ancestors did…they've added plenty of financial
burdens to their balance sheet. They've
megaleveraged their balance sheets. And to support
the debt, they now rely on small holdings of
stock, much as the Irish of the last century counted
on small holdings of land. "The bottom line," said Grantham, "the truth, is that
bubbles give back everything." Fortunately, it
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