F****** Bond Traders

” .. Clinton’s face turned red with anger and disbelief. ‘You mean to tell me that the success of the program and my re- election hinges on the Federal Reserve and a bunch of f****** bond traders?'”

The Agenda,


Bob Woodward’s inside-the-Clinton

Administration book, The discussion of the last few days has been remotely focussed on the relationship between politics and markets…as well as between custom and hyper-rationalism. These four threads are now so tangled that I thought I would have to cut the knot and move on to other subjects.

But then, the following item appeared in yesterday’s WSJ:

The democratization of financial services could take some strange new turns. It may well be in financial services that the self-organizing enterprise flowers in full.

The front page article was about a new mutual fund called MutualMinds.com. The idea is simple. It is a form of ‘open source’ fund management, in which the investors themselves can make suggestions…and the fund is managed according to their recommendations (the organizing company performs the paperwork and actually makes the trades.) The investment decisions are made by a computer program that tracks the suggestions and allocates investments towards the recommendations of the most successful people in the group.

This is not likely to be a very fruitful way to invest. Mark Hulbert has shown that following the ‘hot hand’ on a short term basis doesn’t work. But it is sure to be fun for the participants, since they will be competing for glory as well as profits.

But what caught my eye was the idea of ‘self-organizing’ systems. It brought me back to the subject you were probably hoping I would abandon. That is, the New Dialectic.

Knowledge, as you know, costs something. And there are two main ways of getting it: either by experience or by logic.

Either you think it through and figure it out…or you rely upon your own experiences and the experience embedded in custom and instinct. A young man may have no direct experience with marriage. Nor is it logical, strictly speaking, for a young man to willingly restrict his freedom by connubial contract. But there seems to be an instinct for it. Young men search for the perfect woman to come along. Then, they get married, stop searching…and often discover, years later, that they have married the woman they were searching for.

At least, people have been doing it for a very long time, so who am I to argue with it? Statistically, married men live longer, earn more money and are happier than unmarried men. My nephew was probably unaware of these figures – but he married anyway and is on his way to becoming a happy statistic. Congratulations to them both and the instincts that drove them forward to the altar.

The WSJ article explains:

“Today, self-organization is rapidly becoming a very hot idea, the essence of which is that top-down master plans aren’t the only way to build something big and lasting. Unorganized assemblies of people can create everything from marketplaces to computer systems almost spontaneously, on the fly, from the bottom up.

“The Linux operating system is a good example of what self- organization is all about. Unlike Windows, where an army of Microsoft Corp. programmers churn out proprietary code, Linux software is an evolving collaboration of thousands of software writers around the world. While there are companies that provide Linux-oriented services, such as customer support, the brains behind Linux programming exist not within the walls of any company but inside the heads of people who amount to volunteers.”

Markets are examples of self-organizing systems. It is not logic, nor even sanity, that sets prices and practices. They simply evolve over time. Everyone would like to be able to set prices – and occasionally some large players have the power to influence them in one direction or another. But, ultimately, the market – a natural thing – does what it wants. Every investor is merely a volunteer.

Nature itself is self-organizing – at least from our human point of view. God may have it figured out. But no man or group of men organizes nature. Or understands it. Nature has its own mind and its own agenda.

But politics is different. It uses slave labor, not volunteers. Each of us is a slave to the system – forced to do something we would rather not. This is the difference also, between being a slave to ideas and instincts – which even Ghandi was – and being thrown in jail, fined, taxed or regulated. The force may come directly out of the barrel of a gun, as Mao suggested, or it may hide behind the curtain of a voting booth. Either way – its Will Must Be Done…or else.

Politics must rely on force – indeed, that is what makes it politics – because its aims and projects are almost always preposterously futile, stupid and counterproductive. No one volunteers to waste their time, energy and lives, so they must be drafted.

George Sabine’s textbook A History of Political Theory, shows that Artistotle puzzled over this distinction too. He writes: “It is possible to argue, Aristotle says, that in the making of law the collective wisdom of a people is superior to that of even the wisest lawgiver.. He illustrates this by the assertion (perhaps not quite obvious) that popular taste in the arts is reliable in the long run, while experts make notorious blunders at the moment. To somewhat the same effect is his marked preference for customary as compared with written law…he holds it clearly impossible that the knowledge of the wisest ruler can be better than the customary law.”

Frederic Bastiat, too, makes the same distinction – between “real law” – that is, the rules of a self-organizing system, the laws of nature, the laws of thermodynamics, and customary taboos and practices – and the “pretended law” that kings, despots, Al Gore and the IRS produce. Real law, he says, give us just results. Pretended laws are counterfeit. They are the cause of injustice, not the cure for it.

The conceit of democracy is that people think they can vote their way to justice. They think they can replace the real law of the market with their own wishful thinking about who should get what. But ultimately, the bond traders have their way.

Your correspondent,

Bill Bonner

Baltimore, Maryland July 12, 2000

P.S. About this time, 56 years ago, while John Ketzner was bombing Germany, Field Marshal Erwin Rommel had a problem. He was torn in several different directions – between logic and experience.

It was obvious to him and most of the officer corps of the German Army that Germany was in big trouble. The Americans and allies were unloading troops and supplies in Normandy that the Germans couldn’t match. While the materiel piled up behind the Allies’ lines, the Germans were running out of fuel, ammunition and men. For every 10 soldiers Rommel lost, only one was replaced.

He had been ordered to hold the Allies back at all cost. Yet, he knew that the bigger danger was that the Allies wouldn’t break through. Then, the Russians, who were unstoppable in the East would occupy Germany. It would be far better to have the Anglo-Americans as overlords.

He and his fellow officers plotted. They talked. They tried to figure out how to get rid of Hitler so the way would be cleared for peace talks.

But Rommel was trapped by his instincts, training and the customary reluctance of the German military to interfere in politics. He dithered. And then, on the 18th of July, he was injured in an attack by a British fighter plane. Rommel returned to Germany to recover. Two months later he committed ‘assisted suicide.’

P.P.S. John Ketzner visited Germany many years after the war. He was employed by the CSX railroad system and went to Germany to buy new equipment.

“Have you ever visited Germany before,” he was asked by his hosts.

“Yes,” he replied, “I was a guest of the Third Reich for 8 months in 1944.”

Conversation halted.

*** The fault lies in ourselves…not in our stars…in May consumer debt rose at nearly 10% annualized, or more than $11 billion. But who needs savings? Maybe the instinct to save is outdated. Maybe it betrays those who yield to it.

*** “Virtue,” said economist Mancur Olson, “is what used to pay.” For thousands of years, it used to pay to save enough grain for winter…or the 7 lean years of Biblical history. Otherwise, you might starve.

*** But that was then, this is now. With modern communications, modern government, modern this and that, what’s the point? Savings are an inventory of cash. And inventories are expensive. ‘Just in time,’ the stream-lined, inventory-less production system of modern business, has reached American household finance.

*** Here’s an interesting item, from the Motley Fools:

A dollar invested in gold in 1802 and left there for 195 years would have grown to $11.17.

A dollar invested in stocks in 1802 and left there for 195 years would have grown to $7.5 million.

Tell me again how gold is the best long-term store of value?

*** Ah, but the smarty-pants Fools miss the point. Gold is the ultimate store of value – not an investment. The figures above show that the price of gold will have to double in order to stay even with inflation in the dollar. That is quite likely to happen.

*** But a dollar invested in stocks? What stocks from 1802 are still in business? People do not invest in “stocks,” they invest in companies that sell stock. And companies do not go up over the very long run, they go out of business. An investment in 1802 stocks would now be worth – zero.

*** The price of gold fell $1.60 yesterday. Platinum – which I am watching because of Harry Schultz’s prediction that it will go to $800 this year – fell 70 cents.

*** Amazon, meanwhile, the kind of company you might buy if you are investing for the long run, dropped to $33 and change. Which do you think will be worth more 200 years from now – AMZN or AU (that’s gold to those of you unfamiliar with the basic elements).

*** ‘Harry Potter’ Greenspan, able to conjure up whatever miracle the economy requires at precisely the right moment, is not a DR reader. I have concluded that after careful study of the chairman’s remarks yesterday to the Fed governors. He believes the productivity numbers, which have been, as you know, thoroughly discredited, both by James Grant’s team and by our own Dr. Kurt Richebacher .

*** Nevertheless, his comments were cited as the source of a bit of summer ebullience in the market yesterday. The Dow rose 80 points on the hopes that interest rates will receive no further upward goosing by the Fed.

*** The Nasdaq, however, fell 29 points. Lower interests mean little to these companies. What hurts them is the growing feeling that their hour has come and gone.

*** The dollar was up a bit – even though Japan continues to talk about ending its policy of giving away money.

*** Dividends, as I pointed out yesterday, are providing the lowest yields in history. It is worth mentioning that half the long-term returns of the stock market have come from dividends.

*** “Until mid-March.” Writes Dave Dreman in Forbes, “this year’s new issues shot up an average of 120% on their first day of trading. Now 65% of the [year] 2000 crop are trading below their offering prices.” He notes that the Nasdaq recently declined more than in 1987 and in the 1973-74 bear market. Dreman believes that overvaluation is a big risk, with the Nasdaq 100 carrying “a staggering average weighted P/E of 144” and the DJIA and S&P 500 at about twice their historical earnings multiples.

*** From a DR reader, on the subject of the John Birch Society: “…from a highly-placed Soviet defector, Colonel Stanislav Lunev: The John Birch Society was run by the KGB, with the purpose being to paint patriots as rightwing kooks, and thus discredit anti-Communists.” Who knows? Could be true.

*** My apologies for not answering correspondence promptly. I try to keep up…but time runs out. I almost never have time to follow the chats on the website, by the way, so if you want a response from me…please send an email. And be patient. Thanks.

*** “August 24, 1944, the day they liberated Paris, I met my Waterloo,” said DR reader and Army Air Force veteran John Ketzner. We were having lunch at the Maryland Club where Ketzner told me his incredible story. He was flying in formation over Germany when a German fighter appeared from behind. The tail gunner couldn’t stop him and soon the plane was out of control. “The next thing I knew& I was floating in mid-air. The plane has exploded. I tried to find my parachute – but it was missing. I figured I was finished. But then I remembered that I must have it on. Sure enough, there it was a little over my head. I pulled the cord… The civilians on the ground practically killed me…I was rescued by the German Army. I got to prison camp and began to tell my story. But nobody wanted to hear it. There were 9,000 other guys there and everyone of them had a story to tell.”

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