Heavenly Bubble - or Hellish Bust?

There is nothing like a long spell of good luck to ruin a man. He begins to think he can get away with anything. The next thing you know, he is wagering big money in Las Vegas and chatting up stewardesses.

Right now, the whole world economy is enjoying a spell of catastrophic prosperity. That is to say, things are going far too well…for far too many people.

And here, dear reader, we let you in on one of the deepest secrets of human life. Things do not work in a straightforward, simpleminded way. If they did, then perhaps bureaucrats, Bolsheviks and world-improvers really could make things better. But there is good…and there is evil. The race goeth not always to the swift, nor the battle to the strong. And bubbles don’t always blow up when you want them to.

We say that just to set the stage. What follows is a brief theatrical discourse on the nature of life in the universe in general…and life in this great worldwide super-bubble of 2007 in particular.

Things are going remarkably well – especially for people who count; that is, the people who make the headlines and write them. Paris is out of jail. Stephen Schwarzman has successfully off-loaded his private equity business. The glitterati glitter more than ever. The investorati are as happy as pigs in merde too…for their portfolios, almost no matter where they are or what is in them, are getting fatter by the day. Restaurants are full in London, New York, Shanghai – wherever the great money machine is switched on and humming. And the speculator, who depends on a fulsome supply of greater fools to buy him out of his bets, is in heaven too. In America, there’s one born every minute, just as Mr. Barnum said. But in Asia, heck, they can’t even count them.

At recent art auctions, hedge fund impresarios turned up – wads of cash in their pockets, consultants by their sides – and bid the most remarkable prices for the most unremarkable works of “art.” But thus does the great machine churn money – from one hand to the next…from dimwit to genius…from greedy SOB to saintly do-gooder…from fool to knave. It is breathtaking to watch.

But behold! There is more to it.

There are rules, lesson, patterns…and hell to pay.

When things go so well, for so long, it seems as if all the cuss words had been struck from a dictionary…as if negative numbers had been removed from the number scheme. It is as if bad seeds had been removed from nature…and bad genes from humanity. It is as if we finally had God without the devil…and Heaven without Hell.

No chance of going to Hell? Well, hell…then let’s have some fun! No negative numbers? Well…what are we waiting for? Let’s reach for higher rates of yield; to hell with the risk.

Unfortunate acts of nature happen as nature will have them. Hurricanes, cyclones, droughts – nature will have her way with us. But unfortunately, acts of market tend to happen when men reach for yield.

The markets, which are fairly benign most of the time, are occasionally wicked. But that is just the way the world works. God reigns – most of the time. But the devil sneaks in on occasion, and causes mayhem. Mankind’s history is one of progress, usually…but not always. There are also long periods of ferocious backsliding. Inflation, too, is common – at least since the invention of paper currencies. But woe to the poor sod who thinks it’s automatic, guaranteed, and immutable.

“God and the Devil are about as four to three,” writes Samuel Butler. “There is enough preponderance of God to make it far safer to be on his side than on the Devil’s, but the excess is not so great as his professional claqueurs pretend it is. It is like gambling at Monte Carlo; if you play long enough you are sure to lose, but now and again you may win a great deal of excellent money if you will only cease playing the moment you have won it.”

Prosperity is never guaranteed. That’s why, here at The Daily Reckoning, we are always urging you to take matters into your own hands to build up your portfolio. We have offered you some interesting ways to do so – something for each individual investment style.

Usually, taking the broad sweep of human history, man gets richer one year to the next. It’s a bit like a street brawl in South London. The stronger, faster, bigger man is the better bet – usually. But, the runt can land a lucky blow from time to time. And let the big man forget the risk…let him become too confident…too drunk, too fat, too sure of himself…and the little guy will knock him down every time.

Let this boom run long enough, dear reader, and it will turn into a bust. Already at bubble stage in many places and many markets – when the devil finally gets his due, it is likely to come as very unpleasant to many people. In the long run, of course, it is God’s world. But even He likes to see us get a good kick in the seat of the pants from time to time.

Bill Bonner
The Daily Reckoning
London, England
Friday, June 29, 2007

More news:


Addison Wiggin, reporting from dreary Baltimore…

“Vladimir Putin announced plans to take over 460,000 square miles of Arctic territory – including the North Pole. Russian scientists recently confirmed that the Lomonosov ridge, an underwater shelf that begins in Russian territory, continues underneath an enormous portion of the northern Arctic.

“How big? Imagine a mass larger than France, Germany and Italy… combined.

“Here’s the real kicker: If the international community can’t stop him, Putin and company will have access to over 10 billion tons of oil and gas that, according to his scientists, could be extracted easily. Ten billion tons… that would easily secure Russia’s spot as the No. 1 gas producer in the world, and catapult them it past Saudi Arabia as the No. 1 oil producer.

“Think of the political ramifications…”

For the rest of this story, and for more market insights, see today’s issue of The 5 Min. Forecast


And more thoughts…

*** We have opined…with no real evidence…that private equity is a fraud. That is, that private equity firms do not really “add value.” They buy, they sell…they take out huge fees.

The flattering theory animating the private equity capitalists is that they are smarter than other people. They outsmart the public markets by buying under-appreciated assets from right under the public’s nose. And they pretend that they take the companies and reshape them – according to an inspired vision that completely escaped the firms’ own managers. Correcting the mistakes of Ms. Market and Mr. Management is, according to the theory, worth a lot of money – which is the money private equity firms earn for their labors.

When we first heard about it, we guessed that the two premises of private equity were more vanity than reality. What they really did was to put one over on the investing public (which doesn’t seem all that difficult, in light of the evidence). In short, the private equity managers bought from morons…and then resold to the same group (after stripping assets and running up huge debts).

But what did we know?

Well now comes the evidence.

The International Herald Tribune reported the results of a group of the biggest M&A deals over the last few years. Only three out of seven of them had a positive effect on the companies involved. Unicredit bought Capitalia for $30 billion this year. So far the shares are down 10%. AstraZeneca bought Medimmune for $15 billion, another deal done this year. So far, the result is a 9% loss.

Looking further back, it was a very big deal when Daimler bought Chrysler in ’98 for $36 billion. That has cost the combined firm $12.6 billion of market cap since then. And after Glaxo Wellcome bought SmithKline Beecham in 2000, shareholders lost 25%. Or, how about this…thanks to the dealmakers in 2001, Allianz bought Dresdner Bank. You’d have to be pretty thick to miss making money in the financial industry over the last six years, during the biggest financial bubble in the history of the world, but when the magicians have worked their wonders on the combined firm, it had lost 40% of its value.

In the first five months of 2007, the hustlers earned $25 billion doing deals of this sort. But when Boston Consulting Group looked at the results of similar transactions – 3,200 of them – it found that nearly 60% of them actually reduced shareholder returns.

Takeover activity rose 38% in the first half of this year, compared to the same period a year ago. A breathtaking $2.5 trillion is changing hands as a result. How much of it will really “add value”? Not much.

However, if you are like us, and actual value is what you are looking for in an investment, check out these unnoticed stocks of companies that sweat assets and cash… and are stuffed with hidden wealth. Wealth you could be adding to your bank account right now.

*** As predicted, more and more people are squawking about the widening gap between rich and poor.

Warren Buffett is in the news, decrying the fact that rich people pay so little in taxes in the United States. He’d like to see them pay more.

Rich people pay most of the taxes in the United States, it is true, but not all of them pay as high a percentage of their incomes as those less rich than them.

Here at The Daily Reckoning headquarters we’ve never met a tax cut we didn’t like, but we understand Mr. Buffett’s point. Like the rest of the levelers, he has his own idea of what is “fair” and he wants to see it the law of the land.

Meanwhile, in our own magazine, MoneyWeek, published here in London, our friend Simon Nixon argues that Britain needs to reform its tax laws so that the rich pay more. What sticks in Simon’s craw is the loophole that allows rich foreigners to pay tax only on the portion of their income earned in Britain. Here, we are unequivocally agin’ it…that is to say, against the reform Simon wants. We’re hoping to benefit from Britain’s tax haven status ourselves some day.

And from South Africa we hear the crackly old voice of Desmond Tutu warning on the “gulf between rich and poor.” In Africa, as on the other continents, the rich are getting richer; the poor, relatively or absolutely, are getting poorer. South Africans crossed the Red Sea in their struggle against apartheid, said the former archbishop, but they still haven’t reached the Promised Land. Most people “are still languishing in the wilderness.”

There is something odd…even paradoxical…about all the whining. Money isn’t everything, Tutu must know. The Christian faith holds that it is even a dangerous thing. Jesus was penniless his whole life…the foundation of the whole faith is that we should follow his example.

Would Jesus work for a hedge fund? Darned if we know. But if there is a sure route to Heaven, we doubt that it necessarily passes either through the financial industry or through the redistribution of wealth.

*** Finally, seeing old friends from Baltimore this week, we were shocked. A couple of them – who were previously middle aged and almost portly – were young, tan and fit. We were almost afraid to say anything, worrying that they might have a wasting disease.

Fortunately, that was not the case, as one explained:

“We realized that we were all getting too fat. So we started a competition to see who could lose the most weight. The company put up $1,000 – the prize goes to whoever loses the most in a 12-week period. It’s amazing. Maybe this was just what people needed. All of a sudden, everyone is losing weight. I think the whole group – there are 45 people in the competition – has lost 600 pounds already…in about a month. And even people who didn’t sign up for the program are noticing…and they’re losing weight too. And then their wives and husbands see them slimming down…and they don’t want to be left looking like fat slobs. We never expected anything like this…but it is absolutely amazing. It’s working.”

Meanwhile, a report from the OECD tells us that another big bubble is growing – a bubble of blubber:

“More than 50% of adults are now defined as either being overweight or obese in no less than 10 OECD countries: the United States, the United Kingdom, Mexico, Australia, Canada, Greece, New Zealand, Luxembourg, Hungary and the Czech Republic. By comparison, overweight and obesity rates are much lower in the OECD’s two Asian countries (Japan and Korea) and in some European countries (France and Switzerland), although overweight and obesity rates are also increasing in these countries. Focusing only on obesity, the prevalence of obesity among adults varies from a low of 3% in Japan and Korea to a high of 32% in the United States.

“Based on consistent measures of obesity over time, the rate of obesity has more than doubled over the past twenty years in the United States, while it has almost tripled in Australia and more than tripled in the United Kingdom. The obesity rate in many Western European countries has also increased substantially over the past decade.

“Gender differences are striking. In all countries, more men are overweight than women, but in just over half of OECD countries, more women are obese than men. Taking overweight and obesity together, the rate for women exceeds that for men in only two countries – Mexico and Turkey.”


The Daily Reckoning PRESENTS: There is no better example of the current overabundance of wealth and credit than in the art market. Paintings are being sold at record prices, and the cash flow doesn’t seem to be slowing down. This week, Bill Bonner examines both the absurdity and the rationality of this current bubble. Read on…


Behold, there it is – Waterloo Bridge.

Right outside our office window here at the MoneyWeek headquarters.

It is almost the same bridge depicted in a painting by Claude Monet that became famous last week – a new one was put up after Monet left for Giverny. While we get to see the real thing for nothing, the version preserved on canvas sold at auction for an extraordinary amount, reported as 17.9 million pounds by one source and 18.5 million by another – about twice what experts had expected.

The sale of Monet’s painting last week triggered a rush of reflections and questions in us – on aesthetics, on real value, and on history’s first worldwide credit bubble.

Meanwhile, The Daily Telegraph rushed to succor the poor – not with bread, but with art. It offered readers a glossy reproduction of said painting for free. This gave rise to a question. We didn’t know whether it was an existential question…or a financial one…or a grammatical one, but it haunted our sleep: What is the difference between a genuine work of art and an ersatz copy? So deep and troubling were the resulting cogitations that we spent all of last week in prayer, meditation and inebriation, trying to make sense of it all.

We tossed; we turned. We stewed; we simmered. Finally, we saw a beggar on Blackfriar’s Bridge, and pointing up-river, we asked:

“What’s the difference between a picture of that bridge up there given out for free from the Telegraph…and painting of it that just sold for $35 million?”

“Ah…35 million dollars?” came the reply.

We rewarded the man with half a shilling and continued on our way. It was true. Mr. Market has spoken. Who are we to question his judgment?

The big buyers in the art market come from the financial industry, we are told. But what do they know about spending money? The typical hedge fund manager knows all about making money; he is an expert at separating others from it. But when he has made it, he is completely unprepared for getting rid of it by himself. Instead, it weighs him down…like a heavy mink coat on a rap star; it makes him look sweaty and ridiculous. What’s a rich man to do…but buy a Warhol or build a monstrosity in Greenwich?

When you make $1 billion per year, you can buy the most expensive house in the world – every year – and still have $900 million in change. So, you have to buy bigger and ever gaudier accouterments; until finally, your yacht becomes so big it gets stuck in the East River and your friends laugh at you. That’s the problem with parting with big bucks to get status; you’re always in danger that it will backfire.

The hidden appeal of art, on the other hand, is that you can spend as much money as you want without obviously looking like an upstart. Instead of wearing a diamond-encrusted watch that chimes “nouveau riche,” on the hour, you buy a $100 million diamond-encrusted plaster skull, created by Damien Hirst. It’s not a silly prestige item, you tell yourself; it’s art! Buy one of these absurd concoctions…then buy another…and another. And now you are an art collector! When you die, you can leave the whole foul lot of it to a museum.

What is this art really worth? We calculated earlier this week that if you wanted to look at Monet’s painting of Waterloo Bridge you could get a print for nothing. Or, you could pay $35 million for the real thing. From a distance, you can barely tell the difference. You have to get up close. The closer you get, the more you can appreciate the artist’s genius. As you approach the painting you see the texture…brush strokes…and subtle colors. And there, at maybe a range of two feet, you can appreciate the master’s skill at rendering the view from our office window into a work of genuine art. Maybe that’s worth $35 million. Maybe it isn’t.

This little analysis might have rested comfortably in our stomachs, had it not been for an earlier art auction, in which a print by Andy Warhol was deemed worth $71.5 million. And here we are getting a little queasy. For Warhol never lifted a paintbrush at all. You can get as close as you want. Stick your nose into the canvas. You won’t find any greater detail. You could print up a million copies. Each one could be as faithful to the original, and as readily passed off for the real thing, as a dollar in your wallet to the next crisp new bill to leave the U.S. Bureau of Printing and Engraving.

“Green Car Burning” is not a painting at all – but a print; the “original” is a reproduction of a newspaper photo. The only thing that might be considered the faintest bit authentic or original about it is that Warhol put a green cast over the image and broke up the picture a bit. So, if authenticity, originality, or painterly talent were the only source of the high prices, we cannot explain the Warhol phenomenon. The visual difference between a print and a print of a print is almost undetectable. Both give exactly the same satisfaction at any range. If the print of the print has zero value, the print itself should have approximately the same. Why then would anyone in his right mind pay so much for it?

“Because it will go up in value,” you say? We can practically read your lips.

“It’s a good investment.”

The previous record for a Warhol was set last November, when a portrait of Mao, reproduced from a picture in Newsweek Magazine, sold for $17.4 million. In just six months, Warhol oeuvres increased in value by 100%. But the increase in prices merely increases our puzzlement. The price of a copy, established by the Telegraph at zero, is still zero. But the price of an “original” Warhol has soared to $35 million. The elusive, non-visual, almost undetectable difference between a copy and the real thing is actually doubling every half a year. How to explain it?

It was here that we began our heaving fits. What are these strange objects of contemporary art, we wondered? They have no real value. Are they anything more than a way for very rich people to part with their money on amicable terms? Are they not the perfect way to do it?

The answer came to us – yes. Like the dotcoms of the tech bubble era, contemporary works of art are held down by so little down-to-earth real value that their prices can go up straight to the moon.

Bill Bonner
The Daily Reckoning
June 29, 2007

Editor’s Note: Don’t forget – you can hear Bill (along with all of your favorite DR editors) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is “Rim of Fire: Crisis & Opportunity in the New Asian Era” – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt