Insufferable Development

Last week, 65,000 people came together for cocktails and puerile blather in Johannesburg. Here at the Daily Reckoning, we rarely take notice of these bursts of high-minded sanctimony. But this one – billed as a "World Summit on Sustainable Development" – clogged so much of the planet’s media channels that we could hardly get where we were going without running into some malign hulk of an idea.

We spotted the problem in the headline. The three-score and 5 thousand people, who seemed to drop to the bottom of the Dark Continent like the densest elements in a trash bag, could gab all they wanted, they’d never find a form of development that was ‘sustainable.’ For nothing on this lame ball of ours is ‘sustainable.’ Not the Iron Age, not the Industrial Age, not the Information Age (which seems to have had a life expectancy shorter than a popsicle), not the Stone Age, nor even the Rolling Stones.

What is sustainable is innovation, change…cycles of boom and bust, sturm and drang…with dollops of completely unexpected events from time to time – such as meteors, droughts and plagues. Everything lives and dies…we have noticed…dust to dust…ashes to ashes and boom to bust…

But when people get together they need collective myths to give their pathetic lives an ersatz meaning…and allow them to boss other people around. They pick up the latest faddish pretensions like bums picking up cigarette butts, sucking in the noxious fumes as long as they last.

Poor Severn Cullis-Suzuki. The girl was only 9 when the environmentalist habit got a hold of her. Then, when she was 12 she gave a speech to the last big gathering of huff and humbugs in Rio. "I am only a child," she told the faithful, "yet I know that if all the money spent on war was spent on ending poverty and finding environmental answers, what a wonderful place this would be."

No one asked how she knew what the world would be like, nor how she proposed to transform this old ball from what it is into what it is not. Instead, they rose to their feet and gave the environmentalist ingenue a standing ovation.

Now, 10 years later, the girl has become a young woman and was picked as the only American member of U.N. Secretary Kofi Annan’s advisory panel on the environment. But a decade of schooling has only dulled her wits. She writes in TIME that she has drafted a pledge for young people to sign. "It includes a list of ways to live more sustainably – simple but fundamental things like reducing household garbage, consuming less, not relying on cars so much, eating locally grown food, carrying a reusable cup, and most important, getting out into nature."

It is not so remarkable that she would think these things. What is remarkable is that TIME would have nothing better to report. But the world’s press opened its pages to the planet savers as though they were Romans inviting the Vandals to tour the city. No idea or information was required – just empty, self-serving wind.

"We can do this good work together," was the headline offered by the International Herald Tribune to a mindless article authored by a triumvirate of windbags – Thabo Mbeki, Fernando Henrique Cardoso and Goran Persson. The three heads of state opined that "the fundamental challenge before us is to develop a paradigm that enhances the sustainable use of natural resources and at the same time reverses unsustainable patterns of production and consumption." What is required, they explained is a "gender perspective." They must not of thought of the reusable cup.

There was no report on how many delegates brought their own cups. Or how many rode to the summit on bicycles or asked to turn the air-conditioning off. No mention was made of sweat stains under attendees’ arms. They seem to have eaten the caviar along with the foie gras, though neither was produced locally. As far as we know not a single one of them fasted during the meeting; instead, they fed their fat derrieres with the best food and drink Johannesburg offers. Maybe a few of them wiped their lips with their ties in order to avoid using a paper napkin, but no mention was made of it in the press.

When the event finally came to a close, there were the usual critics…pointing out that the 65,000, for all their labors, left the world pretty much as they found it – except for the big pile of trash at the city dump. We count that as a blessing. For never, as far as we know, has more government control proved a blessing for the environment. On the contrary, over the last hundred years, those countries with the most government control over how resources are used – Russia and China – are the very countries that have suffered the most environmental damage. By contrast, where people can own property and pass it on to their children, they look after it as best they can.

Your correspondent,

Bill Bonner
September 11, 2002

Well, a year has come and gone since the Twin Towers came down. After the event, economists, well-wishers and kibitzers all said that America would bounce back quickly. But stocks are 8% lower today than they were 12 months ago and the economy looks more and more like one of the geriatric streetwalkers on the rue Lombard; we can hardly believe they’re still alive let alone still in business.

Everything comes to an end sooner or later. Nothing is really ‘sustainable’ (more on that below…).

And all that has kept the U.S. economy alive has been the real estate market. Since ’95, houses have been rising in price 30% faster than the inflation rate, adding $2.7 trillion to the nation’s illusory wealth…or, $35,000 for every homeowner.

More people own houses than stocks. And some economists believe this ‘housing wealth’ is a much more powerful hallucinogen than stock market gains. A recent study by the London office of Morgan Stanley, reports John Mauldin, concluded that "property wealth (the value of US homes) is more important than stocks, interest rates or the value of the dollar COMBINED on its effect on consumer spending." By some estimates a 1% increase in home prices will offset a 33% decline in stocks, not in net wealth but in terms of consumer spending.

Alan Greenspan, the maestro himself, credits the housing boom with keeping consumer spending alive. Low mortgage rates should continue, he told Congress, "through equity extraction, to support consumer spending."

And so, the entire world economy rests on the American consumer…and his willingness to spend money he doesn’t have on things he doesn’t need. Low rates lure him to mortgage his home, digging a deeper and deeper hole from which, someday, he will have to climb out.

But in July, he dug at his most furious pace in 8 months – adding debt at a 7.6% annual rate.

We don’t know when he will stop digging and start climbing…but yesterday brought news that he may be getting damp and weary down in the hole. FHA mortgage delinquencies hit a new record – at 11.81% in the 2nd quarter. Foreclosures rose to a record high too – the highest level in 30 years.

And what’s this? Greg Weldon reports that the mean price on new homes is down 5.4% in the last 2 months… stay tuned. Meanwhile, let’s turn to Eric Fry in New York for the latest news from Wall Street…

******

Eric Fry, reporting from Manhattan:

– Investors shrugged off the specter of terrorism yesterday and went about the business of buying stocks. The Dow Jones Industrial Average gained 83 points to 8,602, while the Nasdaq Composite added 1% to 1,320. Well, we all know what day it is, but that doesn’t mean we have any idea what it means or how we should behave. We know that it is a national day of mourning, but is it okay to eat a hot fudge sundae?…One year after the tragic events of September 11, 2001, we still don’t really know how, as a nation, we should respond. Nor against whom we ought to retaliate.

– We can all agree that the attack was a horrible tragedy. But what to do about it? Who knows? Bomb Afghanistan? Bomb Iraq? Put more airport security personnel on the Federal payroll? Do nothing? Honestly, we haven’t a clue. But that’s okay…many of us never have much of a clue about anything.

– In fact, as Wall Street strategists have proven beyond any doubt, being clueless is no impediment to pulling down a seven-figure salary. (Even so, the ordinary investor is probably better off having a clue about when stocks are too expensive, or when they are cheap enough to be reasonable speculations).

– The events of 9/11 were horrible, plain and simple, and the repercussions are as numerous as they are complex. But surprisingly, the economic repercussions are nearly invisible, at least to the naked eye. To be sure, both the economy and the stock market have continued to sputter since 9/11, but they were already sputtering before 9/11. The stock market bubble was bursting well before two planes burst into the twin towers in Lower Manhattan.

– Jeff Skilling, Bernie Ebbers, Henry Blodget and all the other bubble era rogues have much more to do with the sorry state of our economy and our stock market than Osama bin Laden and the 19 hijackers.

– So how else has the world changed since 9/11? Well, for one thing, we’re a little bit more paranoid…about Wall Street research, that is. And most Americans are poorer today than they were one year ago. And that would include Jack Welch, the former CEO of GE. His 22 million GE shares are now worth about $230 million less than they were at this time last year. But weep not for Mr. Welch. His stock is still worth more than $600 million, which means he probably can still make his mortgage payments. Of course, it’s doubtful that Welch even makes a mortgage payment. In fact, other than buying an occasional cup of coffee, Welch doesn’t seem to make payments for much of anything. He’s getting by just fine thank you, courtesy of a plump, bubble-era retirement package. The package puts new meaning into the phrase, "golden years."

– Back in 1996, when Welch negotiated his over-the-top retirement deal, most folks still believed that most CEOs ought to be revered rather than reviled. Now we know better, of course. But a deal is a deal, and what a deal it is for Welch! His exact post-employment compensation is difficult to quantify, because it is so multifaceted. For example, according to the Wall Street Journal, GE continues to pick up the tab for items like, "autos and electronics at several residences; many costs of a GE-owned apartment in Manhattan, from flowers to faxes to food; tickets to sporting and cultural events; and services such as country club fees, security and financial planning." The monthly value of just the GE- owned apartment on Central Park West is roughly $80,000, according to Welch’s estranged wife.

– Welch received $16.2 million in total compensation during 2001, prompting Harvard Business School professor, Jay Lorsch to remark, "Jack Welch got paid for doing a great job. Why should he get paid twice?" Good question, professor.

– As long as CEOs and ex-CEOs and CFOs and all the other suit-wearing acronyms continue to gorge themselves at the trough of shareholder equity, this will be a long bear market indeed.

******

Back in Paris…

*** And what’s this? Guess what is the best performing stock on the Nasdaq this year? Our old ‘River of No Returns’ stock, Amazon.com. You’ll recall…when Blodget said Amazon would go to $400, we thought $10 would be closer to a fair price. The stock now trades at $14, up 32% this year. Is this a good time to buy? "Investors are coming to realize that Jeff Bezos actually knows how to run a business." We’re not so sure. Amazon is still drifting down the river, losing money every year. This year Bezos will lose nearly $1 per share (after expensing employee stock options). Why pay $14 in order to lose one?

*** The Paris headquarters of the Daily Reckoning fell silent this morning…as a man in a nearby apartment opened his window and blasted out the American national anthem. "That’s enough," yelled a man at a bar after the second verse, "we get the message."

*** Now is it Jules’ turn to travel. His class is taking a trip to…Baltimore! Jules’ school, the Institut de la Tour, has an exchange program with the Park School in Baltimore.

Jules suffers from homesickness too, but of a different sort. "I’m sick of home," the 14-year-old Grateful Dead fan explains. He is eager to make the trip.

"But why in the world would I want to pay $800 to send Jules to Baltimore?"

"It would be educational," replied his mother.

"Are you kidding? The class is going so they can speak English and see what life is like in America. But Jules used to live in Baltimore. He’s already seen slums and drug dealers…and people getting shot…"

"But what about the Flag House and Fort McHenry? And they’re going to visit Washington too."

"I hope we don’t have to go to any stupid museums," Jules muttered…

*** Following my recent trip to Milan, I wondered about Italy and its real estate…and asked around a bit. Turns out Barb Perriello of our travel office in Florida is leading a tour to Umbria in a few weeks, to investigate the very same subject.

Says Barb, "In many parts of the Umbrian countryside, you can still purchase restored cottages of around 800 sq. ft. for $73,000. For fans of rustic charm, here’s another value buy: a perfectly habitable house of around 1,600 sq. ft. with a fireplace, new heating system, kitchen, bathroom, and a wood-fired bread and pizza oven built into the outside wall of the house. Plus it has a covered terrace that could be enclosed to add another 200 sq. ft. of living space. The listed price is $130,000 – but in Italy all prices are negotiable."

Now, adds Ms. Perriello, is a particularly good time to buy in Umbria. It borders Tuscany and looks just like it…but property costs about 50% less. Herds of interested buyers are expected soon. Turns out, several films are in production in Umbria right now and due out next year – films that are bound to draw attention to the region…and drive up property prices.