Old Habits

"A long habit of not thinking a thing wrong gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom…"

Thomas Paine

Maybe it is the mid-day heat. Maybe it is the pace of the day’s events.

Whatever it is, life here in this other Eden, Nicaragua, seems to call forth languid reflection. Today, your correspondent continues to forsake Wall Street in mind as well as body, and turns his attention to other matters: specifically, the idea of America. Here on the Pacific Coast of Nicaragua, we are in America too. But it is not the world north of the Rio Grande. It is more as America was when it was first discovered – waiting for the restless, improving energy of Americans.

"In the beginning, all the world was America," said John Locke. There was a time when all the world was wild…waiting to be tamed. We can imagine the first tribes of men, camping on the banks of the Rhine or the Seine…or crossing the land bridge that connected Europe to England. Each step took them into a New World.

But as the steps increased in number so did the number of men and the ways in which one lorded over another. In those marginal times, even a little edge might mean the difference between life and death. If a strong tribe claimed for itself the best hunting area…a weaker one might starve. If a strong man took too big a portion of the week’s kill, a weaker man and his family might perish. Life was, as Hobbs put it, "mean, brutish and short."

It is all different today, of course. But the habits of scarcity are hardwired. A man’s greatest risk today might be that he is too fat. Still, he will find it almost impossible to resist loading on an extra calorie or two – to give himself an edge against starvation.

Conditions change, but habits remain…often as ill-suited to the new circumstances as a three-piece suit in the tropics. For example, the bull market on Wall Street has been dead for over 2 years. Still, investors act as though prices were rising. Buying stocks "for the long run" has become such a habit that they’re still buying stocks – 24 months after the long run ran out.

Conditions in Europe changed after the hot lava flow of homo sapiens first filled its caves and forests. Societies formed…rigidified and stratified, with plenty of edges for men to climb in order to gain elevation above the common riff raff. By the end of the 15th century, there were hard, sharp corners throughout the Old World. The church, the state, the aristocracy, the professions, and even the new merchant classes offered stepping stones to ambitious men…as well as barriers to the less successful.

And then… there was America.

In the beginning, at least, America was America. Another Eden, free from calcifications of Europe. America was a free country at first… well, at least for white men. Wild, untamed, and ready for work. A man could make his own whiskey, build his own house, farm his own land, hire his workers, carry his guns and decide for himself what "money" he would use – without much interference from anyone. And if someone stood in his way or annoyed him, he could always move further west.

Abraham Lincoln recalled how his father had moved from Kentucky to Illinois when the former filled up with settlers. You could hardly go five miles in any direction, said the Great Emancipator, without spying the smoke from some other cabin…

But wherever they went, Americans had to work hard. After the initial Yankee experiment with socialism at Plymouth Colony, work became America’s signal distinction. A man had to work. If he did not work, he would starve. For there was no class of men who could live on the labors of others.

"It is here then," wrote Hector St. John de Crevecoeur, an early Virginia settler, "that the idle may be employed, the useless become useful, and the poor become rich; but by riches I do not mean gold and silver, we have but little of those metals; I mean a better sort of wealth, cleared lands, good houses, good clothes, and an increase of people to enjoy them.

"This is every person’s country," he continued, "…here he stands on a larger portion of the globe…there is room for everybody in America…"

In WWII, some German prisoners were given the choice of working on local farms rather than staying cooped up in POW camps. Many took the opportunity and gained not only exercise and fresh air…but also a measure of freedom. When the war was over, more than a few asked to remain.

"I want to stay in America," said one. "Because here, I can work as much as I want…"

"Those who do not work shall not eat," proclaimed Governor Bradford when the Massachusettans came to the their senses.

Taxes take about as much in America as everywhere else – about a third to a half of everything one makes…and then, when you die, another big tranche of what is left. Worse, every step you take no longer brings you into a virgin New World. Instead, America today is as experienced, corrupt and complicated as the rest of the world. A man must step carefully through permits and litigation, and watch that he doesn’t cut himself on the sharp new edges of modern American society. Or else, he will end up like my friend, Bobbie Ray…and his family will have to take the guns out of the house.

Still, the habit of work remains. Americans still work as if it paid. Things work in America, too – the phones, the roads, the hamburger mongers.

Americans are always looking for work to do. They still look for new Edens in which to apply their restless energy. That is how they end up in places like Nicaragua.

Your correspondent,

Bill Bonner
February 28, 2002 — Nicaragua

The recovery is "just beginning to get under way," Greenspan told Congress yesterday. "’Recessionette’ may be at an end" reads a headline in USA Today…

If it’s true…the recessionette of 2001-02 was the mildest since World War Two. "The previous record-holder was the 1969-70 recession," Gerald Cohen, a senior economist for Merrill Lynch told USA Today. "Then, the economy contracted a modest 1.1%. In this slump, the economy has contracted just 0.3%."

"In contrast to the optimistic consensus," writes Dr. Richebacher, "we’re continuing to warn that the U.S. economy is heading for a protracted, unusually severe recession." One that, to borrow a phrase from Bill, simply hasn’t happened yet.

Two considerations have convinced the good doctor he’s right: "One is the accumulated outsized imbalances and excesses in the economy that need substantial adjustment before the economy can return to normal growth; and the other one is the prolonged, miserable profit performance."

"Observing that poor profit performance started while the economy was still booming," says Richebacher, "essentially raises disturbing questions about its underlying causes, and whether or not these causes remain virulent. Our categorical answer: these causes prevail because they are of long-term structural nature."

Eric, what do y’all think in New York?


Eric Fry writing from Wall Street…

– There used to be some nettlesome accounting problems here and there within the ranks of corporate America, Chairman Greenspan informed Congress yesterday. But those problems have been largely addressed and are now behind us. Thank goodness for that!

– Emboldened by Greenspan’s all-clear, investors swarmed into the market to snap up their favorite stocks…at least until Greenspan stopped speaking. Like a circus plate-spinner, as soon as Greenspan concluded his positive spin on the economy, the stock market "plates" started dropping.

– The Dow, which soared 140 points while Greenspan was busy opining, tumbled all the way into a loss by late afternoon. The index rebounded somewhat to finish 12 points higher at 10,127. But the Nasdaq never recovered from the sell-off, falling nearly 1% to 1,751.

– Part of the Nasdaq’s problem was a little stock named Cisco Systems, which tumbled more than 8% to $14.24. It seems that a certain analyst at Wachovia Securities offered some discouraging words about the networking giant’s earnings prospects.

– "We have become increasingly concerned that even further reductions in service provider spending will affect the company’s results adversely," analyst Stephen Koffler warned. The gang at Grant’s Investor has been warning investors away from Cisco for more than a year and continues to do so. Maybe Koffler is a subscriber.

– Notwithstanding Greenspan’s naive or disingenuous pronouncement (pick one) that accounting concerns are a thing of the past, serious accounting problems remain. This is a disease that has metastasized throughout the American corporate organism. For now, it has merely gone into remission…But there will be a relapse.

– By pronouncing a sick patient cured, Dr. Greenspan might boost the stock market a bit, but he’s not doing investors any favors.

– As it is, most of the average Joes and Janes trying to make a dollar in stocks tend to overestimate corporate integrity while underestimating the potential losses that could result from lack of it.

– In Russia, most investors think just the opposite. They don’t trust corporate management any more than General Patton trusted Stalin…and that’s a much healthier way to approach investing. The vigilant gazelle lives much longer than the complacent one, all else being equal.

– Ironically, at the very same time that many Americans are discovering for the first time that some corporate officers may be dishonest, many Russian managements are cleaning up their acts.

– "Even Russia is joining the crowd clamoring for better accounting practices," Grant’s Investor observes. "Foreign and domestic shareholders of Gazprom are dissatisfied with the auditing job being done by PricewaterhouseCoopers. Their complaint might not draw the same attention as the Enron circus, but neither will it be swept under the rug…The commotion is another positive sign for corporate governance in Russia in general, and at Gazprom in particular."

– Gazprom is the Russian natural gas monopoly which, incidentally, controls about one-quarter of the world’s known natural gas reserves. Strategic Investment editor Dan Denning recommended the Gazprom ADR last summer at $9.74, when news of the positive structural changes at the company first began to surface. The stock, trading under the symbol OGZPF, has jumped about $3 since then. But Dan thinks there’s still more to go.

– "The real story with Gazprom," Dan informed me yesterday, "is that it’s slowly rooting out the parasites from the communist era. The old guard was involved in ‘related-party transactions’ that looked a lot like Enron’s. Gazprom’s officers were selling off some of its best assets to outside entities that they themselves controlled."

– "The fact that these kind of transactions occur is old news in Russia," Dan says. "What may be new news is that they are happening less often. Furthermore, what’s most important about Gazprom – its energy reserves – hasn’t changed. And neither has the fact that the world covets cheap natural gas and oil…which Gazprom has in abundance."

– "In Russia," writes Barron’s Erin E. Arvedlund, "investors aren’t paying for any presumption of innocence." Although Arvedlund could have been referring to almost any Russian company, including Gazprom, she specifically mentions the newly issued Russian ADR, Wimm-Bill-Dann. The prospectus notes that one or more of the company’s officers have "been the subject of speculation in the Russian press with respect to possible links with organized crime." Here in the U.S., the most organized crimes of all occur in the stock market. It’s hard to imagine any crime more organized than Enron.

– "Here’s the difference between American and Russian corporations," Arvelund quips, "In Russia, they now disclose that officers may be crooks who have been in jail – before the companies sell shares. In the U.S., you find out the big-wigs are crooks only after the bankrupt the company and cash in their shares."

– True statement – that’s why stocks like Gazprom can be had for about 9 times earnings. But what’s the greater risk, paying nine times earnings for companies in which dishonest management practices are gradually improving, or 35 times earnings for companies in which dishonest managements are presumed to be honest? Let the reader decide.

– Meanwhile, says Arvedlund, macro-economic trends in Russia are very favorable for investors. "Russia’s economy grew by 8.3% in 2000," she says, "while the IMF says growth was 5.8% in 2001, and it projects 3.6% growth in 2002. The fiscal situation also has turned around. For three years in a row, the nation’s budget has been in the black, with last year’s surplus totaling about 2.5% of gross domestic product."

– Russian corporate practices have a long way to go to reach American standards, but they may be closing the gap. Stay tuned.


Back in Paris…

*** "While Wall Street, the corporations and Fed Chairman Alan Greenspan have been trumpeting an unfolding profit miracle," Dr. Richebacher continues, "we have been emphasizing the exact opposite conclusion – that the influence of [new information technology and America’s new corporate equity culture] were grossly misjudged. Instead of improving profits, they would implicitly demolish them. And just that has happened."

*** The "profit miracle" that Wall Street and everybody else celebrated during the boom years appears to have depended heavily on the sleight-of-hand practiced by corporate accounting departments.

"In contrast," writes Richebacher, "the government’s national income statistics continually revealed a profit performance that compared rather poorly with past cycles. Drastic revisions in these statistics, published in July 2001, have meanwhile confirmed that the profit performance was in reality a lot worse than mediocre. It was the worst in any boom period…

"This unprecedented profits carnage is really the most ominous feature of the U.S. economy’s present downturn. Equally unprecedented and ominous is something else: the fact that this recession has occurred in the face of the most rampant money and credit deluge in history."

Addison Wiggin