Playing the Game

A DR Classique, first run December 27, 2001

Edward, Henry, and their friend from across the road, Nathaniel, were spread out on the floor playing "America", a board game I mentioned yesterday. The Monopoly-like game, festooned with the American flag and billing itself as "a game about our great nation", has recently become very popular in our family.

"What’s the idea," I asked Edward. "How do you win?"

"The one who makes the most money is the winner!" Edward replied.

Money, money, money. That is, of course, the subject of the Daily Reckoning. Day after day, the game goes on. Once your family has food, clothing, and shelter, money is merely a diversion, an entertainment – like a board game or a newspaper’s editorial page. For what difference does it really make if your wife carries a bag from Louis Vuitton or one from K-Mart? Do they not render the same service?

Getting and spending may not make the world go round, but it gives it a good spin. And who are we to question it? Wanting more money is as natural as homemade hooch.

But sometimes people drink so deeply from the cup of financial ambition they nearly go blind and forget that it is just a game. During the great bubble of 1996-2000, for example, investors could not see that the stocks they were buying were worth only a fraction of the prices they paid. Nor could they make out the true dimensions of the debt they took on. Big debts looked small and loopy, spending seemed almost reasonable. "Last year," reminisces an article in the Wall Street Journal, "the well-groomed bankers – inspiration for Bret Easton Ellis’ novel ‘American Psycho,’ fed the city’s economy with their fat bonuses. They easily dropped $200,000 at Gucci on a Saturday shopping spree and test-drove new BMWs with serious buying intent. "It was the norm for a 28-year-old top associate at a bank like Goldman Sachs or Salomon Brothers to earn a $90,000 salary, topped off with a $210,000 bonus."

At the height of the bubble economy, dear reader, people played the money game as though it really mattered. Money seemed to mean everything to people…even though they spent it as though it were nothing. It has been 3 years since the mania reached its zenith. Times have changed. All across the economy, people are rubbing their eyes and straining to see what the future holds. And almost everywhere, they see earnings melting away like snow in Miami. Stocks are down with the broadest measure, the Wilshire 5000, off 27% from its high. Wall Street bonuses are expected to average about 30% lower than last year. "This year," continues the WSJ article, "the same associate will probably earn a total of $210,000, said banking sources. With bonuses slashed across the board, Wall Streeters have to – gasp – spend conservatively, especially in case the market doesn’t rebound swiftly."

"Scrooge puts lid on pay raises in ’02," says a headline from Southern California. First year associates at law firms are getting only half the bonus they got last year, reports the New York Times. Bonuses are extremely important, explains the NYT, because young lawyers measure their success almost completely in terms of money and jump from one firm to another in search of the highest salary. The law firms have to play the game, too, or they will lose their talented associates. And between the two coasts, the story is much the same. Even assembly-line workers in Elkhart, Indiana, are getting slimmed down bonuses and less overtime if they still have jobs at all. Never before in U.S. history have so many people depended so much on the performance of U.S. companies. Over the last 10 years, a sizeable portion of the workforce has moved towards incentive-based compensation plans. If the company does well, so do its employees. While profits and share prices were rising, the shipping clerks and marketing managers, as well as the CEOs, could anticipate an increase in earnings often in the form of a big bonus at year end. But this year, as perhaps never before, the bonuses are smaller. Most people will regret the decline in revenue.

But here at the Daily Reckoning, as usual, we take a contrary view. "Money isn’t everything," they say. "Everything isn’t money," we add, pointing out that the financial gains most people thought they made in the late’90s are turning out to be an illusion.

But what does it matter? The genius of America is not that it celebrates material success alone, but that it lets people worship whatever fool thing they want. Through the refracted bubble light of rapidly rising equity prices in the late’90s, Americans could see only money. Falling incomes, we think, will help improve their vision. In the first decade of the new century, we predict, they will take money less seriously and spend it more carefully.

Your correspondent…just playing the game like everybody else.

Bill Bonner
August 23, 2002

"Well, what’s new in the world?"

My brother-in-law wanted to know this morning. We just came back from spending two days in the Bordeaux wine country, where we were completely out of contact with the news. Still heavily invested in stocks, my wife’s brother is counting on a market comeback. Your editor follows the market for other reasons – entertainment and moral instruction.

"For the first time since early July, the Dow is back above 9,000," I read him the headline news.


Yes, dear reader, the Dow rose 1% yesterday, 96 points. Does this mean the bear market is over and that my bro- in-law will be able to retire early?

Mr. Market can do whatever he wants, of course. But, as we say often enough to annoy DR readers, he is not in the habit of giving investors what they want; he gives them what they deserve.

Overweight in debt, dollars, stocks, confidence and flesh…what do Americans deserve? We do not know…we can only guess what Mr. Market may think…

…that it is time to give them what they are least prepared for: deflation.

"America’s Date with Deflation," warns a headline in the Financial Times.

Retail sales are easing off. Unemployment claims rose to 389,000 last week.

Inflation has been in decline for the last 20 years. Now, it is almost extinguished altogether…retails prices are rising very slowly, and may soon stop rising at all. Then, America will have its ‘date with deflation.’ And who knows? Maybe it will pullulate into a real romance…

The U.S. economy is "hanging by twin threads of home buying and zero percent financing from the carmakers," explains the FT. But Americans already own 1.2 vehicles per person, compared to only half that number in Europe. Financing incentives are scheduled to expire next month – then what? Who needs another car? Without the rise in car sales, consumer spending would be flat. So would industrial production.

Real estate is still booming. That median price for a house in the Bay Area rose to $417,000 last month – up almost 10% from the year before. Sales rose nearly 20%…and mortgage and refinancing applications doubled. How long can this go on in an economy that is barely growing at all? "Not long," is the answer we gave 6 months ago. Now, we find out how long "not long" can be…

One thing is for certain: it is less than forever.

Our guess…when home prices stop rising, the economy goes into recession and deflation finally comes to America.

"Workers grow less happy," says a Newsday headline. Workers are becoming less happy because they have less money to spend, they’re afraid of losing their jobs, their 401(k)s are down. And all these new labour-saving devices – cell phones and email in particular – force them to work more than ever!

What else? The dollar is holding above recent lows. Bonds are selling off. Gold is easing off too. Readers are warned: all three of these mini-trends are subject to reversal without further notice.

Eric’s still on vacation. Addison is still lost somewhere in the New World. So today we’ve asked Sean Corrigan, our London correspondent, for a little commentary. Sean?


Sean Corrigan, reporting from across the pond:

– Remember those archetypal stories which used to circulate of a "Wall of Money" waiting – usually just off Honshu Island – to flood into this or that western country the minute a friendly government was elected, a tax cut passed or a common currency joined?

– Well, debate this week has been about a "Wall of Money" flooding OUT – specifically, out of the US and into the desert sands of Saudi Arabia.

– This all blew up after the FT reported – in what, it must be said, was not a pinnacle of substantiated and sourced journalism – that the Saudis had taken $200 billion out of the US, partly for fear of confiscation, partly to avoid litigation and partly to express displeasure at being dubbed a "kernel of evil."

– Prince Al-Waleed bin Talal bin Abdul Aziz Al-Saud, King Fahd’s 45 year-old nephew, told the BBC that there was no evidence of a Saudi pull-out. "I’m holding onto all of them (my investments) and in all honesty increasing my stakes in certain companies in the US," he said.

– "I have read the Financial Times and I was surprised," he added. "My information tells me none of this is correct. There may be some withdrawals, but not of the magnitude mentioned in the Financial Times. What I am telling you represents the position of the Saudi Royal Family 100%."

– Fair enough, but then the Prince does suffer a little from divided loyalties on this issue, since he is the biggest single investor in the mighty Citigroup. Indeed, last month Business Week reported that the Desert Prince had spoken with Citi CEO Sandy Weill, who joked with him – a little uneasily, we would guess – "I guess you and I have both lost a little money this last week, your Highness," referring to the 41%, $107 billion tumble in market value the group has suffered this year.

– Moreover, just the day before the Prince’s comments to the BBC, Bloomberg reported that Al-Waleed had been left sitting on a $1.5 billion paper loss at the height of July’s panic, after attempting to pick the bottom with a $500 million share purchase a few days earlier.

– He told Bloomberg that he had "no plans to buy more U.S. shares" and that he was "concerned by recent swings in the stock market." "The market is still very jittery, and it doesn’t look like it’s changing," said the royal, whose net worth Forbes magazine valued at $20 billion. "The dramatic swings up one day and down the next are a great concern."

– Whatever Al-Waleed’s story, others are not as equivocal. Saudi newspaper Al-Watan reported that a group of Saudi businessmen had pulled out of a technology project in New York over fears of having their assets frozen by US authorities; Wednesday, the Saudi Gazette reported that the governor of the Saudi General Investment Authority, Prince Abdullah bin Faisal bin Turki, "expected repatriation of Saudi capital invested abroad soon."

– Saudi banks, just one of the various "interests" accused of helping finance Osama bin Laden and his terrorist network in a lawsuit filed earlier this week by relatives of victims of Sept. 11, have denied any such role. They claim that the case is an attempt to extort Saudi wealth and pressure their country into supporting US policies on Iraq and the Middle East.

– Washington has named 15 Saudis among the 19 hijackers on 11 September. "There is no doubt the relationship between Saudi Arabia and the US is going through a turbulent period right now, but eventually it will go back to normalcy," said Prince Al-Waleed. "The US right now is in a mood that is unrealistic and I hope that once the dust settles the US government, people and the media will go back to reality and normal."

– So are the Saudis selling?

– Maybe. Maybe not. But one thing is clear: at this stage, no one is buying the idea that Truth and Justice – in international finance, as in much more – are consonant only with the American Way.

– And that, in itself, should be increasingly reflected in the market price of commodities, currencies and securities in the months to come.


Back at Ouzilly…

*** We were pleased to see that President Bush is backing off his ‘War on Iraq’ talk. Passing a WWII monument in a small village in France yesterday, we stopped to inspect. It commemorated a site where Germans had executed a group of people who were supposedly in the French resistance. Among them were a man of 65 and a boy of 14. We thought of the boy’s family and wondered what they must have thought…trying to understand why he was dead. It was already late in 1944. The war would be over in a year. What difference could it possibly make to the war if he lived or died? And what must the German soldiers have thought…or did they think at all? War – like financial bubbles – may seem like a good idea at the time. But they turn out to be disasters for nearly everyone.

"There are two panaceas for a mismanaged government," wrote Hemingway. "The first is war…the second is inflation of the currency. Both bring temporary prosperity. Both bring more permanent ruin."

No economy ever created as big a bubble…measured by debt, trade deficit, and stock prices…as the U.S. Deflating it will take time…and pain.

Will it take war and inflation too? We will find out…

*** "It says it tastes like a lead pencil."

My sister-in-law was reading the guide to Bordeaux wines as we drove over to look at one of the vineyards. You can train your mouth to be able to pick out the different flavors in a good bottle of wine. Of course, you can also learn to stretch your mouth so it can hold three pool balls at the same time. They’re both talents, but neither is necessarily worth having.

Still, people desperate for any mark of distinction, delight in being able to tell which wine is better based on subtle differences that only a bloodhound could detect. And once again, your editor finds himself blessed by ignorance and incapacity. A $5 bottle is as much a pleasure to him as a $50 vessel. And he can buy 10 times as much of it!