Sentimental Lessons

Yesterday, work stopped in Paris as people commemorated Victory in Europe Day. When the war was over in Europe in May of ’45, people celebrated. Americans in Paris were cheered as heroes and liberators…barkeepers poured them free drinks and women offered free kisses. And everyone was glad the fight was finished. On both sides of the Atlantic, it was time to get back to work and families…the war was over.

We stoop to history again today, dear reader. You will pardon us, I hope. But what else can we do? What else do we have…other than the record of what Voltaire called the “crimes, follies and misfortunes of mankind”? Though we know little about what actually happened…and are suspicious about how people interpret it…we know nothing at all about the future…except that it is an extension of what came before it.

“It’s all happened before,” said Jim Rogers on the phone yesterday, referring to the boom/bust cycle. “Just look at history. You know, I teach college classes here in New York. My students sometimes ask me what they should study if they want to be successful. I tell them to read history and philosophy. They say, ‘shouldn’t we be studying accounting or business…?’ I say, ‘No, you’ve got to study history because that is all we have…a record of all we’ve learned or should have learned.'”

What Europe learned from WWI and WWII was not to do that again. This was not so much an intellectual lesson as a sentimental one. Those who lived though the wars…the occupations…the uniforms…wanted nothing more to do with them. The anti-war sentiment was on their lips and in their blood.

But now the old soldiers are dying off. We missed the little gathering in Lathus, but there were only a handful of veterans left, Mr. Minig told us….this past winter had claimed a couple more. Soon, there will be no one to recall what it was really like.

The new generation of warriors – mainly in America – has a different sentiment.

Arnold Toynbee explains:

“The survivors of a generation that has been of military age during a bout of war will be shy, for the rest of their lives, of bringing a repetition of this tragic experience either upon themselves or upon their children, and…therefore the psychological resistance of any move towards the breaking of a peace…is likely to be prohibitively strong until a new generation…has had the time to grow up and come into power. On the same showing, a bout of war, once precipitated, is likely to persist until the peace-bread generation that has lightheartedly run into war has been replaced, in its turn, by a warworn generation.”

War is still a lark to the peace-bred generation in the U.S….still an exercise in geo-political jingoism as daft as Wilson’s “making the world safe for democracy,” but without the casualties! They think they are defending western civilization…fighting terrorism…spreading democracy and freedom.

It is a different world for them than it was for the survivors of ’45. Then, it was the Europeans who stirred up war…and a reluctant American who helped put things right. Now, it is the Americans who go looking for trouble…but who will sort out the mess they make?

Then, it was the Germans who tried to crush everyone who got in their way. Now, it is the Americans who are on the move…offering a new kind of Empire…a soft empire…whose intention is not to conquer and steal, but merely to slather peace and democracy throughout forlorn areas of the world…thereby making the rest of it safer and more prosperous, too. This new Empire of Goodwill is led by a warrior…but not a Commodus (who fought hundreds of combats in the arena…the spectators scarcely noticed that his opponents had their feet cut off in advance to make sure the Emperor won…)

No, Mr. Bush sees himself as Tiberius or Hadrian or Marcus Aurelius…a fighter, but not a tyrant.

Things have changed. It is not the world of 1945. The U.S. stands on the threshold of a new era in world politics.

Rome stood in a similar position in 146 BC. In that year, Scipio Emilius finally put an end to Rome’s ancient enemy – Carthage. He lay siege to the city, then took it and destroyed it.

But as Carthage burned before him, Scipio is said to have cried; he seemed to understand that a new era had come to Rome. She no longer had a rival; she was now master of the Mediterranean world. She was an empire. Scipio must have looked ahead…and seen the spectral image of Rome in the smoke of Carthage. Sooner or later, all empires collapse. This was not necessarily the beginning of the end for Rome, he may have thought…but perhaps the end of the beginning.

About that same time, the consul Metellus put down a revolt in Macedonia…and Mummius took Corinth and razed it. Greece, formerly the great power of the region, became a Roman province.

Like Europe compared to the U.S. today, the Greek city- states were the old world. They were the source of much of the culture and learning of the Romans, but they had lost their military edge. If they had ever really had an empire of their own, it was definitely yesterday’s empire. The empire of today and tomorrow was Rome.

But before destroying Corinth and enslaving the Greeks, the Romans first rescued them.

“In the spring of the year 176 before Christ [that is about a quarter of a century before Greece was made a Roman province],” writes Peter Bender, “all of the notables of Greece assembled at Corinth in order to hear what Rome had decided for them. After a century and a half of oppression of the Greeks by the Macedonians, the Romans had beaten Philip V and had made him renounce all his possessions in Greece. But all their experience suggested that the Greeks were merely exchanging one master for another.”

“At the sound of a trumpet, the herald of the assembly imposed silence and read the message from the senate: ‘We give you liberty and administrative independence; there will be no occupation and no obligation to pay tribute.'”

The Greeks couldn’t believe their ears. But when the word got around, and they realized what had been said, they gave the Romans a loud ‘Huzzah!’ and tried to get rid of them as soon as possible.

Everyone had the best of intentions. But history had intentions of her own.

“Every super-power has, by nature, a tendency to oppress more and more inferior nations,” a Greek orator had warned after the Romans imposed their “soft empire” in ’76.

Like markets, politics has to run its course…from the beginning to the end…

Bill Bonner
offering no particular insight or prediction…
May 9, 2003


If only things were simpler!

The dollar sank even further yesterday.

Gold rose. The euro rose. Shouldn’t consumer prices rise too?

The dollar is “heavy,” say the traders. It seems to want to sink. But as it goes down, shouldn’t it become less valuable? Shouldn’t it buy you fewer loaves of bread or fewer six-packs?

It is either worth more…or worth less, right? It’s either inflation or deflation…up or down…black or white?


On international currency markets, investors are making the same judgment of the American dollar as they are of its president: it is not a real Top Gun currency, they believe, but just another goofy Hot Shot paper money.

When a nation’s president puts on a uniform, you can be almost certain that its currency will fall. There is just something so clownish, so buffoonish about it…like a Latin American dictator or a million-peso note. Who can take them seriously?

But back in the U.S.A., economists are afraid that the dollar might be holding its value.

“Inflation’s slowdown has many economists worried,” says the headline from USA Today. The paper was responding to the remarkable announcement from the Fed on Tuesday that what it worried about was an “unwelcome substantial fall in inflation.”

People generally do not go to bed at night with sweet dreams of inflation. Nor do they wake up in the morning and read the headlines, hoping to discover that the inflation rate has increased. In fact, many people get a little cheesed off when prices rise. So, it took USA Today a couple of days to figure out why a “substantial fall in inflation” would be so “unwelcome.”

But there it is. Inflation is running at less than 1% per year, according to the government’s “personal consumption expenditure price index.” And the economists are worried about it.

Oh, ye gods of the money heavens…how could ye visit such an awful fate upon such a happy and virtuous people – stable prices! Take every first-born child…send a pox among us…turn all our women into shrews, hags and neo- cons…but make not our consumer prices not rise.

The whole thing is, of course, absurd. But no one asked our opinion.

Inflation has been on a downhill trend ever since 1980, when it was clocked at 12.4%. Since then, the rate of inflation – and here we speak of it not like an economist who knows what he is talking about, but as one who doesn’t…that is, we’re using the term like everybody else, as consumer price inflation, not increases in the money supply, which is another matter altogether – has fallen about 1% every year. We are 13 years into this trend and the rate of inflation is barely positive. Housing, medical care and college tuition keep rising – but other prices fall. Already, the inflation rate has fallen below the Fed’s lowest lending rate. And still the economy sinks…along with the dollar on foreign exchange markets.

Here at the Daily Reckoning, we are trying to figure out what it all means….but no one ever said it would be easy…

Over to our man on The Street, Eric Fry…


Mr. Fry with the news from New York…

– Yesterday’s headlines did not seem to be any different than the headlines we’ve been reading for the last several weeks: the dollar is still collapsing, jobs are still disappearing, Donald Rumsfeld is still scouting around for another country to bomb and Wall Street strategists are still bullish. But for some inexplicable reason, this intriguing constellation of macroeconomic phenomena inspired little buying yesterday. The Dow dropped 69 points to 8,491, while the Nasdaq forfeited the 17 points it gained on Wednesday to close at 1,490.

– Meanwhile, the dollar got pounded again, falling to a new four-year low near $1.15 a euro. A moment of silence, please, for the “strong dollar”…we will miss it. And the Daily Reckoning crew over in the Paris office will miss the strong dollar even more. Their Big Mac lunches are becoming très cher.

– The dollar’s recent selloff, rather than pausing to catch its breath, seems to be accelerating. As the greenback hurtles downhill, some investors are becoming a little anxious and are seeking sanctuary in the gold market. The precious metal jumped $6.50 yesterday to $348.70 an ounce. Why might investors be buying gold when the dollar is withering? Hmmm…A recent headline from Beijing’s “People’s Daily” provides a helpful answer: “Gold Increasingly Viewed as a Safe Heaven Investment: Experts”

– The story that followed began: “Gold’s generally upward trend seems very likely to continue and it is increasingly being viewed as a safe haven investment, experts from ABN AMRO Bank said here Wednesday…”

– Thank goodness for the “experts,” what would we do without them? We are not experts, of course, but we did receive passing grades in our history classes. And we seem to recall a multi-millennial connection between gold and the phrase “store of value.” Further, we seem to recall that folks who worried about the value of their currencies tended to buy gold. Maybe that’s why gold rallied yesterday. But we’re just guessing. We are not experts.

– Despite yesterday’s stock market retreat, investors, by and large, remain bullish. Investors Intelligence, which polls money managers to see if they’re bullish or bearish, counts 55.8% bulls at present and 24.4% bears. “Everyone is enthusiastic,” says the publication’s editor Michael Burke. For perspective, Burke’s poll showed 55.7% bulls and 26.4% bears at the market top in March 2000. In other words, bullish sentiment has become quite extreme – a phenomenon that often presages market peaks.

– Over the last few weeks, investors have been accentuating the positives and minimizing the negatives. But some of the negatives refuse to be minimized. Unemployment, for example, is becoming an increasingly worrisome trend.

– A whopping 525,000 jobs have been lost in the past three months and the economy continues to shed jobs at a rapid pace. Although the number of initial claims for state unemployment benefits fell by 28,000 to 425,000 in the most recent week, the average number of weekly first-time claims over the past four weeks hit a fresh one-year high of 446,000 in the week ending May 3.

– More worrisome however, is the fact that the average number of Americans who collected state benefits over the past four weeks rose to 3.6 million, the most in six months. “Of the 8.8 million jobless workers in America, almost 2 million have been out of work for half a year or longer,” the Washington Post reports, “the highest number in two decades, according to the Bureau of Labor Statistics.

– “Blue-collar jobs in the manufacturing sector…continue to be hit particularly hard…There were 817 mass layoffs of 50 workers or more in January, 427 in February and 385 in March, according to the Bureau of Labor Statistics. Overall, about 2.7 million jobs have been lost in mass layoffs since January 2002, with about one-third in the manufacturing sectors.”

– As we’ve noted previously, unemployed consumers don’t do a whole lot of consuming. They tend not to buy TVs or cars or houses, or even rounds of drinks at the local bar. In fact, they tend not to buy much of anything. Meanwhile, most fully employed folks aren’t spending with their habitual gusto. Perhaps they, too, are feeling the pinch of a sluggish economy or the squeeze of too much debt.

– “We’re not really laying a very strong foundation for an economic recovery when it’s on the backs of consumers who are either going into debt through refinancing mortgages, or taking equity out of their homes, or whose net worth has been declining with the stock market,” says Comstock Partners’ Charles Minter. “Typically, to have a good, sustained recovery you need investment and hiring by corporations.”

– Fortunately, a stock market rally does not require any evidence of a recovering economy…It requires only a large population of optimistic buyers.


Bill Bonner, back in Paris…

*** The bond market sees no inflation…or doesn’t care about it. Despite a falling dollar, bond prices have remained high. And the differential between the yield on inflation-indexed Treasury notes and regular 10-year notes…has actually fallen. You can get a yield of 3.66% on a 10-yr. T-Note and only 1.92% on TIPS, treasury notes indexed to the inflation rate. This implies that investors expect an inflation rate of only 1.74% for the next 10 years…which is down from the 2.5% they expected a year ago.

*** “The Fed is doing everything it can to support this market,” said our old friend Jim Rogers. We had him on the phone yesterday to talk about his new book…and our own new book. What we spoke about was inflation. “I just spent three years traveling around the world,” he continued in his Alabama voice. “You can’t tell me there isn’t any inflation. Everything I buy has gone up in price. And it’s going to go up a lot more when all this liquidity the Fed is putting in the system in order to support the bond market and the stock market finally reach consumer prices.”

[By the way, you can check out the route of Jim’s world- record-setting 3-year trip around the world by visiting his website: You can also pre-order copies of his book, Adventure Capitalist, which he wrote to describe the first-hand insights he gathered during his remarkable journey.]

*** Why bother with puny yields on overpriced, vulnerable U.S. dollar assets? While the U.S. dollar falls, the New Zealand dollar rises to multi-year highs. And you can buy a big company such as Telecom New Zealand, with a monopoly position in a critical industry, at a PE of 11…and a yield of 6.25%.

*** One of the things that always seem to go up in price is college tuition. Jules, 15, has had enough of the French schools. Looking for an alternative, his parents checked out boarding schools in the U.S….and an American high school located on the outskirts of Paris.

None of the choices were cheap…with the boarding schools up to $30,000 per year…and even the American High School over $20,000.

(The American High School looks like almost any public high school in America, except that there is no flag flying over it…and not even a sign to tell you what it is. You’d hardly know it was there.

“We keep a low profile,” explained the director. “With all this talk of terrorism…you just never know. We don’t want to be a target.”)

Jules’ father suspects that education is one of the biggest frauds in America. Well-meaning parents mortgage their homes so they can send their children to lectures they’ll never remember, about nonsense, given by people without a real clue. Young people would do better to get out in the world, go to work, read a book and learn for themselves…in his opinion…rather than sit through sermons on gender politics in the afternoon and attending keg parties in the evening.

So, inspired by his friend Gary North, who wrote a report on the subject, your editor tried to interest Jules in dropping out of institutional schools and undertaking a learning program of his own…backed by a home-school curriculum, and tutors, so he could still get his diploma and go on to college. He even offered to deposit the tuition money in Jules’ account so he’d have a nice next egg by the time he finished school, rather than a large unpaid credit card balance.

But the boy wasn’t interested. “I don’t want to do anything that weird,” he told his father.

*** What else is new? With all this racy lingerie advertising we can hardly keep our minds on interest rates and world politics. But thank god for them all. Without the titillation of sex, baseball, politics and money…a man might become preoccupied by his own wife. And what woman would want a man like that?