The Heart's Dupe, Part II

The Daily Reckoning PRESENTS: Fads, fashions, cycles…booms and bubbles…public spectacles – all come and go. The disaster is that nobody takes it seriously anymore…because it doesn’t deserve to be taken seriously. But there is probably a deeper cycle at work. Bill Bonner explains…

THE HEART’S DUPE, PART II

Elizabeth has been reading Paul Johnson’s ‘History of Christianity’ and has gotten quite interested in it. She turns to me with occasional commentary and delight.

The Roman Empire peaked out a hundred years or so after the birth of Christ. People gradually, slowly turned their interest away from fighting…and gaining glory by expanding the Empire’s borders…to merely holding off the barbarians and living as high on the hog as possible. Meanwhile, interest in religion increased.

From politics, to money, to religion; from war, to wealth, to faith; from Caesar, to Mammon…to God. This too seems to be the drift of thing…looked at with a particularly wide-angle lens.

“As people became more interested in Christianity,” Elizabeth reports, “they began to take it more and more seriously. They had arguments over everything…tiny points of doctrine…abstract ideas. Emperor Constantine himself coined the word, consubstantiation, to resolve the dilemma of the Holy Trinity.

The problem was how could there be three divinities – Father, Son and Holy Ghost – when there was really only one God? Christianity is a monotheistic religion. On the surface of it, the Holy Trinity doesn’t seem to make sense. We don’t care much about it now, but back then it was the source of fierce argument and even some pitched battles. Different groups employed bands of armed thugs to go around intimidating those who disagreed with them on these issues. They often fought…and of course…the losers in these fights were branded as heretics. It must have been wild.”

Well, back then, people were pretty excited about religion. They were wound up about it. Issues that mean nothing to us today were of such importance that people were willing to die – or to kill – for them.

In the centuries following, this fire of interest in religious doctrine gradually died down. The Crusades, the wars of religions, right up to the violence in Northern Ireland…might be better seen as struggles for land and power, rather than religious conflicts. What was really happening was that a new fad…a new cycle…a new bubble was forming – this one centered in Western Europe and focused on power, politics and war.

The twentieth century, in which we spent most of our lives, was when this trend reached the bubble stage…and finally popped.

We recall life as a student in Paris in the 1960s. It must have been like being a student in Constantinople 16 centuries earlier. We sat around in cafes arguing the most obscure and preposterous points of doctrine. But they were political doctrines …not religious doctrines. Which ‘ism’ was better – Marxism, communism, Trotskyism, radical syndicalism, Maoism? How could the proletariat be radicalized in pre-industrial societies, we wondered? Who set up Che in Bolivia…the CIA or bourgeois counter-agents in his own movement? We tried to make sense of Sartre…thinking he was a kind of secular saint. We read and reread. We argued. And none of us had the slightest idea of what we were talking about.

Reading a history of the Spanish Civil War, we find the same effervescent enthusiasm for politics. All of a sudden, people felt compelled to take a position on something heretofore they had never thought about at all. One joined the Communist Workers. Another lined up with the Anarchist Militia. Still another thought his place should be with the Catholic Landowners League. And every one of them reached for his gun. Soon, they were killing each other with such vigor it would take another seven decades for the wounds to heal.

The 20th century was clearly the bubble phase of the world’s great love affair with politics. The death toll was staggering – more than 100 million. And then it was over. People looked around sheepishly. They felt embarrassed. They prosecuted a few war criminals…but generally wanted to think about other things… and then they moved on. To Mammon!

Money never seems to have the hold over people that power and faith do. Still, from time to time, it seems to flair up as the ‘main thing’ in people’s lives. Jesus said that it would be easier for a camel to go through the eye of a needle than for a rich man to enter the kingdom of heaven. In 2007, there seem to be a lot of people willing to take a chance.

Jesus said a great number of things that are inconvenient. In one instance, for example, he says you have to hate your father and your mother. We thought he must have been exaggerating, so we asked our brother-in-law, who is a Baptist minister in Southern Virginia. “Did Jesus ever use hyperbole to make a point?” we wondered.

“No, he nevah diyid,” came the answer.

We see signs of this interest in Mammon all over the world. We traveled around the world a few weeks ago, and coming out of the Bombay airport, into one of the noisiest, dirtiest, poorest and most crowded cities on earth, what did we see – a Rolls Royce dealership! Apartments were selling for millions of dollars, and the Indian stock market index was at an all-time high.

In Paris, we just bought an apartment. We were staggered not only by the price of the apartment, but also by the cost of fixing it up. All we can say is thank god for the mining shares we bought last year. They’re up at record prices too.

In Paris, also, our son Jules goes out to something he calls an Ice Bar. We don’t get out very often ourselves…so we don’t know if this is something unusual or not. But it sounds like an extraordinary way to waste money. The bar is literally covered in ice…and the whole place is like the inside of a giant freezer. Why anyone would want to go to such a place, we have no idea, but Jules says it is very fashionable and very expensive.

In New York, too, we’ve been told that young hedge fund managers and investment bankers go out to celebrate ripping off some poor pension fund by ordering $1,000 martinis. And of course, here in London, prices are so high that most people in the city would consider a $1,000 martini a bargain.

Everyone seems to want to show off, to splurge, to celebrate the one thing that matters most to them – making money.

Every bubble era, too, has its winners and losers…its kings and queens as well as its cannon fodder and concentration camp victims.

Most of the new bubble royalty – of this era – work here in the City or on Wall Street. They run hedge funds…or investment banks, making a fortune from the huge gush of liquidity that is flooding the world. The Economist estimates liquidity to have risen at 18% per year for the last four years – “probably the fastest pace ever,” it says. Liquidity lifts up almost all financial boats. So, the captains of industry and finance have never had it so good. Too bad the galley slaves aren’t doing better too.

But someone has to row the boat. That’s one of the big problems with public spectacles. They turn the ordinary voter…the patriot…the soldier…and the saver…into chumps! He has to go fight and die…in wars that mean nothing to him personally. He has to be set up and then wiped out by inflation and stock-market crashes. He has to be hornswoggled by every bit of mass thinking claptrap that comes his way…he ends up trapped into believing the most absurd things…and then he is ruined when the inevitable disaster finally comes.

For every excess has to be dealt with; every bubble has to be pricked. Market bubbles have to sell off. Imperial armies are eventually defeated; all empires – like all paper currencies – eventually disappear. Religious heresies are stamped out – or, sometimes, they exterminate themselves – with belief systems so pure they do not even permit themselves to procreate, such as the Albigensians, or the Cathars.

But back to the here and now…and back to the bubble kings.

Corporate managers are also riding high, especially those in the financial industry. But, after a long surge in salary increases, corporate boards are starting to stiffen up. Executive compensation rose in 2006, but much less than the year before, say the estimates; corporate compensation boards were both embarrassed and afraid of getting sued. Poor Robert Nardelli, CEO of Home Depot, may have marked the turning point. He was just ushered off the corporate ship with a mere $20 million in bonuses.

Do we envy the corporate over-achievers? No, not at all. Now, everyone has it in for them – prosecutors, tax collectors, ex-wives and even the gods themselves. “It’s the fat pig that gets the butcher’s knife,” goes the old Cantonese saying.

What bread do these people eat? What water do they drink that makes them so extraordinarily valuable? At $15 million, top executives are now making about $300,000 a week…or $60,000 a day…or $7,500 an hour – more than a thousand times more than the average guy.

Do any of these corporate stars deserve even $1 million, let alone $17 million or $250 million? There are probably plenty of people who would do the job just as well for less money. We say that from experience as well as theory. We have been CEO of our own publishing business for nearly 30 years. If ever we did anything worth $1 million in a year, it was an accident. Granted, ours is a very small business. But running a small business is harder in many ways than running a big one. In a big company, you have squads of highly-paid professionals to help you cook the books. In a small company, you have to work in the kitchen alone.

The aforementioned Mr. Fairbanks owes his fortune to two things: he heads a company that is in the debt mongering business at a time when debt has never been more popular and he heads up a business whose owners are idiots. In theory, Capital One Financial’s profits should go to the capitalists who own it. Instead, a big chunk of them go to the managers, the wily hustlers who figure out how to hijack the enterprise for their own interests.

The press gives us two ways to look at this phenomenon. On the one hand, the plebes and finger-pointers are outraged. Greed, they shout. Excess, they chant. Regulation, they demand. Something should be done, they say, to cap executive salaries. Apparently they think executive salaries should be determined by politicians rather than businessmen, that is to say, by muggers rather than by swindlers.

Of course, there’s another way to look at it. Capitalism is the finest system ever devised, say believers. It is great because it permits shareholders to run their businesses anyway they want. If it gives huge incentives to corporate managers to increase ‘shareholder value,’ well, that’s just what makes it work so well. Besides, every mother’s son in America, 2007, hopes he might someday be able to work his way to the top of a big corporation and get that kind of money for himself. He’s not worried about heaven; he figures he’ll be able to grease his way in somehow.

Will he? We don’t know, of course. But in the here and now, is there anything out there that supports Emerson? Is everything in the world really moral? Have not all these people got away with something?

Again, it depends. From one point of view – the point of the view of the people who get them – enormous bonuses are something to celebrate. From another – from the point of those who don’t get them – they are terrible examples of waste and extravagance. Since the people who don’t get enormous bonuses clearly outweigh those who do, we can imagine a time of rebellion among the unbonused masses.

But then again- we are not sure we think that bonuses make such a big difference either way. After all, they will ultimately be spent, and usually in as inexplicable a way as they were earned. The waiters at the Ice Bar, Rolls-Royce salesmen, condominium boards, a host of workers and middlemen stand ready to relieve the rich of their riches. It is not simply that in the long run we are all dead, as Keynes said. It is that in the short run we all have to live, and there is nothing to say that a Goldman bonus is necessary to do that well.

But that is the delusion of the current public spectacle, and who are we to stand in its way?

All of it in the end, after all, is God’s world too…a world full of cycles of delusion…and vanity…alternating with despair – where the rules can be forgotten but never suspended. It is this exquisite jewel of a system that we celebrate today…rich, rewarding, uplifting…full of humbug and hallucinations…but where all wealth…and all things…and all the public spectacles…and all of us…fold back into the mantle too…and eventually get what they’ve got coming.

Regards,

Bill Bonner
The Daily Reckoning
January 19, 2007

Editor’s Note: 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

Hmmm…hmmm….hmmm…

If we had a rocking chair on the front porch, we would rock…if we had a front porch.

We’re waiting…biding our time…searching the horizon.

Everyday, we turn on our computer to get the latest news…hoping for some movement that will prove us right. And every day, nothing happens. (More below…) We are becalmed in a sea of liquidity.

The Daily Reckoning has its ‘Crash Alert’ flag flying in front of the company headquarters. Looking out the window…or at the headlines…you’d wouldn’t expect any trouble. When have things ever been better? Stocks rising. The housing bubble is now coming in for a ‘soft landing;’ everybody knows that. Oil is going down. And the winter will soon be over. People are beginning to wonder why we remain on ‘Crash Alert.’

“What do we know that they don’t?” they ask.

“Nothing,” is the answer.

All we know is that when liquidity is rising at the fastest rate in history – with New Inflation that is not completely controllable by the central bank – somebody’s money is going to be flushed away.

How? When? Whose? We wish we knew.

But we have a feeling that we are not completely alone. Look at the price of gold. While oil has dropped to $50 a barrel, gold has gone up. In January 2005, gold was still only $425 an ounce. Now, it is $625…after having gained 20% last year.

Other commodities are up…down…all over the place. But gold keeps gaining ground. Why? Because it is the ultimate antidote to rising liquidity. People have wealth…money. They are happy to put it to work in the hope of earning more. But when they begin to worry – about inflation…or about deflation (about the real value of the paper assets they hold) – they look around for safety.

Typically…they find gold – because gold has always been a source of financial safety. No, it doesn’t necessarily go up; and it doesn’t necessarily go down. It never pays a dividend. But it never goes away.

The remarkable quality of gold is its steadfastness. Most of the time, you could care less. Why would you want to hold a lifeless, dividend-less, cold, inert yellow metal, when you could own a warm, living, productive business…or a farm…or a Treasury bond? You wouldn’t. Most of the time, holding gold is not a very shrewd thing to do…unless you are in the banking business. But the same thing that makes gold useless most of the time makes it invaluable occasionally. It is a bit like an annoying friend or an insurance policy. Most of the time it is a waste of time and money; then, once in a while, you are glad you have it.

We’re not sure of anything…but it looks to us as though this is one of those times.

More news:

————–

Eric Fry, reporting from Orange County, California…

“Greed is one reason why brokerage stocks might be dangerous stocks to own at their current lofty valuations.”

For the rest of this story, see today’s issue of The Rude Awakening

————–

And more thoughts on this stormy January day…

*** Our old friend Jim Rogers is in the news again. Bloomberg tells us that he expects oil to go up to $100 a barrel, ‘after a correction.’

Yes…he is surely right. After that New Inflation finally becomes old-fashioned consumer price inflation…then we will see a lot of prices rise…spectacularly. But until then, who knows?

*** Is there a commodity more precious than oil? Chris Mayer seems to think so – and what he’s talking about just may surprise you…

“Water is the most basic and necessary commodity,” observes Summit Global Management, “and it is the only element in the world that has no substitute at any price. One can substitute wheat for oats, coal for natural gas, corn oil for soybean oil and hydro-electricity for fossil-fuel generated power, but…water has no substitute regardless of price, the only element in the world of which this is true: This most fundaments of facts is another key to the inexorable and intractable demand for water that will not abate with time.”

“Without question, therefore, clean water is the earth’s most precious resource. But this essential truth has not prevented decades of water mismanagement,” Chris explains.

“Throughout the world, clean water is underappreciated and woefully abused…except by the billions of people who struggle to find it each day…or die trying. Only 20% of the world’s population currently enjoys the benefits of running water. The other 80% have to find it whenever and wherever they can. In some parts of the world, people spend as much as six hours a day fetching water.

“For most of the world, clean drinking water is a far more precious commodity than oil.”

*** Vanity…vanity…all is vanity.

We can’t wait for some clarifying event…something that will prove we are right! A crash…a depression…the collapse of the housing market…the fall of the dollar…a run on the banks.

Not that we want people to suffer. We are not mean, just vain…and uncertain. We need to know for sure that we are right.

‘You can’t get something for nothing,’ we keep saying. And yet, when we look around, we see a lot of people getting a lot of something for not much of anything.

Americans are living higher on the hog than they can afford, in our opinion. They’re buying things they don’t need with money they don’t have and trusting that the moment of truth will never come.

But we need that moment of truth. Without it, we wouldn’t know what the truth is. Without it, we have to watch people get rich shuffling money…and living on credit without repaying…and buying works of art at absurd prices…and saying preposterous things and getting away with it…and we have no way to prove any of them wrong.

People look at us and say: “If you’re so smart, how come you’re not rich?”

What can we do? Our vanity is pinched. We feel the pain and reply, “Well, if you’re so rich, how come you’re not smart?”

But the retort bounces off. The rich are armored by their wealth. Hedge fund managers…the investment bankers…the fellows who take over, merge, arbitrage, derivatize…shuffle…and reshuffle the financial deck, deftly slipping an ace or two up their sleeves every time they cut the cards…are still held in esteem, not in jail – at least in America. In other countries, wealth is not such a badge of honor. But in America, the wealthy are regarded with awe. Normal people practically double over in their presence, like pilgrims in front of the True Cross.

No, dear reader, we need a clarifying event. Either we are wrong…or we are right. We need to know.

But, on the other hand, what is the hurry? Things are bound to sort themselves out. And anyway, when we finally get our moment of truth…people are likely to hedge. Well…yes…but…

…that was only because…

…and if so-and-so hadn’t done such-and-such, it would have turned out differently…

…and you could look at it in an entirely different way…

and, soon, it won’t seem quite as simple and true as we had hoped.

Ah, that is the problem with vanity, dear reader. Even when you think you have been proven right…others will still take you for a fool.

*** So don’t fight ’em…join ’em.

We find on a website called fintag.com that we too can get into the hedge fund business:

“HEDGE FUNDS FOR MORONS,” begins the article, which is a reposting of the article “A how-to of hedge funds,” from Financial Times.com.

“‘Nowadays there are two kinds of people in the financial world – those who want to run a hedge fund, and those who want to invest in one,’ argues Hannah Terhune over at Capital Management Law.

“‘Today, pretty much anyone with $15k or thereabouts can start a hedge fund,’ says Hannah. ‘What money cannot buy is talent, courage and entrepreneurial drive.'”

This $15,000 figure must be an error, fintag comments. You’ll spend that much in a couple of consultations with lawyers. Maybe $150,000 could get you started.

“‘The how-to guide, reprinted at Moneyscience.org, includes advice:

1. Key items needed to start a hedge fund (‘money, a lawyer, a prime (or introducing) broker, office space (or a home office), and eventually, an accountant’)

2. Time-line (‘The legal process of setting up a hedge fund usually can be completed within 60-90 days’)

3. Where best to set up an offshore hedge fund (Cayman Islands or the Bahamas)

4. Who can invest in your hedge fund (generally limited to very high new worth individuals or plans with funds in excess of $5 [million])

5. ‘Incubator’ hedge funds (A way of testing the waters – ‘setting up an incubator hedge fund allows a hedge fund manager to develop a track record which will assist in attracting investors later in time)'”

Oh, if only we had had this helpful information two years ago. We could have begun a hedge fund based on our Anti-Liquidity Variable Evolutionary Model Portfolio Theory.

Which is to say, we could have taken in $1 billion…made a single call to place the money in gold bullion…and then taken a two-year vacation in the tropics.

Let’s see, first we get 2% of the capital each year…so that’s $20 million each year, or $40 million for the two year period. Plus, we get 20% of the gain. Gold rose about 47%…that’s a profit of $475 million…times 20%…well…that’s a cool $95 million for us. $95 million plus $40 million equals $135 million. See how sweet this hedge fund business is?