The Ides Of March

Fates, we will know your pleasures:

That we shall die, we know; ’tis but the time

And drawing days out, that men stand upon.

Shakespeare’s Julius Caesar I arose from my bed this morning, thinking about it. I took a bath brushed my teeth thinking about it. It was on my mind as I sat at the kitchen table – eating a bowl of bran flakes with a sliced banana. It dominated my thoughts as I put on my clothes…and walked along the street to the subway station…and mounted the train for central Paris. Even as I read the newspaper on the subway…and then made my way to the office – passing cars, stores full of appliances and furniture…billboard ads…and people on their way to work – and still, as I sat down at my desk and turned on my computer – I cogitated, like a computer doing a calculation in the background, on the idea.

All of the time I was surrounded by things – nourished by them, warmed and protected by them, transported by them, annoyed by them…admiring their shapes and forms…and using them as tools for various tasks. All of these things are wealth. Materially, they are all that separates me from the rangiest savage in the most godforsaken backwater on Earth. He must think too…he must have his emotions…his tastes and his beliefs. But I have more things.

It is in things that we measure wealth. Dollars, yen and euros only have value to the extent that they can be traded for things. And it is these things that allow us to make more wealth. Put me at the controls of a backhoe, fill the tank with fuel, and I will dig a bigger hole, faster, than even ten primitives with wooden hoes!

These things do not just appear. They are designed, built, distributed, and sold by teams of people – all of whom have their own ideas, expertise, capital, management style, resources and limitations.

Information is everywhere throughout the system – guiding, misguiding, confusing, informing. Like the latest management fads, sometimes it is useful, and sometimes it is as useless as an analyst. But until the thing appears – the tangible item that we can use, consume, enjoy or despise – the information, management, skill and capital behind it is only a potential value, not a real one.

But America’s ‘Cult of Information’ has performed its purpose. It has inspired and sustained an immense bubble. Stock prices have reached levels not seen since the late ’20s. Companies with no profits and no proven business plans have been given billion-dollar market caps.

To the question, ‘how could such values be justified?’, comes the answer: ‘They have information capital that doesn’t appear on the balance sheet.’

The ‘information’ illusion has persuaded people all over the planet to accept U.S. dollars – as though they were valuable. It has seduced foreigners not only to provide goods and services in exchange for dollars – but to invest those dollars in the U.S. economy, because it is the U.S. economy that leads the world into the “Information Age.”

Grand bubbles need grand illusions to sustain them…and, often, grand mistakes to deflate them.

Caesar’s military campaigns were waged well and successfully – especially against the Gauls in France. Ordered back to Rome, where he was to be stripped of his command, Caesar instead took a bold gamble. He ‘crossed the Rubicon’ with his army – which was forbidden – and eventually won a civil war.

But just as nothing sets up a man for huge losses better than easy profits — nothing prepares a man for disaster better than success. Caesar then made a monumental blunder – one which Napoleon imitated 18 centuries later. He had himself declared ‘dictator for life.’ This act cheesed off the Senate to such an extent that a group of them – led by Caius Cassius and Marcus Brutus, who delivered the ‘unkindest cut of all’ – put a dagger into Ceasar’s remarkable bubble of ambition on today’s date in 44 B.C.

The last time the U.S. faced a major bear market was in the late 60s. Then, the sustaining illusion was that American business management and the size of the domestic market made U.S. businesses unstoppable. American go-go marketing, branding, quality manufacturing and financing were the envy of the entire world. The dollar was also the currency of choice for anyone who could get his hands on it.

But the ’60s were followed by the ’70s, in which the illusion was destroyed completely – thanks to inflation, a bear market, Richard Nixon, Jimmy Carter… and others.

In the 1980s a new illusion arose – that the Japanese economic system was unstoppable. A popular book of time reflected American’s admiration for the Japanese: “Theory Z: How the U.S. Can Meet the Japanese Challenge.”

It was less than twenty years ago, but the Japanese boom seems to have fallen into a black hole of memory. In the 1980s, Japan’s GDP growth followed almost exactly the pattern of the U.S. in the 90s, beginning the decade with a growth rate of about 2% and ending it growing at 6.3%

The Nikkei index, meanwhile, performed even more spectacularly: it was only 6,500 at the beginning of decade and nearly 39,000 at its close.

For reference – or amusement – the Nikkei is now below 12,000 and the economy’s growth rate is about zero.

Nor did the Japanese sit idly eating their raw fish as the Japan, Inc. went belly up. They “did everything imaginable” says Christopher Byron in a recent article. Interest rates were reduced to zero and public spending (a.k.a. fiscal stimulus) went wild.

Is there anything else they could do?

“If I were the head of the Bank of Japan, I’d charter every helicopter I could get my hands on,” said a “top global market analyst” quoted by Byron, “fill them with money and dump the cash over downtown Tokyo starting tonight. That economy has simply got to be reflated somehow. We are at a critical juncture.”

We are at a critical juncture, dear reader. But destroying the yen would probably not solve the problems the world economy faces.

Money is only valuable because it’s supply is limited. Dropping it from helicopters may encourage the Japanese to spend it quickly, but who will want it? American economists have been advising Japan to destroy the yen for the last ten years. But this would not solve Japan’s economic problem…it would merely add a new dimension to it – a monetary problem.

Could it be, dear reader, that Japan’s economic problem – and America’s – is not something than can be solved? A collapse may not be avoidable. Instead, perhaps it must be endured. Like death, it is merely a question of when and how – not if. Bill Bonner Paris, France The Ides Of March

*** Mr. Bear just couldn’t restrain himself. After backing off for a day, he couldn’t resist going back into the market and having some fun.

*** The Dow got mauled, ending the day below the 10,000 market – down 318 points. And the Nasdaq was scratched for a 42-point loss.

*** The ‘two most dangerous stocks’ – IBM and GE – both suffered losses. IBM fell $3.54. GE dropped $1.30 (3%).

*** There were only 766 stocks making progress on the NYSE, against 2316 that declined.

*** Still, it could have been worse. The popular view is that while the tech sector was overvalued – everyone says they knew it all along…even the analysts! – the ‘Old Economy’ companies were still healthy and benefiting from new technology. In the last three days, that benign view has been blown away. The Dow is going down too.

*** “The Nasdaq will be down 75%” when the bear market is over, according to John McGinley of Technical Trends. “And the Dow will be down 50%.” How will you know when the indexes finally hit bottom? “Call up five friends,” suggests McGinley, “and ask them if they’re still checking stocks. If they say ‘no’ – it’s over.”

**** The Leuthold Group figures that the average length for a bear market is just a little shy of 3 years. Most people would mark the beginning of the bear market at last March – when the Nasdaq topped out. If so, and this is an average bear market, you can expect to wait another two years before the big bottom makes its appearance.

*** Looking on the bright side: “We are definitely in a bottoming process,” says Byron Wein, Morgan Stanley’s investment strategist.

*** And investors, though worried and frustrated, are not yet panicking. “I’m in it for the long haul,” said Jeffrey Hutchins, interviewed by the Detroit Free Press. Mr. Hutchins goes on to say that he hopes his fund managers are “buying like crazy.”

*** If you are going to buy over-priced stocks in a bear market – ‘buying like crazy’ is probably the only way to do it. “I’m holding Cisco, Intel, Palm. Everybody has a Palm,” said another clueless investor.

*** Yet, the Dow is down 7.5% this year. This week alone, investors have lost $680 billion – or about $7,500 for every family in the nation.

*** The ‘reverse wealth effect’ is bound to start pinching consumers soon. USA TODAY reports that household’s net worth declined 2% last year – for the first time since 1945.

*** “The bursting of the stock market bubble has eroded household balance sheets and undermined the willingness and ability of Americans to spend as aggressively as they had been spending,” said economist Mark Zandi. Associated Press reports that “Retails Sales fell unexpectedly in February.”

*** The Fed’s rate cuts will probably turn the situation around, explains Paul Krugman, but “there is the small but scary possibility of a Japanese-style trap, in which even cutting rates all the way to zero turns out not to be enough.” How great are the chances of a Japanese-style trap? More below…

*** The dollar rose yesterday. And gold fell $4.60. So far, gold and the dollar have resisted nearly all my analysis, recommendations, and tedious harping. Alas, dear reader, there is no point in my telling Mr. Market what he SHOULD do. He will do what he wants.

*** In 1999, Americans consumed about 96.1 quadrillion British thermal units of energy. The Energy Dept. projects U.S. energy consumption will grow about 32% by 2020. Dan Ferris has been following what he calls ‘The Internet’s Dirty Secret’ since early July 2000. The company he recommended, CONSOL Energy is up 103% in the last year.

“At 19.3% and 20.4%,” says Ferris, “coal producer CONSOL Energy’s 5-year and 12-month returns on capital are the highest in the energy business.”

*** Elizabeth tells me that it is now illegal for her to ride her horse outside of our own farm. Horses do not usually get hoof and mouth disease. But they have both hooves and mouths and may carry the malady.

*** Jules, Maria and I went to see the movie, Stalingrad, last night. This is the second film I have seen about the great battle. The first one was made by a German. This one was made by an American company but with a French director using mostly British actors.

*** In the German version, the poor German soldiers are starved and shot down by the Soviet Army. In this version, it’s the poor Russian soldiers who are beaten, shot in the back, herded onto locked cattle cars, and mowed down by machine guns – also by the Soviet Army. And if they survived – they still had to face the Germans! More below…

*** Meanwhile, “Dublin is hopping,” notes Addison, who recently passed through there on his way back to Paris. “For the first time in about 1000 years of history Ireland, rather than exporting labor, is experiencing net immigration. More people of non-Irish decent are moving into the country seeking work, than Irish are leaving to seek work elsewhere. And more than 50% of the population of Dublin is aged 30… or younger. Never before have the young had a reason to stay.”