The Rich Are Different

“A fool and his money are soon parted.”

– An old saying “A rich man came up to Jesus with a question. ‘How can I be sure of getting into heaven,’ he asked.

“Well,” replied Jesus, “you have to obey the 10 commandments.”

“No problem there,” said the man, “I have obeyed them since my youth…”

I cupped my ear with my hand to make sure I could hear what followed. Pere Marchand was recapitulating a particularly annoying gospel passage. His voice quaked whenever he quoted the words of Jesus. Moderating your voice in that way is probably not required in the handbook of reverence, but the gray-haired priest must have felt that he was getting too old to take chances:

“Well, then,” said Jesus [perhaps with a challenging twinkle in his eye], “you can give all your wealth to the poor and follow me… for it is more difficult for a camel to go through the eye of the needle than for a rich man to enter the kingdom of heaven.”

Preachers and rich men have wrestled with this passage for many generations. The priests, who have taken a vow of poverty, generally take Jesus’s words without question. Rich men, and those who want to be rich, even the one speaking directly to Jesus, balked. They would rather be camels…

The Nasdaq has lost about a third of its value from its high of March. Few people will rejoice – even though, taking the Biblical passage literally, they now have a better shot of getting into heaven. Surely, a few months of losses, followed by a few years of relative poverty, is worth an eternity in heaven? But why would being a greater fool get you a ticket to heaven?

Today’s letter, dear reader, has no answers to these questions…just more questions.

Taking the logic on its face, taxes must make it easier for people to get into heaven too. At least those from whom the wealth is looted will have smaller humps – and will pass more easily through the eye of the needle. On the other hand, the people to whom the loot is given may find themselves – along with tort lawyers and rap singers – doomed to hell. At least, I hope so.

Barron’s reports that Warren Buffett, the son of a moss- backed member of Congress and now a “Democratic Party stalwart,” appeared at Columbia University to endorse the candidacy of Hillary Clinton. Buffett told the audience that he considered himself “very under-taxed.”

Buffett, the fourth richest man in America, says he doesn’t mind the estate tax either. “I do not believe in the divine right of the womb,” says the billionaire who forced his daughter to sign a promissory note before he would lend her $20 to pay for a pizza.

Buffett likens inheritance to welfare: “People are leaving tons of money to their kids. And when those kids emerge from that womb, instead of a welfare officer, they have a trust fund officer.”

Buffett is so rich; how come he’s not smart?

Whoever gets Buffett’s wealth risks being damaged by it, if not in this life, perhaps in the next. He may choose to give it to his own children, or to welfare children. It’s up to him. There is no ‘right of the womb,’ divine or otherwise.

The only issue is who decides what happens to Buffett’s money – Buffett himself? Or the government? Yet, Buffett sees no difference in having his own children receive money willingly given by him or forced at the point of a gun from unwilling taxpayers.

You may recall my discussion of the ‘marginal utility of money’ about a year ago. The principle is simple: each additional dollar you earn is worth less than the last. You can easily see why. If you have only $5 to your name, and someone gives you $50,000, it will completely change your circumstances. But, if Buffett were to get an additional $50,000, he wouldn’t even notice. The extra dollar is worth a lot less to Buffett than it is to other mortals.

Thus, Buffett’s views on taxation come cheap. He built his fortune by compounding capital gains, thus avoiding income taxes. Now that he is filthy rich, his excess capital means nothing to him – its marginal utility has declined to almost zero.

Plus, Buffett says he intends to leave his children very little money anyway – the rest he will give away to abominable tax-exempt causes.

“Can’t buy me love…” wrote the Lennon/McCartney team, “Money can’t buy me love.” I’m not sure. Maybe it can’t buy you the best quality love, but at least it will bring you the economy class variety. Studies show that richer men, generally, get more sex.

One of the unattractive features of human nature is the way people regard other people with more money. Let a man make a fortune in the stock market and soon people ask his opinion on foreign policy or tax policy or some other collective absurdity. Why else would Warren Buffett appear on a stage with Hillary Clinton?

Americans are particularly prone to this weakness. With no hereditary aristocracy before which they can grovel, the rich will have to do. People feel an almost irresistible urge to bend a knee and crook a neck when meeting rich people.

But it doesn’t stop there, because as much as they want to genuflect before the super-rich, they are also envious and feel the need to cut the rich down and see them squirm. Many, if not most Americans, would have been happy to see Bill Gates not merely hauled up before the thieves and knaves in Congress – but taken out onto the Capitol lawn and beheaded.

The super rich develop their own defenses. Upper class Brits stutter and do funny things with their mouths when talking. Americans act like buffoons. They become Democrats and hang expensive modern art on their walls – monstrosities that prove their susceptibility to popular sensations. They wear blue jeans and work-shirts. They hug people they don’t know.

Perhaps as evidence that inheritance turns people into Democrats and morons, Nelson W. Aldrich Jr., the author of “Old Money” and the editorial director of Civilization magazine, proudly tells the world that he is happy to pay estate taxes on his family inheritance (which includes a New England Coast beach house where “four generations” of his family have lived).

Perhaps Mr. Aldrich is rich enough, too, so the cost of the estate tax is marginal. Besides, he didn’t earn the money anyway. Easy come, easy go.

Bill Bonner Paris, France October 17, 2000

*** The investment club members I wrote about yesterday were separated from their money sooner than I expected. Intel, the stock they decided to buy, was certainly a “leader in its field” yesterday. It led the losers with an 11.6% drop, down more than $4 per share.

*** Following the giant Intel was the giant Microsoft, which shed 5% of its value. Down $3, MSFT dropped below $50 – its lowest level in 2 years and 60% below its high of last December.

*** Also conspicuous in the pack of losers was the once- giant Xerox, down more than 25% – at a 9-year low of $7. Xerox’s commercial paper is selling for 72 cents on the dollar.

*** Meanwhile, Amazon.com fell $4 a share; this ‘must own’ Internet retailer has lost 75% of its value since the end of 1999. Would it be too immodest of me to point out that I began making fun of this River of No Returns stock while it was still over $100? Yes, it probably would.

*** “Nasdaq’s fall no surprise after meteoric rise” is the headline on Steve Harmon’s Internet Insight. Unfortunately, like so many New Economy analysts, Mr. Harmon may have forgotten to make this point before prices fell.

*** The 30% drop in Nasdaq prices now seems to have been inevitable – even to those who never saw it coming. And now they are as sure that it is over as they were that it wouldn’t happen. “But that won’t stop technology,” they say. Harmon points out that the Nasdaq was only 500 in March of ’91. In the next 9 years, thanks to the wonders of technology he believes, it rose 1,000%. Didn’t they have technology in ’91?

*** Could it be that it wasn’t really technology that lifted the Nasdaq – but debt and irrational exuberance?

*** In January 2000 stocks were worth a record $16.8 trillion, compared to a GDP of $9.5 trillion. Somehow, technology seems to have lifted up stock prices, but left actual output to take care of itself. Even at the height of the Japanese bubble in 1989, stocks only slightly exceeded the value of GDP.

*** Throughout the 90s, consumer credit grew about twice as fast as GDP. Even now, consumers are increasing their borrowing at nearly 10% per year…while a record 1.28 million people filed for bankruptcy last year.

*** This could be an important week for Wall Street. Investors are getting nervous. They still believe in technology and in stock market wealth…but they are beginning to have doubts. If the Nasdaq could stage a rally – it would help restore confidence and complacency.

*** But yesterday, investors seemed to be looking for safety. The Dow rose 46. The Nasdaq fell 26. More worrisome is the fact that 1483 issues declined, while only 1373 rose. Also, there were 3 times as many stocks hitting new lows as new highs. This does not look like a rally. It looks like a pause.

*** The huge California state pension fund, CALPERS, decided to sell its tobacco stocks. Tobacco, though, is one of the best investments the retirement fund has had all year. Would it be too immodest to remind you that Philip Morris rose more than 50% since I suggested it earlier this year? Yes, I guess it would.

*** “Stunning incompetence” is how the head of currency trading at Goldman Sachs described Wim Duisenberg’s remarks yesterday. Duisenberg, head of the European Central Bank, broke the cardinal rule of currency managers – never discuss your strategy publicly.

*** The euro got knocked down below 85 cents, near a new all-time low, and considerably lower than the point I thought might be a bottom. But its leading competitor, the dollar, is still probably “an accident waiting to happen,” in the words of economist Peter Bernstein.

*** And the nemesis of both currencies, gold, lost 90 cents.

*** In late August, Lynn Carpenter issued a report that warned readers to sell the leading Big Techs. “Since Labor Day,” Lynn wrote last Thursday, “those stocks are all down: MSFT down 20%, SUNW down 18%, ORCL down 30%, INTC down 47%… and CSCO down 22%.”

*** Meanwhile, current assets of India’s largest telecom – Videsh Sanchar Nigam Ltd (VSNL) – “exceed current liabilities by a ratio of more than 2 to 1,” writes Grant’s Investor analyst Jay Akasie. “The company has cash equivalent to more than one-third of its market capitalization, and there is no long-term debt – amazing in a world in which global telecoms are often highly leveraged with high equity valuations to match. Despite the potential in VSNL’s vast reach… the stock has failed to click with investors. The company trades at 4.6 times estimated 2001 earnings.” Nigam Ltd. was listed on the NYSE in August.

*** Daily Reckoning fame spreads. A reader reports that Rush Limbaugh refers to it in his monologue.

*** I decided to paint clouds on the ceiling of one of our rooms at Ouzilly. So, I asked Sophia, 18, to try her hand at it as a test. In the billions of clouds, no two are the same. There are an infinite variety of swirls, and puffs, and a multitude of grays, blacks and crimsons…and yet, Sophia’s cloud looked like no cloud that ever existed… or could exist. Instead, it reminded me of a glop of rice pudding, left in the refrigerator so long, mould had taken up residence.

*** Henry, 10, left on a class trip. For 11 days, his class will stay in an ancient abbey a couple of hours outside Paris.

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