The Way We Wish We Were

George Soros calls it “reflexivity”.

It’s the market’s nasty habit of punishing simpleminded hope, group thinking and outsized ambitions. Those who expect unlimited profits end up without a pot to put their portfolio in.

And the best time to sell stocks and take a vacation, it turns out, is the precise moment when most people expect it to rise.

The rest of life is much the same. The left, rational side of our brain is constantly confounded by the other half. We get love not by going after it directly, but by giving it away. We are born…we learn…become wiser… and then, when we finally feel we have things figured out, we die. Good and evil lie side by side in this world, so close, sometimes, it can be hard to tell one from the other. For everything that is created, something is destroyed. And for every little nanogram of courage, truth or justice, some poor soul lies smoldering on an ash heap in hell.

The paradox that the left side of the brain cannot imagine comes to the right side as an intuition: that pride goeth before a fall…what goes up must comedown…and that, over time, all vanities are corrected.

But that is not the world I write about today. Instead, bowing to popular demand and commercial pressures, today I give you the world as we would like it to be – a world dumb enough to be a campaign slogan and simple enough to cause a bar fight:

Daily Reckoning readers will recall that everything was going along just fine until September 11. Investors had not paid too much for stocks. Consumers had not spent more than they could afford. Businesses had not over- invested in unprofitable projects. Americans had not become too confident in their economy and their future…nor had Europeans extended them too much credit.

The revolution led by information technology had seen its bubble popped. The silliness was passed. Earnest men and women were getting back to business, putting those new technologies to work in ways that would permanently boost productivity and increase asset values from here to eternity.

Alan Greenspan had cut rates 7 times already – bringing the key rate to half what it had been at the beginning of the year. The bottom was in sight…Abby Cohen said so. So did almost all the CNBC guests. And Rukeyser’s elves, too.

Then, last week, a group of evil men with horns managed to slip through our normally rigorous security precautions (remember…vigilant security guards even caught Henry trying to board a plane with his super- soaker!)…and knocked the U.S. economy down again, just as it was struggling to its feet. Because of that, the third quarter is probably going to show a loss.

Whatever happens, it is the fault of the terrorists. Who could have foreseen such an attack? Who could have imagined the damage they could do?

But the attack on the WTC and the Pentagon gave Americans a new sense of purpose and of faith in our free economy. Even as I write, a new American armada is gathering – one that will unleash a fury of “infinite justice” on our enemies. Their cities will be laid waste, never to be rebuilt. Their crops will be destroyed and their fields will be salted. Their soldiers will be smitten and their fortifications annihilated. Their leaders will be brought to trial and publicly executed.

Then, with new energy and determination, the American economy will come roaring back. After a brief decline, stocks will rise – and go on rising, nearly forever.

That is what happened the last time America was attacked. Six months after the attack on Pearl Harbor, stocks hit an all-time low. But then, spurred on by the new war economy, stock market capitalization rose steadily, from only 16% of GDP in 1942 to a peak of 78.1% of GDP 30 years later.

That, dear reader, is the world as most Americans believe it to be.

Wouldn’t it be nice if they were right?

Not only would we have the prospect of a new boom to look forward to, but also Osama bin Laden to blame if they are not.

“When people are riled…” writes Frederick Sheehan, “discourse explaining to them their own culpability may be the wrong tactic to employ.”

“The average Congressman may not understand the Black- Scholes option pricing model,” he continues, “but can sense an opportunity to lead a popular crusade.”

Americans are riled. They are sure that whatever ill- wind blows their way must come off the sands of some far-off Arabie, stirred by a man with a beard on his face and a diaper on his head.

They are sure, too, that once America is mobilized against this evil…peace and prosperity will follow, just as it did following the Japanese attack in 1941.

But in 1941, stock prices in America had been falling for the last 12 years – as in Japan today. In 2001 America, stock prices have been falling for only 2 years.

In 1941, America’s factories geared up for a world war, involving vast amounts of material – jeeps, planes, food, trucks, oil, bombs, guns…you name it. The War on Terrorism involves the use of very limited resources.

After all, there are only a few dozen terrorists.

Instead of gearing up, aircraft and automotive industries are gearing down. Boeing alone is laying off 30,000 workers.

In 1941, Americans lacked confidence. They had not yet emerged from the Great Depression. They saved money. They were reluctant consumers. The idea of a “patriot rally,” was absurd back then. Investors could only imagine that stocks would fall further. In 2001, Americans are confident to a fault…so confident that they imagine that almost anything – even a new war – would cause a stock market rally.

The left side of the brain cannot imagine it. But the right side suspects that a real rally will begin only when the idea of it has become as absurd to Americans today as it was in 1941.

Your correspondent,

Bill Bonner
September 20, 2001

P.S. Uh oh. I’ve done it again, I’ve slipped into my bad habit…warning of doom and gloom. But wait…tomorrow I will give you some uplifting commentary. I’ll tell you about another American president, 200 years ago, and his battle with Arab terrorists. But he set his sights lower than Mr. Bush. He aimed for just a little bit of justice…and hit is mark. More tomorrow…

Investors sold off stocks again yesterday. At first, it looked as though the panic selling we’ve been expecting may have finally begun. But there was no panic. Just orderly selling as the big institutions, foreign and domestic, got out.

After falling more than 400 points on heavy volume, the market turned around. This led many to think that, after 8 rate cuts and $5.135 trillion in losses, as measured by the Wilshire 5000, Wall Street had found its bottom.

Probably not.

It’s a major bear market, says Dow Theorist Richard Russell. “All new money should go into short- term Treasury obligations. All stocks should be sold and placed in short term Treasuries.”

Japan’s stocks sold off this morning, too. But Japanese stocks have been selling off for the last 12 years. If a bottom is to be found anywhere…perhaps it will be on the other side of the world…

Eric, what else happened yesterday?


Eric Fry in New York:

– Ouch! Things seem to be going from bad to worse these days. The stock market swooned again. This time the Dow fell 144 points to 8,759 and the Nasdaq dropped 1.8% to 1,528. It could have been worse. In fact, it was. At one point the Dow had fallen down to the levels reached during the Asian Crisis of 1998.

– It’s hard to say exactly what sparked the stock market’s recovery in the final hour of trading. Maybe it was the announcement that Defense Secretary Donald Rumsfeld ordered more than 100 U.S. warplanes to the Middle East. Or maybe it was the mere mention of Robert Rubin returning to Washington for a meeting with Greenspan. (We want Bob! We want Bob!) Lawrence Lindsey was also invited. Whatever the case, we might need similar announcements tomorrow to keep the rally going.

– Outside the stock exchange, lower Manhattan was no more inviting a place than it was on Monday. The area continues to feel like a war zone.

– The health club on the ground floor of 30 Wall St. that once teemed with the chiseled bodies of young financial professionals working up a sweat now serves as a rest stop for emergency workers. It’s also a temporary home to numerous bomb-sniffing dogs. Cases of Alpo are piled high next to the weight machines. Narcissism is certainly more fun than the tedious task of insuring our national security.

– Yet, amidst the emotional hardship, New York City has never seemed more civil. Because everyone shares a common pain, everyone seems to be a common friend. As a native Californian, weaned on stories of mean-spirited New Yorkers, I can attest that this urban legend has always been patently false. It is even more false now.

– It had to happen. Companies are now lining up to blame their poor third-quarter performances on the WTC attack. General Electric was one of the first in line when it announced earlier this week that its Employers Reinsurance Corp. subsidiary, one of the main reinsurers of the World Trade Center towers, would lose $400 million to $600 million after-tax. “It is the first time in more than seven years that GE has had to warn on profits,” the Financial Times reported.

– However legitimate GE’s warning might be, we can expect hundreds more somewhat less legitimate earnings shortfall warnings. This attack provides very convenient cover for already slowing sales and/or managerial incompetence.

– Jim Grant, with whom I share an office, assures me that our building at 30 Wall Street is the absolutely safest structure in downtown Manhattan. It seems that once upon a time the building was the Assay Office of the U.S. government.

– In Grant’s book, “The Trouble With Prosperity,” he notes that an 80-foot smokestack used to extend from the roof. “Through this stack had poured the noxious vapors of melting gold. New Yorkers would take bouillon-bearing dust, foreign coins, or scrap jewelry to the assay office ($100 minimum order required) and receive in return gold bars or United States money at the statutory rate of $20.67 to the gold ounce.”

– To safeguard all the gold on the premises, the three stories above ground rested upon a five-story underground vault. Writes Grant, “Its floors were reinforced up to a load-bearing strength of 1,000 poundsper square foot

The underground vaults were protected by reinforced concrete sheathed with 2 ¬-inch sheetsteel.” I feel better now.– Speaking of vaults of gold, AP reports, “some 11.8 metric tons of gold worth an estimated $110 million and 30.2 million ounces of silver valued at $121 million are buried in the rubble below one of the collapsed buildings in the World Trade Center…” But, “even if for some reason the gold can’t be recovered, there’s plenty of supply in the world. One company estimated the trade center hoard to be 0.3 percent of the global supply.”

– Even if stocks continue to disappoint their most ardent admirers, New York’s commercial real estate market may be picking up a bit. “25 million square feet of office space in lower Manhattan is either completely destroyed or otherwise out of commission,” says my friend Randy Fuchs, vice-president of

– 400,000 office workers have been displaced. This all adds up to lots of opportunity for commercial real estate professionals in and around New York City. “The attack on the Twin Towers has spurred a new real estate and construction boom,” the New York Post reports. “From tragedy some good things come to an industry that was beginning to look down a dark hole,” Lenore Janis, president of Professional Women in Construction, tells the Post.


Back to Paris…

*** “In the wake of last week’s attacks,” writes Marshall Auerback, “outright nationalization of Japan’s troubled financial institutions becomes a very realistic option. In wartime, markets do not operate freely. There is a tendency toward increased regulation and centralized, government-directed activity – even among governments which, under normal circumstances, champion free markets.”

*** Little by little, day by day…the madness of the financial bubble on Wall Street seeps down the East Coast to Washington.

*** Asset values deflate while the conceits of politics get puffed up. Gone is the “lock box” that protected the non-existent Social Security trust funds. Gone is the worry about fiscal restraint or preserving the budget surplus. Gone is the concern about the “moral hazard” of bailing out industries…swept away by the hot air of war whoops.

*** The billions are adding up…but how can you fight a campaign for “Infinite Justice” without an unlimited budget?

*** “Infinite Justice” is nothing if not optimistic. But is nature more likely to allow infinite justice than she was to give up unlimited capital gains?

*** Oh, if only we could live in an irony-free world! More below…