Intermediaries

Mr. Deport was born the same year I was. He is a farmer — one of our neighbors in rural France. A visit to his farm is like a trip to Cold Comfort Farm…or maybe a set for a Monty Python movie. There are dilapidated stone buildings with shutters askew, a pile of manure as big as a house and mud everywhere. A broken hand pump sits atop a well in the middle of the courtyard. Rusty machinery sinks into the mud in every unused corner. We sat in the billiard room in front of the fire as Mr. Deport recalled his youth and explained how much more difficult farming has become.

“When I was young, in the `50s,” he said, “you could make a living on a small farm. You weren’t rich. But you weren’t poor either, even if you didn’t have any money.

“I could take a bag of wheat to the baker, and he would give me 26 loaves of bread for it. And they were big loaves, not like the loaves today.”

“Of course,” the wheels of calculation beginning to turn, “the baker won’t even take your wheat anymore. You have to sell it to the wholesaler. And he gives you just 49 francs for it. How much bread can you buy for 49 francs? Well, maybe about four loaves — but they’re only about half as big.”

By this arithmetic, a bag of wheat is worth only about one-seventh what it was in the `50s. But since bread is made from wheat — what we are really measuring is the widening gap between wholesale and retail. Wholesale commodity prices tend to fall in real terms — while prices of finished products go up.

Who gets the money?

“Intermediaries,” said Mr. Deport, probably thinking, “parasites.”

I had a meeting with one of these intermediaries on Friday. As a resident of France, I pay taxes in both the United States and France. The French tax rate was negligible early in the 20th century — as it was in America. But it is now 54% on marginal income, plus, of course, all the other taxes you pay, including a valued added tax of nearly 20% on almost everything you buy. And don’t forget the “wealth tax” — in which you pay a percentage of your entire net worth to the government each year.

Fortunately, there is a tax treaty between the United States and France. Americans are excluded from the wealth tax for five years — except on their French property. And they get to credit the taxes paid in America against their French tax liability, or vice versa.

I really have no idea how it works. I would prefer to be robbed at gunpoint once a year and be done with it. Instead, I have to pay the intermediaries of government more than half of everything I earn. And I have to pay more intermediaries on two continents to figure out how much to pay.

The two attractive young women I met with on Friday were both bright and friendly. I could have stayed to chat with them, but I reminded myself that they were tax attorneys billing me by the nanosecond. Even with my eye on the clock, I know I will get a bill for more money than the average annual per capita income in most places.

At the tollbooth on the highway back to the city, I was reminded of yet another intermediary. A gendarme stopped me to inspect the stickers on my windshield. You’re supposed to have one that shows you paid the annual car tax — which I did. You’re supposed to have another one that shows you paid your annual insurance bill — which I didn’t. He was nice about it, only giving me a friendly reminder. But it served to recall the high cost of insurance. The baker, the trucker, the maker of the ovens — they all need to have insurance, as I do. Much of the insurance is not to protect against the real hazards involved — but to protect against the trumped up hazards of tort lawyers.

And, of course, there are the “social charges” and all the other intermediary expenses of hiring anyone — expenses that have nothing to do with actually making and delivering a product.

Farming used to be a fairly straightforward business. The accounting books from our farm are still in the attic. I can look and see that they record each transaction in an understandable manner. “Sold to Mr. Deshais, one pig, 51 kg., 120 francs. Paid to Mr. Bougeon, 42.50 francs for 10, 2 cm. X 10 cm. X 3 m. boards.” Debits on one side; credits on the other. But it’s not simple anymore. Another of my neighbors sells a software program to help farmers keep up with the paperwork requirements — and help them figure out how to run their farms. Decisions are no longer made on the basis of how much grain or beef they will produce per unit of labor and capital — but on how much will be received in subsidies against the amount of paperwork and regulation that they entail.

Mr. Deport stopped growing wheat many years go. Instead, he runs a small dairy operation. But he’s ready to give that up, too. The final straw is a new tax — on cow manure! Manure is charged with contributing to global warming. So the politicians have proposed to tax it. The money, Mr. Deport opines, will be designated for “environmental” projects — such as re-introducing wolves, which will attack his calves.

“Forget it,” he says. “I’ve had enough.”

Bill Bonner

Paris, France January 31, 2000

*** Remember the “wealth effect?” Well, Friday, investors got to meet its evil twin — the poverty effect. That’s what you get when stock prices head down.

*** Ordinary people, who put money into stocks to help finance new cars, vacations, houses and retirement, suddenly discovered that they have less to spend than they thought. This will not come as news to hardened investors, but it is a bit of a shock to Mom and Pop: stocks do not always go up.

*** Those who had their wealth in Dow stocks have about 4% less money this week than last. Those with more of a taste for risk, who held Nasdaq 100 shares, for example, are 10% poorer. The S&P, meanwhile, went down 5% during the course of the week.

*** No one cares if old-time investors lose money. They’re like people who go to the racetrack — they’re supposed to take a drubbing now and then. Heck, it’s part of the fun.

*** But when people see their retirement savings disappearing, it is a source of real problems. They will almost certainly cut back spending. It would not be surprising to see a recession later this year. And if stocks fall too much — investors might even get panicky.

*** But it’s too early to tell what’s really going on. The Nasdaq fell 152 points on Friday. Commentators blame the fall on worries about the likelihood of a rate hike later this week. Another way to look at it is that investors came to a “moment of truth” during the past week.

*** One of the things that might have triggered the moment of truth experience was the announcement by Amazon that the company was laying off 150 people. If growth prospects were really infinite…if the company is expanding at such spectacular rates…why would people be laid off?

*** Amazon’s stock fell five points. It’s now down 40% from its high. Richard Russell reports a rumor that Amazon is going to raise a lot more money — a billion dollars. Hmmm… This could be the coup de grace to the whole Internet bubble. Should be fun to watch. Yahoo is down 30%.

*** The Nasdaq was worth 5% of GDP at the start of the ’90s. Now, it’s worth 50%. Even with spectacular growth in Nasdaq companies — and assuming that all the companies on the Big Board just sat on their hands — you might expect the Nasdaq to be worth, say, 10% or 15% of GDP. Nasdaq stocks have to give up about $3.5 trillion of nominal value to get where they ought to be.

*** Clarification: this doesn’t mean that the Internet won’t be a smashing success. But Internet businesses are still businesses. And investors will eventually price them like other businesses — relative to what they actually earn.

*** Amazon’s layoffs remind us that Amazon is just a business — with all the sort of problems that normal businesses have. Why shouldn’t it have a normal stock price?

*** As for the Internet, I am more and more inclined to believe that it will be like other communications breakthroughs — telegraph, railroads, telephone, radio. It will change everything…and nothing. It will revolutionize life on the planet — but life will go on pretty much as before. The Internet is momumental, but not serious.

*** GE is down, too. I’m watching GE because I believe its stock is reaching its own moment of truth. Jack Welch may be a genius…but it’s just a business like any other. And it’s selling at twice the multiples of similar companies.

*** Meanwhile, GM also went down. But GM is already so cheap that they are practically giving away the auto business. I don’t know what the future holds for GM — but if they are willing to give away one of the world’s leading auto companies…take it. Short GE…long GM.

*** The techs got hit hard, too. QUALCOMM went from seven to 200 last year. Now, it’s about 110. Even at that price, it’s selling at a lunatic 387 times earnings. Will it soon get back to where it started? We’ll see.

*** Almost no matter what stock you owned on Friday, chances are your net worth declined. Sixteen stocks hit new highs. More than 10 times that many hit new lows.

*** You can learn more about Doug Casey, whose views on China were discussed on Friday, at http://www.douglascasey.com

*** Let’s see…what else is new? Probably a lot. But it’s very early…I’m flying back to Baltimore this morning, so I’m writing this before my usual news services are up.