Reversion To The Mean, Part One

"Patriotism…is the last refuge of scoundrels. It also occasionally can be the first resort of shills, not excluding those peddling stocks."

Alan Abelson

Barron’s

Widely reported is the idea that Islam abhors violence and the Koran specifically forbids suicide missions.

But great religions all have one thing in common. They lay on such a light yoke that their adherents can run off in almost any fool direction they want to.

How else can you explain so many mullahs and Muslim clerics throughout the Middle East who seem to support bin Laden and other terrorists?

And is it not at least ironic that in a nation of more than 200 million Christians, hardly a single voice suggests turning the other cheek to terrorists? There it is, about as unambiguously stated as anything Jesus ever said:

"Ye have heard that it hath been said, An eye for an eye, and a tooth for a tooth…But I say unto you, That ye resist not evil: but whosoever shall smite thee on thy rich cheek, turn to him the other also."

As I have explained, the Daily Reckoning is a free service. But if I had the same views as Time magazine, what would be the point of reading? (Not that I am advocating turning the other cheek to murderers. It is just that an unnoticed irony is a dangerous irony.)

The entire American press agrees: the nation has been rocked by a tragic and catastrophic attack, but it seems to have brought out the best in America. Americans are united as never before and prouder than ever…of themselves.

But here at the Daily Reckoning, we are a bit disappointed in our fellow Americans. Just when they seemed to be coming to their senses, after a long spell of overconfidence…they seem to have slipped into even greater fantasy.

The ordinary man seems to have suddenly taken up a vast and unhealthy interest in military affairs and politics, just as he was beginning to recover from his interest in stocks. And now he can scarcely tell the difference.

"If you believe in our great country – that we will survive and prosper – then spend a little money," urges Louis Navellier. "Buy that new sofa. Go out to dinner. Take a weekend getaway. It’ll do your psyche good and help grease the wheels of recovery, as well. AND ONCE YOU’VE spent a little cash on yourself and your family, invest a little in America, too. The stock market represents our future – a bright future, I believe. But don’t invest just to be patriotic. Invest the right way now – with great companies selling at flea market prices…"

History will some day record that following the terrorists’ strike in September of 2001, God, Mammon, and the State curled up so tightly together in Americans’ minds that separating them was like trying to pull apart mating snakes. The nation’s blood is up. Now is the time to act. To speak out. We will have plenty of time for regrets later.

"Wake Up, America!" comes the clarion call from Ben Stein in Barron’s. The terrorists’ attack gave us a wake-up call just like Pearl Harbor, Stein believes. How did America’s Greatest Generation react? "We didn’t worry a lot about hurting anyone’s feelings. We bombed their cities from the air…we won and saved the whole future of mankind."

Bombing cities is a popular theme. "Bomb them all," said one New Yorker, as I reported yesterday, "Let God sort them out."

"Strike hard and fast," adds Stein.

This sentiment has already triggered streams of refugees pouring out of Kabul. Residents of Delray Beach, Florida are said to be packing up too.

If Simon de Montfort had had bombers, he would have used them to crush the Cathar heresy in 1208. Cathars lived in towns in the southwest of France…where they practiced their form of "pure" Christianity. They believed that work was good but that all matter was evil. Why were they considered such a threat? Eight hundred years later, it is hard to imagine. Perhaps it was because they did not eat meat; vegetarianism has always been regarded with alarm in France.

Blessed by the Pope, and joined by men in search of paradise in heaven or confiscated lands on earth, Simon de Montfort led a campaign against the heretics.

St. Dominic despaired of trying to talk sense into them. "I have preached, I have entreated, I have wept…therod must now do the work of benediction."

In the ensuring campaign whole towns were wiped out – with every man, woman, and child put to the sword…many tortured before finally being put to death. A favorite means of killing heretics was to burn them alive at the stake…"with a small, slow fire", the chroniclers report. Those who escaped ran and hid in the forests. There, they starved…other towns were forbidden to give them food or shelter, under penalty of death.

How could de Montfort tell the difference between heretics and the honest Catholics who lived in the same towns? He was as ignorant of an individual’s guilt or innocence as a smart bomb. So he killed them all. "Slay them all," was his instruction (attributed to Papal Legate Arnaud Amaury). "God will recognize his own."

The ruthlessness paid off. Scarcely a hundred years later, the last known Cathar, Guillaume Belibaste, was burnt alive, and – in the eyes of the church – the future of mankind was saved.

For Stein too, the time for modesty and cautious thinking is over. "Back to reality…" he says. "Reversion to the mean is a law, not a choice."

Long suffering Daily Reckoning readers will recall too that "reversion to the mean" is a law that rarely goes unenforced for long. A bear market had already begun on Wall Street before the terrorists finished flight school. Stocks were already reverting to the mean and so was the U.S. economy. Those trends still have a long way to go.

But your editor wonders whether there isn’t an even bigger bubble waiting for deflation…and whether, in some ironic way, a bear market in confidence might cost the nation even more than its bear market in stocks.

More tomorrow…

Bill Bonner
September 27, 2001

We’ve been following the great "river of no returns" stock, Amazon.com…all the way down. Yesterday, it lost another 10% – closing at $6.35. CMGI, which once traded at $162, became a penny stock, trading as low as 98 cents yesterday.

These stocks once represented the golden future of American capitalism and modern information technology. They were supposed to go up, not down. Meanwhile, gold shares – which were supposed to go nowhere – are up 73% so far this year.

("Buy the gold shares," said Harry Schultz, as we enjoyed the sun at the Paradis Caf? a couple of days ago. "They’ve already gone up a lot, but they have a lot farther to go.")

But irony is underappreciated these days. "The Age of Irony Comes to an End," declares Roger Rosenblatt sourly in Time magazine.

To save you some time, I read his piece. Now I have doubts that he even knows what irony is. "The ironicists, seeing through everything, made it difficult for anyone to see anything." Rosenblatt goes on to complain that Ironicists even made fun of such heartfelt expressions as "I feel your pain".

To Rosenblatt, irony suggests that "nothing is real." Now he says that irony is dead because the nation knows that some things ARE real: real pain, real anger…and, of course, the real greatness of the country.

Okay, Roger, let me ask you: was the productivity miracle real? The "new era", the social security "lock box", the never-ending economic expansion? What about the ever-rising stock market or the federal surplus?

Ironically, life is still full of lies, myths, hypocrisies, wishful thinking and twists. About which, more below…

Eric…what’s happening over your way?

*****

Eric Fry in New York:

– A stock market "hat-trick" was not to be. Stocks could muster no better than two consecutive days in the plus column before fading yesterday. The Dow dropped 92 points to 8,567, while the Nasdaq lost 2.5%, to 1,464.

– Adam Lass and Bryan Botterelli, our colleagues at the Options Underground, nailed this one on the head (again!). Tuesday morning, they urged their subscribers to buy puts on the Nasdaq 100 Index (betting that the market would fall). One day into the trade, things look pretty darn good. The Nasdaq 100 has dropped about 3% since midday Tuesday.

– Last week, Wall Street analysts made 3,390 changes to their revenue or profit forecasts for specific stocks, according to Thomson Financial/First Call. An unsettling 84% of those forecasts were revised down. Brokerage stocks typify the trend: Goldman Sachs, Bear Stearns and Lehman Brothers all posted quarterly declines in net income yesterday…Goldman’s profits fell 43%, Bear Stearns’ slid 26%, and Lehman Brothers’ dropped 32%.

– Bad news for the stock market was good news for gold. The monetary relic mounted another of its stealth rallies – rising $3.50 to over $393 per ounce.

– Immediately after the World Trade Center attack, gold rallied about $15. But the advance quickly reversed as many dispirited, would-be gold bulls threw in the towel. Since then, gold has been tiptoeing higher. And now, more than two weeks after the attack, spot gold has managed to climb to its highest closing price in more than one year.

– Ironically, investment demand for gold coins appears to be the driving force behind the move. Greg Weldon of Weldon’s Money Monitor reports that retail demand for gold coins is "through the roof." Mike Tordella, a wholesaler of precious metals, bars, and coins tells Weldon that his sales volumes are up 500% over last month.

– "We are getting calls from financial planners who are looking for half-a-million or even one million dollars worth of gold for their clients," says Tordella. "That represents a small portion of an individual portfolio, but it is a lot more than what people had been considering previously."

– "The Mint was caught unprepared for the run on coins, having maintained minimal inventories due to lack of demand," says Frank McGhee, a coin dealer at Alliance Financial in Chicago. This new demand "has created problems with getting enough planchets (blanks) for the making of bullion coins."

– Something less extreme than impending Armageddon may be whetting the appetites of all these gold buyers. Like plain vanilla inflation, for example. The recent sell off in the 30-year Treasury bond seems to suggest as much.

– "Fed easings have been unusually aggressive (inflationary?)," observes the ISI Group. "The attack has opened the door to wartime government spending (inflationary?). The dollar could decline persistently as foreign investors unwind unprecedentedly [large] long positions in U.S. stocks and bonds." These trends may all add up to rising inflation…at least, as ISI sees it.

– Still, the price of oil dropped again yesterday. "Crude prices have declined 25% in the past week," writes John Myers of Outstanding Investments, "and is now hovering around two year lows. One reason? Demand for jet fuel is dropping dramatically as airlines cut back on their traffic by as much as 25%. The industry accounts for as much as 1.8 million barrels a day of jet fuel – almost 10% of the U.S. oil consumption. War, of course, could make the price turn around in a hurry."

– John, by the way, is having his own string of luck with The Resource Trader Alert. He recently added 145% to his readers’ portfolios with this interesting twist on the surge in demand for gold: a "call" on the Swiss franc (betting the market would go up). This currency, seen by many as a safety play in times of strife, is largely backed by gold reserves.)

– Life in lower Manhattan, while far from normal, is at least moving in that direction. Yesterday’s spectacular fall weather seemed to put a shine on everything.

*****

Back in Paris…

*** I stopped in at the famous auction house Drouot yesterday. If you want to buy antiques, this is a good place to go – it’s the wholesale market, where Paris antique dealers get their inventory.

*** At an auction of modern art…I felt as though I was glimpsing the future.

*** Two men in suits held up a large tableau covered in brown paint with purple figures. It looked as though it might have been done by a 5th grade art class in a bad neighborhood.

*** "We will begin the bidding at 5,000 francs," said the auctioneer.

Silence.

*** "Well, let us reduce the opening bid to 4,000 francs…"

Silence.

*** "Two thousand francs. Do I hear 2,000 francs…?"

No one spoke.

*** "Okay…1,000…?"

*** "500 francs…? Does anyone in this room want to bid on this painting?"

Dead silence.