A Funny World

“It is a funny old world,” said Maggie Thatcher in a

light-hearted moment.

And it is getting funnier and older all the time.

What makes it especially amusing is the willingness of people to swallow almost anything, if their gullets are sufficiently lubricated by the popular media.

Thus do wars, collective myths, bubbles and mad delusions spring up – for our entertainment. The ‘drug war’ is one such fantasy. We imagine brave and true law enforcement officers battling it out to protect the nation, much like Lincoln’s conscripted soldiers fighting at Gettysburg “to preserve the union.”

“You guys are so stupid,” (or words to that effect) explains a drug dealer to the attending DEA agents, “you think you are fighting a war against drugs. But what you’re really doing is helping the Juarez mob against the Tijuana mob. Funny, isn’t it? You’re working for a drug lord too.”

Yes, dear reader, the drug enforcement apparatus is a part of the drug industry. The federal government squeezes $15 billion per year out of taxpayers and spends the money helping to reduce supplies – keeping the price margins on illegal drugs at least as high as those on penny stocks.

High margins encourage other entrepreneurial efforts – which result in new supply, and thus the funny old world keeps turning around.

There are many ways to take a loss – either personal or financial. You can buy stocks when everyone says it’s a good idea. Or you can buy drugs when everyone says it’s a bad one. Or, you can just watch television all day.

But there is something magical and preposterous about big ideas. People who are otherwise intelligent and successful can hold ideas that make absolutely no sense when reduced to specific circumstances.

Warren Buffett’s favorite cause is a campaign to reduce the number of human beings. Which human would he eliminate? I can think of a few – quite a few, actually – without whom the world might be a better place. But targeting specific individuals or entire groups for extermination went out of fashion in 1945. Instead, we are not supposed to know or care which future people are eliminated. And yet, some must not exist – or the cause of population control is a complete fool’s errand.

As a big idea, “reducing population growth” has a certain superficial appeal – like a high school marching band in full dress uniform. But you can’t reduce population growth without eliminating specific people. Who? The drummer? The tuba player? The majorette? Would the world really be a better place without them?

I don’t know, dear reader. But it is not for me to say. Just as it is not for me to say if someone else should use drugs or watch television.

But Buffett can stop worrying.

“Where have all the children gone?” asks a headline in the ‘Courier International.’ The article, translated from ‘Foreign Policy’ magazine, describes a world with falling birth rates. “Never in world history has this ever happened before,” say the authors. Throughout the developed world people are not having children. Fertility rates have fallen below replacement levels in Europe…and are dropping sharply in other countries too. If it were not for immigration, populations would be falling.

Even more surprising, women in countries such as Iran, Bangladesh and Mexico are having fewer children. Neither illiteracy, religion, nor poverty seems to stand in the way of the worldwide trend towards fewer children. The population of these places are still expanding, but much slower than expected.

More to come…I have to catch a train…

Bill Bonner
Paris, France
April 18, 2001

*** Oh Cisco! The company warned Wall Street Monday night that sales were falling. But investors didn’t seem to mind – cutting the stock by only 3% in Tuesday’s trading.

*** “Almost one year ago, ” explains Lynn Carpenter, “on March 27, 2000, Cisco Systems became the most valuable company in the world, achieving a market capitalization of $555.44 billion after only 10 years as a publicly traded company. On that same day, General Motors, a 91-year stalwart of the Old Economy, had a market cap of about $88.19 billion.

“General Motors’ lower value, about 16% of Cisco’s, came despite the fact that GM had earnings per share of $7.66 versus Cisco’s $0.31 in 1999. Yet the P/E ratio on GM’s earnings of 6.54 was far below Cisco’s P/E of 194.23. GM’s price/book ratio at the time was 2.55, Cisco’s was 33.35. Across the board, GM’s fundamentals represented a better value than Cisco. Furthermore, GM had assets of $274.73 billion on its balance sheet compared to Cisco’s $21.39 billion. Yet, in terms of market capitalization, GM’s 10 times as many assets in an accounting sense only generated one-sixth as much value. A truly remarkable difference.

“In February 2000, an analyst at Credit Suisse First Boston had forecast that Cisco would become the world’s first company worth $1 trillion. Not quite. It’s been downhill ever since March 2000. The company’s market cap is now $100 billion…Cisco’s claim to fame these days has changed slightly. Investors have lost more money on Cisco than on any other stock in history!”

*** One particularly unfortunate soul, former Cisco Systems engineer and erstwhile paper millionaire Jeff Chou, owes the IRS $2.5 million. As reported by AP, Mr. Chou triggered the new economy-sized tax liability last year when he exercised his Cisco stock options – in the process producing a $6.5 million paper profit that the IRS recognizes as taxable income. Unfortunately, he didn’t sell his stock. (Everyone knew that Cisco was going higher, right?) “There’s no chance I can pay the government back within my lifetime,” moans Chou.

*** “This may be the fastest any industry of our size has ever decelerated,” John Chambers, Cisco’s chief, told the IHT yesterday.

*** But it was not a bad day on Wall Street. The Dow rose 57 points. The Nasdaq managed to climb 13 points. 1857 stocks advanced on the NYSE, compared to only 1163 that declined.

*** And while Cisco fell, competitor Juniper rose 5%. Hmmm… investors must see something I don’t. Cisco’s shelves are groaning with unsold inventory. Among the items is, for example, the Cisco AS5396 dial-in modem for ISP, with a list price of $44,000. Yet, the item is available at www.usedrouter.com for just $13,500. Likewise, you can get a 2610 Cisco Router at a 31% discount and a WS-C2924-K-XL-EN switch for 23% off. Juniper can’t hope to maintain its margins in the face of this flood of used and unsold equipment. At 50 times earnings, Juniper is screaming: SELL!

*** The Nasdaq, down 68%, has given up nearly two years’ worth of growth. Is that all there is? Investment Biker Jimmy Rogers comments: “No bubble ends with 2-year lows. Bubbles end with 10-or 15-year lows.”

*** “Be warned: The other shoe is yet to drop,” warns Friedburg’s Commodity & Currency Comments…We are referring to the fact that equity funds are experiencing the first outflows in over two years…”February 2001 showed an outflow of $3.1 billion,” Friedburg writes, “compared with an inflow of $53.6 billion in February 2000; and March 2001 showed a preliminary (based on the Trim Tabs weekly survey) of $20.2 billion, compared with an inflow of $39.3 billion in March 2000.”

*** “Brace yourself,” warns another news item, “over the next several weeks hundreds of U.S. companies will report profit and loss statements that are going to look ugly.” Second quarter earnings are expected to be off about 7%…following an estimated 9% drop in the first quarter.

*** “The market has ignored earnings chicanery in the short term, but over time negative fundamentals erode stocks,” Bill King notes. “Oil topped in 1980 and didn’t bottom until April 1986. Mucho dinero was lost, many reputations ruined, and renowned money management firms disappeared over that period. In 1984, Barron’s featured ex-Gov. John Connolly bragging that he was buying oil properties for pennies on the $. Two years later, just months before the oil bottom, Connolly’s personal possessions were auctioned in a bankruptcy action. [Friends took up a collection to buy ‘Big John’s’ saddle and give it back to him.]”

*** And while consumers continue to borrow and spend, there is evidence that they are now borrowing just to stay even. “Households are not increasing their consumption nearly as quickly as they appear to be increasing credit card debt,” observes the Dismal Scientist. “It is reasonable to surmise that many households are taking down debt to make up for income shortfalls.” An accompanying chart shows unemployment rates going up as credit card repayment rates go down.

*** More from the Dismal Scientist: “Household balance sheets have been deteriorating at a quickening pace for some time now. The household debt service burden, which is equal to the percentage of disposable income devoted to interest and principal payments on both consumer installment and mortgage debt, rose to 14.3% in the fourth quarter. This is up from an early 1990s low of 11.7%, and about even with its mid 1980s peak.

“So what households are getting into trouble? Survey data from the Survey of Consumer Finances indicate that debt burdens are highest among middle and lower income households. Nearly one-fifth of households who earned less than $50,000 in 1998 had debt service burdens that were greater than 40%. This compares to a consistent one-sixth of such households found in previous surveys (see chart). This also stands in striking contrast to households earning over $50,000, for which only a consistent less than one-twentieth labored under such high debt burden.”

*** “In 1997, Mohamed Mahathir, president of Malaysia, wanted to try currency speculator George Soros as a war criminal. Today, Malaysia, Thailand and Singapore sit atop world trade again with the world’s largest current account surpluses – 13.6%, 9.1% and 25% of their GDPs, respectively. It is eminently possible to export deflation and turn the current account back to surplus as the Tigers have shown. But can the United States do it? No. One thing the United States cannot export is its stock
market.” (see: href=”http://www.dailyreckoning.com/body_headline.cfm?id=1102″>Will The Asian Cure Work Here?)

*** The Nasdaq may be rising, but so are the number of readers asking NY Post columnist, John Crudele, how they can sue their broker. Crudele’s column answers some of the essential questions of our time like, “I watch CNBC constantly and bought a number of stocks because of recommendations I heard on that station. Can I sue the pundits who recommended them? How about the station?”

*** Remember Michael O’Higgins’ “Dogs of the Dow” strategy? The idea was to buy the five cheapest stocks with the highest dividend yield on the Dow. Now, Lynn Carpenter reports on Morningstar’s “Unloved” mutual fund strategy: “This strategy is similar to the “Dogs of the Dow” strategy, but with a twist. Instead of investing in the worst performers over the past year, this strategy involves investing every year in whatever three fund categories attracted the least amount of money over the previous 12 months. Morningstar says an investment in the Unloved has beaten the average equity fund in 75% of all three-year periods since 1987.”

*** It is a holiday week for the children, the second week of the Spring vacation. Last night we went out and saw the film “Traffic” at a local theatre. The movie describes a sequence of events in the drug wars along the Tijuana/San Diego border, reminding me of Henry Kissinger’s comment on the Iran/Iraq war: It’s a pity both sides cannot lose. More below…

*** And this from a Daily Reckoning reader (referring to my admiration for Pierre’s work on the forge): “Blacksmithing can improve upon one’s Christianity, you know. Gazing into that intense white hot fire can discourage a fellow from visiting Hell in a hurry.”