A Kiss is Still a Kiss

“Cometh Princeton Professor Daniel Kahneman, who won a Nobel Prize for his work in the emerging field of neuron-economics. We are well aware that we owe to science all the modern wonders we enjoy. Without their inquiries into the nature of things, we wouldn’t have prime-time TV or subprime CDOs. Still, it is hard to believe that man is such a simpleton as science makes him out to be.

“Professor Kahneman teamed up with brain neuroscientists and began peeking into investors’ skulls. What they found was that the same areas that flare up under the influence of drugs, also get a buzz going when there is money on the table. So, they got together a group of people who had been hit on the head or whose brains had been damaged in other ways; these people functioned normally otherwise, but experienced much less emotional fizz than normal people.

“Then, they played a little game. Starting with $20, each one flipped a coin and called it: heads or tails. If the participant called it correctly, he won $2.50. If he called it incorrectly, he would lose only $1. If he was feeling unlucky, he could pass.”

Bill Bonner,
October 15, 2007

Keep reading today’s guest essay here:

A Kiss is Still a Kiss

Now over to Short Fuse, back in Los Angeles…


Views from the Fuse:

Well, after a few days of not much going on in the news cycle, we are thrown right back into the mix this morning…

First and foremost – oil has hit a new record high, sitting at over $86 a barrel.

“A run at $90 is now seen as reasonable,” Citigroup analysts said in a note.

OPEC forecasts of greater demand for crude in the coming months, along with geopolitical strife have had its hand in the price boost.

Reuters reports:

“…rising tensions between Turkey and Kurdish separatists in northern Iraq that have dimmed the prospects of a recovery of Iraqi oil exports from the region.

“Turkey’s cabinet on Monday asked parliament for permission to launch an attack on Kurdish separatists in northern Iraq, just days after witnesses reported that Turkey had shelled an Iraqi village.

“‘The escalation in Turkey could threaten supplies both from Ceyhan and the Baku-Ceyhan pipelines, jeopardizing well over 1 million barrels per day of supplies,’ said Nauman Barakat, senior vice president at Macquarie Futures USA.”

This is just the tip of the iceberg for geopolitical tensions, according to Outstanding Investment’s Byron King. “And at the heart of all these disturbing developments is a worldwide scramble for oil resources.

Byron calls this the New Energy Crisis.

“You might recall the original energy crisis of the 1970s…when Arab oil producers launched an embargo against the West. Americans lined up for blocks just to fill up at the gas station – if the gas station had any gas to sell,” he continues.

“The New Energy Crisis will be much more serious…with many more far-reaching consequences.”

And from today’s issue of The 5 Min. Forecast… “The gift that keeps on giving: Moody’s downgraded another $33 billion of subprime bonds late last week- it’s biggest downgrade to date,” write Addison and Ian this morning.

“The multi-billion dollar downgrade includes 2,187 securities all written in 2006.  This gigantic sum accounts for over 7% of the original dollar volume of debt rated by Moody’s.

“Citi, Bank of America, and JP Morgan Chase announced they are leading a consortium of 30 banks in establishing a bail-out fund for the ‘commercial paper’ market. ‘Commercial paper’ is a bond sold by a firm needing to raise money quickly in the capital markets.

“The new fund will amass up to $100 billion and will target only Triple-AAA rated debt. In order to assure investors in the fund, the banks have promised not to touch the subprime junk that has caused so much consternation this year.

“So, much like the consortium assembled by then Chairman of the Federal Reserve Alan Greenspan, designed to ward off evil following the LTCM derivatives crisis in 1998, this fund will seek to separate the wheat (good, honest debt) from the chaff (bad, cheeky subprime debt). And keep the credit markets operating smoothly for those who need it.

“The theory is a good one. But as always the drama will unfold when they put the plan into action. And it’s worth noting, it will not help stave off any damage to mortgage lenders who dipped their fingers in the dirty debt. We’ll keep you posted as this one develops…”

Let’s see…the Dow rose 77 points on Friday (only to fall a bit this morning, but more on that below). Oil hit a new record – at above $85 a barrel.

But we always try to look beyond to news to figure out what is going on.

Despite the problems in housing, most Americans are feeling pretty fat and sassy. Living standards – at least, by the standard measures – have soared in the last 30 years. In 1950, the average new house had only 1,100 square feet of space. Now, the average is about 2,400 – even though families are much smaller.

Back in the ’50s, the typical family had one car. Now, driveways are full of them. And, of course, there are Jacuzzis, air-conditioning, big-screen TVs and all the other paraphernalia of modern life.

From the Eisenhower years to the Bush years, however, the U.S. economy was maturing. In the ’50s, manufacturing profits were half the nation’s total. Americans made things and sold them to foreigners. This left us with money to spend, to lend, to save…or to invest. Typically, we saved nearly 10% of what we earned in the Eisenhower/Kennedy era.

But then came a New Era. The government spent too much in the ’60s…and rather than own up and make good, the Nixon Administration defaulted. “The dollar is our currency, but your problem,” said Treasury Secretary John Connolly in a moment of spellbinding honesty. Then, in 1972, the U.S. trade deficit stood at $3 billion. Now, the trade deficit is nearly $3 billion every day!

It did not pay to save dollars in the ’70s. Inflation rose to 12% and made them worth less and less. In a way, this was the lesson Americans most wanted to learn. They didn’t want to save anyway…they wanted to spend. Gradually, the economy shifted from one in which people made things at a profit to one in which they bought things at a loss. Households turned their attention to how to consume what they had never earned. And business turned its attention to how make money by selling to people who didn’t have any money. The economy itself shifted to one based on manufacturing to one that emphasized marketing…and then finance. Factories rusted. But shopping malls and housing development proliferated.

In 1967, Henry Kaufman was made a full partner at Solomon Bros. in New York. His compensation: $25,000 a year.

Forty years later, the average hedge fund manager is taking home nearly $24,000 PER WEEK.

Meanwhile, the average U.S. weekly pay is only $841 – a figure that is about the same, in real terms, as the average 30 years ago.

And here is the question to which we keep returning, a question that is purely rhetorical:

How can people who don’t earn more money still spend more?

Not only do we know the answer, we’ve given it to Dear Readers countless times:

They borrow.

Total U.S. credit debt rose during the Greenspan years alone from $9.8 trillion to $37.3 trillion – a 400% increase. That is the weight now pressing down on the U.S. economy. That is the burden that must be lightened.

And it is being lightened – in two ways. Many debts are going bad. House foreclosures in September doubled from the year before, for example.

The other way it is being lightened is by inflation. Every day, people add more debt…and inflation takes a little more off. In the last 30 years, consumers, business and speculators were able to add debt a lot faster than inflation took it off. But now, debtors are already stretched to their limits…and creditors are getting persnickety. A Reuters report tells us that consumers have switched to credit cards in order to continue spending. Home equity lines and mortgage refinancing has fallen from favor.

Eventually, inflation will wipe out debt. The 1,000% inflation rates in Argentina in the ’80s eliminated most debt. Still today, the country has very little debt.

Is it hard to get a mortgage? We don’t know, but if anyone is lending money in Zimbabwe, he should probably seek medical attention and bankruptcy protection; with an inflation rate of 100,000% per year – he will be wiped out overnight.

In America, the process has a long way to go. Official inflation rates are only 2%-3%, though consumers report price hikes much greater than that. Still plenty of excitement ahead!

Stay tuned…

Who’s worried about inflation? Stock markets are booming all over the world…

In the United States, stocks have doubled in the last five years. That’s an annual rate of increase of 15% per year. But the New York Times tells us that the U.S. gain is small potatoes. Almost every other stock market has done better. Of the 83 major stock market indices, since 2002, 78 of them did better than the United States. The top performer was Peru – with an annual gain of 87.5%. Right behind Peru were the Ukraine at 83.7% and Bulgaria at 77.1%.

The stock markets highlight the differences between old economies and new ones. The places that are doing the best are the ’emerging’ markets – where people are actually making things and selling them at a profit. Among the “old” economies, only Germany was a top performer – with an annual stock growth of 34%. Russia rose at 43.8% per year. The Shanghai composite rose at 32.6% per year. And take a look at Vietnam! The Ho Chi Minh index rose at an annual rate of 42.6% over the five-year period.

“I spent 18 months over there, getting shot at…” says a visiting cousin. “I might just as well have stayed home…”

Our old friend, Mark Skousen has a new book out – Investing in One Lesson. A tight book, full of practical insights and advice, it is well worth reading.

“While sleeping in a hotel room in Los Angeles,” he begins his story…”The phone rang.”

“I lifted the receiver and heard from a man who said he was a new subscriber to my newsletter service. His voice was intense and emotional. He said he was worried about an investment he had made in a ‘no load’ offshore commodity fund that had ‘guaranteed’ 25% annualized returns…”

As the story developed, it turned out that the man had put all his savings…and his wife’s money too…into an ‘investment’ that was an obvious fraud. That is, obvious to anyone who spent two minutes thinking about it. The man was a doctor…a successful man…an educated man. Apparently, he was also a very busy man – he didn’t have two minutes!

Yes, he was wiped out.

Meanwhile, we learned from other friends that the Nigerians are still in business.

“Apparently, there are people who fall for their scams. They send a letter or an email explaining that they have a huge amount of money that they need to transfer to the United States…all they need is the help of an ordinary person with a bank account.

“You wouldn’t think that any one would be so dumb as to fall for it. Especially now that everyone has heard about these scams. They’ve been around for decades…and almost always from Nigeria. But I understand that they are getting a lot cleverer and now using other addresses. Still, it’s said to be a significant part of the entire Nigerian economy. A big source of foreign earnings.

“The TV show ’60 Minutes’ followed up on one of these come-ons. They answered the letters and kept playing along until they had set up a meeting with the scamsters…in Miami, I think. Anyway…the reporter was supposed to meet the Nigerians so that he could give them $5,000. There was a hidden camera watching. And those guys meant business…they weren’t fooling around. They wanted the money and they were going to get it.”

Our cousin from Maryland came to visit in Buenos Aires and brought news from home:

“The area around Washington is a special case. So many people work for the government. And they seem to have a lot of money. Because they’re building these huge houses…6,000 square feet…and the amazing thing is these are usually couples with no children. Both of them work. So, I guess on two government salaries they can qualify for a lot of credit, because I don’t think they have any real money.

“But even around there the housing boom is over. Prices topped out, I would say, about a year ago…now they’re coming down. Not too much so far…but they’re definitely coming down.

“Which is too bad, because I know a lot of these people have houses they paid a lot of money for…thinking they would go up in price. And now, they’re not going up…they’re going down. It must be painful.

“And you remember John Hall?” our cousin continued. “Well, he’s now 91 years old and his wife is 95. She’s been bedridden for a year. Everyone thought she was going to die a year ago. The hospice people came out to look after her. But then the tough old lady wouldn’t die. The hospice folks gave up and went home.

“So John is still taking care of her himself. I don’t know how he can do it, because he’s fading fast too. I take them some hot food whenever I can…and the poor people are really suffering. When we had that snowstorm last winter the power went out for three days…I wondered how they were making out…so I went over. …I came in, didn’t even knock…no point to it, they can’t hear…and there John was sitting on the couch holding his chest…he said he couldn’t make it up the stairs…so I took the food upstairs. The house is a mess. Cold. Dirty. And the poor old lady is upstairs…almost dead as near as I could tell.

“John,” I said to him, “you can’t go on like this. You can’t take care of yourself…let alone take care of your wife, too.

“‘No,’ he said, ‘but we get by. And after spending so many years together, taking care of Annie is not a burden…it’s a pleasure.’ He’s a delightful old guy.

“But John, at least get yourself someone to help you…hire some household help.

“‘Oh…I can’t afford it.’

“What do you mean you can’t afford it? You’ve got a farm here worth millions of dollars. What are you going to do…take it with you?

“‘No…I’m leaving it to my son.’

“So I called up his son…also named John…I said, good Lord, you’ve got to get your parents some help.

“He told me that they wouldn’t listen to him…nothing he could do…and so forth…probably annoyed…thought I was meddlin’ in his family business…

“But there you are…these young people spending more money than they have…putting in movie theatres in their suburban houses…and old John out there on his farm…with plenty of money…and he won’t even get someone to help him take care of his wife. Go figure…”

Until tomorrow,

Bill Bonner
The Daily Reckoning

The Daily Reckoning