A Year In The Daily Reckoning, 2003

Last night’s party was at it should have been – an amalgam of tristesse and joy.

The old year passed away. It had brought a 50% increase in the Nasdaq. What investor would not have enjoyed his champagne and Auld Lang Syne after a year like that?

“I still have faith in the U.S.,” said a French friend last night. “Over the next 3 to 5 years, at least. You know, when you can get a 40% increase in the Nasdaq in a single year, you don’t have to worry too much about the long term.”

We tried to warn him. Yes, the Nasdaq does shoot up sometimes. But it goes down, too. It typically goes down
after it goes up.

But his mind was made up. “France is a complete mess,” he went on. “Nothing works the way it should. They have all these laws that, fortunately, people pay no attention to. But they can enforce them when they want. Be careful when you’re driving back to the Paris, by the way. They put in this new automatic radar. You used to be able to drive to 160 kph and not get a ticket. Now, they’re going to send you a ticket in the mail if you go over 135! I refuse to live in such a country.”

We fêted the New Year in a very old house, set against a small stream. Mr. Carton had lived in the house all his life with his aging mother. For at least 20 years, he had not entertained. But this year, invitations were printed up and sent to all the local gentry.

Mr. Carton, you see, is a close friend of the local mayor, whose daughter was killed in a traffic accident this past summer. The poor parents are still in agony. So, Mr. Carton and some friends decided to host a New Year’s Eve party to try to distract one and all.

The first thing we noticed in arriving at the old mansion was the front door. It looked so old, it might have been made of wood recycled from the True Cross. The oak itself was practically wasted away; all that was left were sinews and ridges held together by giant nails and bolts. Pushing it open, we found that it lead, not to a reception room… but into the dungeon – where cold stone steps circled up to the next floor. We might have been lost, had not someone opened an interior door to welcome us in.

Inside, the house might have been a museum. Lit by candlelight, it looked as though nothing had been touched since the Second Empire. The wallpaper was delicate, stained and torn… but as dignified as spinster. So were the family portraits and photographs. An old general graced the mantel. A beautiful belle looked down from the wall.

In the salon, there were about 30 people – most of whom we have met many times before – drinking champagne and reminiscing.

“These provincial French societies are extremely closed,” said a pretty American woman from Bordeaux. She had married a Frenchman in the 1970s and been in France ever since.

“How did you ever get accepted into this group… it is almost impossible… How do you fit in?” she asked.

She was new to the assembly, and was – alas – the focal point of the evening’s sadness. For while she maintained a lively and cheerful air about her, she wore black and carried around an invisible jug of sorrow, from which she must have had to take a swig from time to time. It was her son who was engaged to marry the mayor’s daughter… and his hands on the wheel when the car spun out of control.

“We don’t know exactly why we they originally invited us,” we replied. “Maybe they were desperate. But we just seem to fit in. Curiously, in some ways we feel more at home among these French mossbacks than we do in modern suburban America.”

What we fit into is a group of 20 to 40 middle-aged couples who have known each other for decades. They are charming, civilized, entertaining… and on the verge of extinction.

The run-up in the Nasdaq could prove to be an enduring feature of the financial landscape. But here we offer a geological prediction: more likely, it will be swept away in a flood of trouble long before Alan Greenspan leaves the Fed. We recall for readers too that a major bear market began in March of 2000. Most Americans would like to think it ended in October of 2002. More likely, it merely paused.

“What’s happening today happened 300 years ago in the French economy when John Law, another Scotsman, was allowed to launch the first government-sanctioned bank, which replaced coins with paper money.” London-based fund manager, Hugh Hendry, was explaining to a Barron’s reporter what happened when the Alan Greenspan of the 18th century destroyed France’s financial system:

“Commerce boomed. Politicians recognized this correlation between issuing more money and people liking you. They
issued more and more money, but it was a false promise. Nothing intrinsically was being added to the economy except promises, which could never be redeemed. Selling by speculators caused the stock market to correct. The correction encouraged the authorities to print more funny money. Ultimately, the continued pumping of liquidity destroyed the economy, the stock market and France’s currency.

“More recently, the U.S. came off the gold standard in 1971 and the Dow Jones Industrial Average bottomed in 1974. Over the next 25 years, the Dow goes up 20-fold because every period of economic anxiety brought forward an orthodoxy of generous liquidity. Money has to go somewhere. It seeks to perpetuate itself by going into a rising asset class. This time, it is financial assets. Just like the Mississippi stock scheme in 1720 and the South Sea Bubble in London at the same time.

“The mechanism is the government-sponsored enterprise sector in America, the Fannie Maes and the Freddie Macs. The U.S. has nationalized the credit-creating process, previously the preserve of the banking sector. Freddie and Fannie can borrow money at almost the risk-free rate. At times of anxiety, they are profit-motivated to expand their balance sheets because government bond yields, the risk- free rate, fall during times of risk aversion. The spread widens between riskier assets like mortgage-backed securities, which Fannie and Freddie buy, and Treasury bonds. The combined balance sheet of Fannie and Freddie is $3 trillion, 30% of the U.S. economy.

“The annualized growth rate in September and October of their balance sheets was 50%. Now when people talk about M2 or the old monetarism, it hasn’t kept pace with the disintermediation, which has gone on in the economy. It doesn’t include agency paper. The money supply looks as if it’s waning. It’s not. There’s enormous dollar creation. You can control the domestic price of money. Short-term interest rates have not gone up in America because of this economic Frankenstein. But you can’t control the external price: The dollar is weakening versus everything, even versus the ruble.

“The response to the crash since March 2000 has been to create even more money. Just as it was 300 years ago. We’ve created a tidal wave of liquidity, with the Dow back at 10,000. But in doing so, strange things have happened. Gold has broken its 25-year downtrend and has now established an uptrend. The CRB index is at a nine-year high. Oil prices didn’t come down after the Iraq war concluded. Strange things are going on in the world at large. But not strange to a citizen of Paris in 1720.

“The authorities have broken their trust with us. Middle- class society preserves its wealth in paper assets and the honesty of the paper asset is that the central banks will not dilute your financial assets by printing too much money. We’re having to go to extreme measures to preserve our wealth by owning gold, a barbarous relic. Greenspan is the smartest guy on the planet, but you know what? Wise guys make mistakes.”We doubt that Mr. Greenspan made a mistake. His goal was to keep alive the illusion of a consumer economy – that you can get rich by spending money – at least until he is off the job. So far, so good.

But the end comes for everybody and everything. John Law was ruined along with his system of paper money. He spent his last years gambling in Italy and worrying about someone killing him.

The end will come for Mr. Greenspan’s paper, too. He has created more of it than all the previous Fed chairmen put together. When it goes up in flames, the bonfire is bound to scorch balance sheets and retirement plans all over the

Happy New Year,

Bill Bonner
The Daily Reckoning
January 1, 2004

P.S. Sometimes the end comes with fireworks… sometimes with a gentle sigh. As the midnight hour came upon our little group, lips bent to cheeks… and kisses were passed throughout the room. And then it was over… the whole year had been used up. Another one was on the calendar already… with its own story still ahead.

P.P.S. Below, in an attempt to capture the year in review, we collected a few of the essays which appeared this year in The Daily Reckoning. You’ll find them below. Enjoy.

A Year In The Daily Reckoning, 2003


“… A man who lets himself be bossed around by Ought is no man at all, in our opinion. He is a dullard, a wimp, and a wuss… a logical, rational, reasonable lump. Thankfully, most men, most of the time, will not readily submit. Instead, they do not what they ought to do, but what they want to do. Stirred up by mob sentiments or private desires, they make fools of themselves regularly… ”


“… The dollar index topped out a year ago. Starting very hesitantly and gradually, its fall has distinctly gathered momentum in recent months. Considering the resistance of the trade deficit and the worsening economic situation in the United States, it is plainly time to ponder a protracted decline of the dollar and its broader implications… ”

10-K SEASON (03/21/03)

“… “10-K Season” has arrived on Wall Street… and this year’s 10-K season promises to be more exciting than ever Lending drama to the 2002 vintage of 10-Ks is the fact that pension plan liabilities are skyrocketing to become a very serious problem for many companies… and the annual 10-K filing is the only public document in which companies must fess up to these ugly truths… ”


“… Intellectuals have long since come to see the world in a different way: it is a mechanistic world, not a moralistic one, they say. All people have to do is to push the right buttons and pull the right levers. Why was Bush pushing so hard on the “I” button? For the last 6 months, critics have been tracing the wires to try to figure out where they lead. Only recently, they have come upon the dollar… “


“… We want you to know, dear reader, that we take up today’s topic carefully. We have ventured comments on our President and the war in Iraq before; we know what we can expect. Still, what subject is more interesting? What poses a greater threat to our peace, tranquility and prosperity? We can think of nothing. Besides, with the fate of the world and its favorite money at stake… how can we turn our backs?… ”

MIA’S WEDDING (06/06/03)

“… At some point, a man has to stop thinking. He has to stop because no amount of thinking can get him where he needs to go – such as, to the altar. Getting married is not a rational act, it is a desperate one. He has to feel his way to it. You can make money by figuring things out. But if you spend all your time figuring things out, you’ll never figure out what you can’t figure out by figuring… ”


“… These two ideas – central planning on the one hand… and individual planning on the other – were what separated America from the rest of the world. Americans think their model triumphed over the central planning model of the Soviet Union… and is now beating the pants off Europe’s lighter, softer versions. But it is just the opposite. Even in America, no one really argues against central planning anymore… ”

SINO BUBBLE (09/08/03)

“… ‘You are so sceptical of everything else,’ began our  friend Michel at lunch on Wednesday, ‘but you seem to believe every word about China. You seem to forget that  the country is run by communists who lie about everything. In particular, they lie about economic statistics in order  to make themselves look good. That’s what the Soviets did right up until the whole system fell apart. And Western  economists believed them! And now they believe the Chinese. Even you believe them!’… ”


“… The Fed and Treasury have lost their way altogether. Gone are the days when self reliance meant busting your gut to build a house, a factory… or even a fine piece of furniture. Now, credit lines grow ever longer and home equity loans more ubiquitous. Boobus Americanus – to borrow a phrase from HL Mencken, by way of our friend Doug Casey – has regressed along the line from ‘know-how’ to ‘nowhere.’ And judging from the reader mail we expect to receive upon publication of this letter, they’re quite belligerent about it… ”

BAT MEAT (10/20/2003)

“… What kind of world has God put together for us, dear  reader? We ask the question not expecting an answer, but offering one: it is a strange world. But the weirdness of  the world seems to have a pattern to it… a pattern of perversity, with cracks big enough to bury a house. When  the tungara frog, for example, undertakes to whine his way to what he most wants – love and immortality – he gets  what he least wants: almost immediate extinction… ”


“… Many are the times we have railed against this injustice. That is the problem with democracy and popular markets, we have pointed out; only the living get to express an opinion. The poor corpses lay mute, still, and lifeless as a senator… ”


“… In 1971, when Nixon closed the gold window, the Bretton Woods system collapsed, and the dollar – the last major currency to be tethered to gold – came unstuck. Economic growth as measured by GDP was no longer restricted by the growth of material goods production. Toss in a few financial innovations, like derivatives, and the ‘fictitious’ economy assumed the central role in the global monetary system… ”

The Daily Reckoning