A DR Classique, originally aired on 9 Aril 2002. This essay inspired themes found in Chapter 6 of Financial Reckoning Day.
We humans flatter ourselves. We believe we are reasonable people. So successful are we at applying reason to the things close at hand that we cannot resist applying the same process to things far afield about which we haven’t a clue.
We try to make sense of the events around us by describing the "reasons" they happen…and then we extrapolate…looking logically forward to what those reasons will produce next.
From an investor’s point of view, the events we see coming are uninteresting. For there is little profit in them. The company that earns 20 cents per share every year, year in and year out, for an entire century, offers few surprises. Investors rarely get carried away with enthusiasm or despair.
And yet, there are times to buy the shares and times to sell them. For the world does not stand still. Beneath the obvious and predictable trends are less obvious ones…some that seem wholly unpredictable, and yet have patterns of their own. It is these trends that produce the tragic surprises, the comic moments and the pathetic scenes that inspire artists and historians.
Leicht Denken: Entertaining and Profitable
Here at the Daily Reckoning, it is these latter patterns that interest us. Not merely because they are more entertaining, but also because they are most profitable. It is the unexpected events, after all, which are most mis- priced. It is the unseen menace which causes the most damage. But seeing the unseen and expecting the unexpected isn’t easy. Even here at the Daily Reckoning, we have our hits and misses.
Still, we go about our work with the patience of the proto- economists – the two Adams, Adam Smith and Adam Ferguson, the Scottish moral philosophers of the 18th century. We do not try to predict the future, but only to understand the nature of man. We study him as if he were a bug or a maybe a honey bear – adorable, dangerous, and moronic all at once – and try to guess about what he will do next.
What is unique – more or less – about man is his ability to reason. Unlike the tse-tse fly or the wallaby, man can put 2 and 2 together. Up close, working with things that make sense to him, he comes up with 4 more often than not. But, when he applies these same reasoning talents…collectively…using compound abstractions…to other people’s business – such as how to achieve peace in the Mideast or a boom on Wall Street – 2 somehow becomes 5.245 or a swamp in Indonesia…and the whole equation soon degrades into complete nonsense.
Reason, as it turns out, is man’s greatest strength. It is, alas, his greatest weakness.
Nietzsche identified two different kinds of knowledge. There are the things you know from personal experience and observation, which he called "erfahrung." There are also the abstractions you think you know – the kind of thing that is reported in the paper and discussed on the editorial pages – which he called "wissen."
Leicht Denken: Two Ways of Reasoning
Today, continuing in the Nietzschean tradition of erudition and the Daily Reckoning tradition of pseudo- intellectualism, we expand Nietzsche’s insight. Not only are there two forms of knowledge, there are also two entirely different ways of reasoning.
The first is the type of reasoning you do with things you know about. If you see someone climb too far out on the limb of a tree, for example, and see the limb break…you might reasonably conclude that the same thing could happen to you in similar circumstances. We’ll call this kind of thinking "schwer uberlegen."
But if you turn your thoughts to the WAT (War Against Terror) or the next election, you are using a different thinking process altogether. Instead of thinking about things you know…you are thinking about things you cannot know and cannot even explain. We call this type of thinking "leicht denken." For example, yesterday’s International Herald Tribune offered an editorial comment from Zbigniew Brzezinski, entitled "Time for America to intervene." Immediately, we are in a different world.
America cannot intervene, because the nation exists only as an abstraction. An American soldier can shoot someone…an American plane can drop a bomb…but America itself is much too big. Whatever "America" does will only be done by a tiny percentage of the whole thing…most Americans will play no role, some will be opposed…and more than a few will be completely unaware of what is going on.
"The U.S. response…has to be guided by a strategic awareness of all the interests involved…"
Who is Brzezinski kidding? Take America’s interests, for example. What are they? Who can say? Americans have various interests – relatives, vacations, business connections – but they are not necessarily the same.
You could say, broadly, that "America has an interest in peace" in the Mideast. But so what? At what price? Under what conditions? Even if it were true…there is no way of knowing what actions might bring it about.
But people take this kind of thinking seriously. They think they can understand big issues as well as small ones and manipulate world events as though they were rubbing two sticks together.
Leicht Denken: Germany Must Pay
"Germany must pay…" voiced an editorial from 1919 in Le Temps. "The enemy must pay for everything…that’s the fundamental principle." Philippe Simonnot continues his long slog through the errors of economists during the 20th century. At the end of WWI arose the third big one – the illusion that Germany would, or could, pay for the huge losses incurred by the allies during the course of the world’s most costly war. All the combatants had borrowed heavily to finance the war. Now, they wanted Germany to pay off the debts.
What would it pay with? Germany was falling apart. Her economy was ruined. She had borrowed colossal sums to pay for the war – an amount equal to 3 times her GDP! German political and social structures were tottering. It looked, in fact, as though the country might be on the verge of revolution.
Besides, as Keynes pointed out, the cease fire was achieved by explicitly promising (he called them "sacred engagements") Germany that she wouldn’t have to pay more than her fair share of the war’s costs. But the argument fell on deaf ears…except those of the young Nazis, who used it to show that Germany had been stabbed in the back.
Asked his opinion of the war debts, Calvin Coolidge reduced the matter to a simple and ineluctable logic: "They borrowed the money, yes or no?"
Of course, Germany would never pay the war debts. Of the 152 billion marks demanded, only 23 billion were ever paid. And even this modest amount came with a very high price tag – "the crisis of ’29 was engendered, in part, by the financial illusions of 1919," Simonnot says.
Leicht Denken: Believe What You Want to Believe
And so, Norman Angell was almost right, after all. War does not pay.
But from the beginning of the war until its end, leicht denken helped people believe what they wanted to believe – that there would be no war, that it would be short, that the costs would be borne by someone else. World War I took a course that hardly a single person in the whole world expected. And that no one – save perhaps some lunatic fringe revolutionaries – would have wished.
How is it possible, dear reader? The world’s finest minds – millions of them – focused on an issue of life-and-death importance…and still, barely a solitary person was able to understand or even predict it.
What to make of it…when the result of their aggregated efforts is the biggest catastrophe ever to befall humanity? For WWI was no natural catastrophe. No Vesuvius buried people in ash. Instead, they were buried by millions in the mud of Europe by cannon and machine gun fire. No freak storm…no asteroid hit the planet…no drought or pestilence. Still, by the war’s end, millions lay dead.
A third of France’s capital was used up. A third of Britain’s. A fifth of Germany’s. And then, mankind went back to its business…on its way to its next big mistake.
Your editor, on his way to his next big mistake…
November 14, 2003 — London, England
Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the Wall Street Journal best-seller: "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century"(John Wiley & Sons).
"There is a lot of ruin in a country," said Lord Keynes.
How much ruin is there in America? That’s what we are finding out.
Each day, more and more of it is sold off, mortgaged, wasted and eaten up. The trade deficit widened again in the most recent period. Consumers are still borrowing – at a rate of nearly $1 Trillion per year. Add that together with corporate and government borrowing, says Richard Russell, and you get about $2.5 trillion in total new debt added this year. The current account deficit alone adds $1 million per minute to America’s debt – with no end in sight.
The Land of the Free has become the Land of the Free Lunch…where people will go along with almost anything as long as the cash and credit flow, and as long as they’re able to make the monthly payment. Thus does the nation sink into ruin at a rate equal to a quarter of the entire national GDP each year.
"This sputtering economy requires an ongoing stream of new stimulus just in order to keep it afloat," writes Jim Puplava. "Compared to past recoveries, economic growth has been half of what it has averaged over the last half century.
"What makes this situation more worrisome is that it has taken 13 rate cuts, three tax cuts, massive government deficits, and record growth in money and credit just to keep the economy growing. In economic terms, it is the largest fiscal and monetary stimulus the world has ever seen. What does the Fed have to show for its efforts other than multiple bubbles and the return of speculation to the financial markets?"
Any other country would have already suffered a run on its currency. Investors would have dumped its bonds and sought refuge elsewhere. In the time of the gold standard, even America could not have gotten away with it. Foreign dollar holders would have lined up at the ‘gold window’ at the Treasury and asked to have their paper redeemed in gold.
For decades, America kept its promise – it paid off foreign dollar holders at the rate of one ounce of gold for every 41 dollars tendered. But now, the gold window is shut. The only way to trade dollars for gold is to go onto the open market – where, at last count, you would have to put up more than 390 dollars for an ounce of gold.
Woe! Woe! Woe! America is not sinking into ruin…it is diving into it. Headfirst. Recklessly. Wantonly.
There is nothing we can do about it, of course. Nature must have Her way. Night must follow day. An open can of beer must go stale. A fool and his money must be separated.
But what a wonderful world it is. "Find the trend whose premise is false," says George Soros, "and bet against it." Rarely have so many people believed so much that wasn’t so. Their premise is that they can borrow and spend forever…without every having to settle up. They believe there is no limit to America’s ruin.
In that, we think they are wrong. The premise is false. Not that we know what will happen. But we know what won’t happen. There is a lot of ruin in a nation. But not an infinite amount.
Over to Addison, with more news:
Addison Wiggin, taking cover in Paris…
– Look out for falling prices! Stock prices, that is…Wal- Mart, the world’s largest retailer and therefore a bellwether for retail stocks, reported less-than-stellar 3rd-quarter earnings yesterday. Investors took advantage of the lowering price of the stock…and sold even more of it. The stock fell 4% and helped the Dow put in a 10-point loss…to close at 9,838.
– The Nasdaq Composite, S&P 500 and Russell 2000 index of small-cap stocks all barely budged for the day, each falling by a fraction, closing at 1,967, 1,058 and 541 respectively.
– With the stock market asleep at the wheel, the financial media turned its attention to the big macro stories we so like to comment on here at the Daily Reckoning: Gold pushing $400…the dollar dangerously close to new lows against the euro…the trade deficit widening to a record $41.3 billion in September…the Fed re-confirming they’ll keep rates low for a "considerable time"…and China coughing up $1.7 billion dollars for some U.S. airplanes…all of these stories being related. Naturally.
– Our favorite story, for the first time in about 20 years, is dangerously close to becoming everyone’s favorite: ggggoooold!
– "Everybody is waiting for the $400 level to be tested," a gold trader in Germany told Reuter’s. "Together with the euro, U.S. dollar, renewed fears about terror attacks and a very bullish chart pattern, the [$400] level does not appear to be too difficult. Reuters reports in the COMEX options trade there has been significant interest in $400 December calls on gold…which are basically bets that that’s where the gold price will be by December.
– On Wednesday, gold topped $397…Yesterday, the price inched its way ever closer, reaching an intra-day high of $398.40 – its highest point since Bill Clinton was first reviewing applications for future White House interns. But then, alas, the yellow metal lost its nerve and demurely shed 70 cents…dropping wistfully to the floor at $394.30.
– The world’s 15 largest gold mining stocks, as measured by the Gold Bugs Index, are up 489% in the last three years. "That 489% moon shot," writes our friend Steve Sjuggerud in his weekly address to the students of the Investment U e- letter, "is just one indicator of gold’s shining performance – to say nothing of its even brighter future. Take a look at these nuggets: the price of gold itself is up over 50% from its lows in 1999; graded gold coins are up 70% in the last three years; and futures and options on gold have soared…"
– The story has even made its way to the mainstream pages of USA Today’s money section. "Investors snap up gold as dollar sags," reads the headline. Gold soars when the dollar weakens, is the gist of their original and piercing argument. "Uncertainty about the economic recovery"…"Low interest rates"…and "perception" are blamed for the dollar’s weakness.
– Traders believe that the Bush administration wants the dollar weaker to help bolster manufacturing and exports going into the election year. The smart money is beginning to chase higher returns than the piddly 1% it can get on U.S. Treasuries…thereby moving out of dollar-based assets. Many traders believe the third-quarter GDP growth numbers are smoke and mirrors…a mirage. All of which, say the writers at McPaper, provide good reasons to own gold…
– But, according to Dr. Sjuggerud, the biggest reason to buy gold right now is: "it’s super cheap." Gold is cheap…stocks are expensive. "In January of 1980, both the Dow and the price of gold were at the same level: 800. Now, nearly 24 years later, the Dow is near 10,000, while gold is less than half its January 1980 value." This is a trend which is bound to reverse.
– The dollar, which fell back to 1.17 against the euro over the course of this week, is headed for its worst week against the euro in more than six months. The greenback has now fallen against 14 of 16 major currencies in the past week, according to a Bloomberg report. "The top four currencies year-to-date versus the dollar," writes Chuck Butler in the Daily Pfennig, a daily e-letter he authors for the Everbank World Currency unit, "are, in order, the Aussie, South Africa (up 28%), Canada and New Zealand." Not coincidentally, these are all countries with commodities- based economies…and a strong predilection for gold.
– There’s a slew of economic reports coming out today…not least of which are Retail Sales…the Producer Price Index…Industrial Production and the University of Michigan’s Consumer Confidence report. Each one of these reports will bring a clue as to how much smoke and how many mirrors will be used in concocting the witches’ brew of economic growth in the U.S. economy for the 4th quarter…There will be lots to cover in the Daily Reckoning’s Weekend Edition. Look for it tomorrow, with Eric Fry…
Bill Bonner, back in London:
*** "We must be the most idiotic investors in the whole blooming world," we agreed in the Daily Reckoning office yesterday. We have been expecting a rise in the price of gold. We have seen it coming for 3 years. As forecasters, we have done well. But as investors, we are zeros. We nibble at gold…and wait for it to drop before we take a bigger bite. And each time, it doesn’t drop…it goes up…farther away from our buying target. Then, we move the target up….but again, the yellow metal bobs up to a higher level…leaving us with our mouths open and are hearts sunk.
*** "Americans seem to be getting ready to pull out of Iraq…as soon as possible," was the comment on British TV last night.
Meanwhile, on the street, demonstrators are gathering from all over the kingdom…to protest. Last night, we saw one of them with a Vietnam-era jacket. "I know I’m going to heaven, because I’ve served my time in Hell," said the embroidered message on the back.
George W. Bush is to come to London next week. The papers seem to know exactly what he is going to say: "Your sons die in noble cause," is the TIMES headline guess. It is the ‘old lie,’ as Wilfred Owen put it, "Dulce et decorum est…"
*** And here’s a little item from the Times of London:
"Villagers in Fiji wept yesterday as they apologized to descendants of the Rev. Thomas Baker for eating the British missionary 136 years ago." They said they wouldn’t do it again.
"Humans," says the Times, "were called ‘long pigs’ because their flesh was found to be similar to pork."