Confidence Game

You would not find my late mother listed along with George Soros, Julian Robertson and Warren Buffett in a compilation of the leading investors of recent times. Yet she taught me one of the greatest lessons an investor can learn. Investment success begins with your attitude to life.

Following her advice in the summer of 2001 helped me add $10 million to my balance sheet last year.


When the depredations of the bear market had swept away $50 million and I was beginning to stagger and flinch from my losses, my mother forcefully reminded me not to succumb to the bear market mentality. She counseled me never to allow myself to become a prisoner of fear and dwell on the negatives. “Believe in what you invest in and you will be successful. You will find a way to make it work.”

At times my mother’s sense of accountancy seemed to rival that of Enron’s. But instead of capitalizing derivatives, she saw it as an almost spiritual principle that you create your own luck. This has been known for ages by first- caliber athletes who understand that confidence is not mere arrogance, but a necessity for performance. The top basketball player or professional baseball pitcher can seldom win if he approaches the game in a timid and frightened way.

Without the kind of confidence that “bull markets” normally impart to investors, an athlete lacks that little edge to him that all the great ones have. And what is true of sports is equally true in other aspects of life.

Bull Market Creation: Courting Success

I was inspired by my mother’s vision that I could create my own bull market. Rather than count my pennies and prepare for failure, I took her advice, mustered my remaining investment resources and concentrated on creating value. Where I might well have ducked opportunities because I feared losses (the essence of the bear market mentality), I convinced myself that good things would happen from courting success. I took some real gambles on small-cap companies that might have gone out of business. They didn’t.

In fact, by the end of 2002, I was $10 million ahead of the weak position I was in during the summer of 2001, when I found myself wobbling into fear and despair – only to be turned around and steadied by my mother’s apparently naïve faith that I would surely succeed if I only “cast my bread upon the waters.”

Crippled by disease and fastened to life-support for the final stage of her life, my mother was no Pollyanna. But she was someone who instinctively understood that you must choose happiness. Her cheery disposition was not a calculated investment gimmick, but a profound expression of her understanding of life, made more credible by the fact that she had much to be unhappy about. She imparted to me the conviction that I could succeed by creating my own bull market without waiting for “safety in numbers” or the approval of others. She understood that it is easier to take risks when everyone is in a mood to do so. But equally, the returns are higher when most investors are pinching every penny as if it were their last.

Bull Market Creation: Self-Defeating Prophecies

Now that my mother is gone, I can no longer rely on her to reorient me when I threaten to absorb the negative bear market mentality that is underscored in every night’s news. While I once was a confirmed bear and made myself an expert on threats to prosperity, predicting many of the unhappy developments of recent years, I ultimately found that focusing on my own predictions was self-defeating, rather than a sound preparation for the future.

Stock market debacles, threats of “Code Orange” terror alerts and bankruptcies may engross the headlines, but I have learned not to let them engross my thinking and take over my central nervous system. Whenever I find myself being affected by the bleak civic mood that engulfs us, or the equally bleak sentiments of market experts, I make a point to pause for an internal dialogue with myself. I think back to what my mother would have said to shake me awake to the positive potential of life.

Although I am not a particularly religious man, I see a version of this profound truth echoed in the Bible: “Anyone who starts to plough and then keeps looking back is of no use in the Kingdom of God” (Luke 9:62). I now look ahead when I plow.

I recommend that you do, too.

James Davidson,
for The Daily Reckoning
April 2, 2003


Japan is back in the news. Readers will recall that Nippon enjoyed a New Era in the late ’80s, when investors lost their heads and bid the Nikkei Dow up to nearly 40,000. In January, 1990, stocks began to fall and the New Era was over. But nearly everyone was sure that the miracle economy would soon recover. The Economist, for example, ran a major article explaining why a serious slump in Japan was out of the question.

Since then, the country has been in on-again, off-again recession…with stock prices falling. And yesterday, the Nikkei dropped below 8,000…effectively wiping out nearly 20 years of stock market gains.

In this space, 3 years ago, we wondered if what had happened to the world’s second-largest economy might not happen to its first largest. We made the suggestion not because we knew what was coming, but because we didn’t. If a long, slow bear market is what happens to a modern economy following a bubble, why wouldn’t the same thing happen in the U.S.?

America’s bubble began almost exactly 10 years after Japan’s…and reached similarly absurd proportions. Then, stocks began to fall in America…almost exactly 10 years after the Japanese top. Again, economists at first dismissed the bear market. All seemed sure that America’s miracle economy would quickly bounce back. But here we are, Anno Domini 2003, and the latest news is bad.

A USAToday business poll tells us that 43% of those asked think business is worse than expected. Only 26% think it is better. In February, almost all indicators were negative. Durable orders, retail sales, payrolls, business activity – all fell.

GM, desperate, is offering to finance its cars at zero percent interest for up to 5 years.

And profits? As reported in this space yesterday, by Kurt Richebächer, profits are disappearing. As a percentage of GDP, profits were 6.7% in ’97. They declined to 4.3% in 2000…and are now near 3% – their lowest level in the entire post-war period.

And now, economists are beginning to wonder if we are already back in recession.

“Is this the second dip?” asks a CNN headline.

We don’t know. But it looks to us as though the U.S. is still following the Japanese example. In Japan, GDP growth slipped to near zero in ’93. Then, it went negative in ’95. In ’96, it looked like the country was back on a growth path…but then, in ’98, it slipped into a severe recession, with falling prices and growth rates at nearly negative 5%.

Faced with the same peril in America, you can expect the Fed to make a further rate cut…which may be followed by another flurry of refi activity…and a final top in the bond market…and, oh yes, buy gold.

Eric, what do you see?


Eric Fry in New York… – What was it that inspired the bulls to buy stocks yesterday? Was it war, or was it pestilence?…Or both? The experts tell us that war is bullish. So war and pestilence combined must be doubly bullish, right? Let’s look at the facts: We’ve got a war raging in the Middle East and a fatal disease raging in Asia…What could be more bullish for stocks than that?

– Yesterday, the Dow rallied 78 points to 8,070, and the Nasdaq gained half a percent to 1,348. Perhaps war and pestilence had nothing to do with yesterday’s rally. Maybe the bulls bought stocks because the economy is floundering (which means that the Fed will cut rates, which is bullish for stocks).

– The Institute for Supply Management’s index imploded to 46.2 percent in March from 50.5 percent in February. In a healthy economy, the ISM number rises above the 50 level and stays there. Let the reader decide what a reading of 46.2 might portend.

– While stocks advanced yesterday, the safe-haven assets backpedaled a bit. Gold for June delivery dipped $1.70 an ounce to $335.20; crude oil for May delivery dropped $1.26 to $29.78 a barrel; and the benchmark 10-year Treasury note retreated 11/32 to yield 3.84%, up from 3.80%. When, dear reader, might investors demand more than 3.84% per year to lend money to the US government for 10 years?

– “The new consensus opinion in the bond market,” writes Jim Grant, “[is] that tactical reversals for American forces are bullish, because the war will last longer than expected, energy prices will not collapse as hoped, the U.S. government will borrow more than planned and the Fed will stay more accommodative longer than it would otherwise have done. In other words – if we follow correctly – heavy public borrowing, fast-paced debt monetization and high commodity prices are non-inflationary. We had somehow believed the opposite…”

– So had we…and we still do. Over here in the New York office, we apply the “Brooklyn Method” to financial analysis: “We calls ’em as we sees ’em.” And what we see is a far-flung military campaign, an out-of-control fiscal deficit, a soaring current account deficit and a struggling dollar. Which of these trends, we wonder, helps a bondholder to sleep soundly at night?

– Your co-editor has let it be known that he considers the Treasury’s long-dated bonds to be financial landmines…Or perhaps they are more akin to a blunderbuss – a weapon as likely to fire at the intended target as to discharge in the face of the shooter.

– Many are the reasons to steer clear of Uncle Sam’s obligations. For one thing, the Clinton-era budget surpluses are a distant memory, as the federal budget plunges into deficit. Making matters worse, the war meter is running and the longer it runs, the higher the fare. President Bush has procured $75 billion to pay for the “liberation of Iraq”. But that number is likely to grow. Ironically, therefore, liberating Iraq will shackle American taxpayers to a national liability that will almost certainly exceed $100 billion, if not $200 billion…

– Congress, doing its patriotic duty, is prepared to spend as much of our money as it takes to establish a beachhead in Baghdad. The Federal Reserve, likewise, is prepared to wrap the Stars and Stripes around its reckless monetary policy…if need be.

– “The ancient role of the central bank in wartime is to accommodate the national government,” writes Jim Grant. “The Fed, worried about deflation, was engaged in a strenuous program of credit creation before the U.S. invasion. ‘Geopolitical uncertainties’ only strengthen the monetary tendencies in place. Heavy public spending doesn’t guarantee a rising inflation rate. Neither does easy money. However, the two in combination make the bond market and even more forbidding place for widows and orphans…

– “Perhaps the war will exert less influence on economic and financial events than the unfinished business of the bear market will exert,” Grant continues. “Whatever the case may be, the new Wilsonian look in foreign affairs (coupled with a continuing inflationary bank in monetary policy) heightens whatever risk of inflation there was before the bombs fell.”


Bill Bonner, back in the land of Liberty…

[France, that is; we have picked up the idea of renaming everything associated with France with the word “Liberty”. In a gesture of solidarity with our American compatriots, we will eat Liberty legs in a Liberty restaurant tonight.]

*** Why hasn’t the dollar crashed? That it will crash seems a foregone conclusion. For isn’t the federal government lowering taxes while conducting a war against terror…a war against Iraq…and a war against recession – all at the same time?

Oh how we miss America! You remember that great country, don’t you, dear reader? It was the country in which the people’s elected representatives were supposed to get together and debate the merits of important issues – such as war. It’s right there in the Constitution…no kidding. With furrowed brows and grave tones, they are supposed to hash out the pros and cons…and solemnly vote on it. And if they see fit to go to war, they also have the responsibility to find the means to pay for it, typically raising taxes to cover the bills.

But it is all fraud and hokum now. Congress has become like the Roman senate when the empire began to decline – cowardly, irrelevant, and repulsive. Members of congress hide in the toilet rather than even discuss the war. And how to pay for it? No one bothers to ask.

In war as in love, of course, you never stop to count the cost until it is over. When the tally is finally done, we don’t know what it will show. But we have a fair idea of how the bill is paid. The same Congress that could not find the courage to raise the money for the war while it was young and fetching…will find even less will for raising money to pay for it when the affair is over. Instead, it will pass the buck, so to speak, to the people who seem to have the power to create bucks out of thin air, the Federal Reserve. Always ready to provide credit, whether it is due or not, the Fed will come through the war like a good soldier. The Fed will do its duty; it will produce dollars as if they were war supplies. And, sooner or later, the world will have more than it can use.

*** Poor Fannie Mae. The old girl had a spectacular opportunity and made a mess of it. Refinancing activity hit a record last year – running an approximately 9,300% larger operation than in 1990. Yet, Fannie found a way to lose money for shareholders. The company’s net worth declined by 2% last year, reports