Darwinism...And Other Nonsense
A DR Classique, originally broadcast December 13th, 2000.
Looking out my office window at Mount Vernon Square in Baltimore, I again pose the question – why do I choose to live in France rather than the United States?
And since there is no one else in the office at 5 o’clock in the morning, I will have to answer the question myself, as well as pose it.
The answer has to do – in a very roundabout way, of course – with Darwinism.
But first, let me introduce a distinction to which I refer often in these letters. There are two forms of knowledge, said Nietzsche before he went mad. There is the knowledge you get from personal experience…which he called "erfahrung"…and there is "wissen" – which is the knowledge you get from the newspapers and from the abstract ideas you learn in school.
Darwinism is an example of "wissen," confirmed, or at least not contradicted, by much of what we can observe personally. People who understand Darwin’s theory believe they know something.
Darwin noticed that there were similarities between living things. He wondered if all might not have developed, or evolved, from the same source. This led to a theory about the way nature works.
The popular expression of the theory has two main elements: that random mutations are the source of change…and that these mutations either confer an advantage or a disadvantage in the competitive environment, and are thus selected in or out as the case may be.
In answer to the question, why does a giraffe have a long neck, the reply – "in order to eat the leaves of trees" – is incorrect. That response would suggest a hidden order or even design to the natural world. Darwinists don’t believe in design…they believe life is, in the poet and insurance agent Wallace Stevens’ words, "an old chaos of the sun." The giraffe, according to Darwinists, has a long neck because the short-necked giraffes did not survive.
A recent argument I had with Elizabeth concerned the meaning of "random."
"Either things are random or they are not," I told her, following up with the logical flourish worthy of William Jennings Bryant:
"And if man evolved from monkey by random mutation, favored by natural selection, then God had no role in man’s creation. And if God had no role in man’s creation, then Nietzsche is right…he may as well not exist."
"But how could Darwin or anyone possibly know whether the mutation is random or not?" asked Elizabeth. "Maybe it just looks random."
There is something about the concept of randomness that always seems to provoke an argument in our household. Longtime Daily Reckoning sufferers may recall another argument that we had – concerning the Random Walk Theory of stock price movement.
There, too, Elizabeth resisted the idea that stock price movements could be entirely random.
As it turned out, she was right.
By way of further introduction, we practice a division of labor in our household. Elizabeth decides where we live, what we eat, where our (six!) children go to school, how we spend our money and so forth.
I take on the big, important issues – such as the family’s position on the Efficient Market Hypothesis (EMH)…or what we think of the Strategic Air Power (SAP)…or whether we favor the Designated Hitter Rule (DHR). If it cannot be reduced to three capital letters, in other words, it is out of my sphere of influence.
But the randomness of stock price movements, the Random Walk Theory, or RWT, is clearly something I should know something about.
Still, Elizabeth’s instincts were right. As Smithers and Wright put it in their book, Valuing Wall Street, "It is now widely agreed among economists that the random walk version of the Efficient Market Hypothesis is very nearly, but crucially not quite, supported by the data."
People took the Random Walk Theory very seriously, just as they took Darwin’s Theory of Evolution (TOE) very seriously. Both appear to describe the way things work. But neither gives the reader any clue as to why they work the way they do…how things got to be the way they are…or what they will be like in the future.
Smithers and Wright do explain that the failure of the Random Walk Theory does suggest a useful insight – one that could save you a lot of money – but I will get to that later. Let me first return to Darwinism…and why I like living in France.
France is a country with many things that I deeply dislike.
It has a strong, well-padded central bureaucracy. Everything requires paperwork and approvals. Since I do not like anyone telling me what to do…the bureaucracy is annoying.
It has high taxes – with a maximum income tax rate nearly 50% higher than in the United States and a "wealth tax" which eats away not merely at what you earn in the current year, but what you earned, and managed to save, from previous years.
It is also a culture that delights in "solidarite" – where group-thinking and mass action are cultivated. Strikes are common…with the trains and highways often blocked. Still, the French not only tolerate these disruptions – they invariably seem to sympathize with the disruptors.
France is more of a socialist country than the United States. Perhaps it is a genetic flaw…or a weakness of my character…but I find myself completely unable to get into the spirit of "isms." Crowd behavior and group- thinking always seem imbecilic…and even dangerous. I do not even like watching sporting events.
Darwinism is an amusing, stimulating idea…but it is also easily vulgarized into a mob-slogan. Thus, the Theory of Evolution devolved into "the survival of the fitness" and the "law of the jungle"…which further devolved into the socialist apologia: "you can’t make an omelet without breaking some eggs." And by the mid-20th century, the socialists were using this vulgarized abstraction to run not merely their own lives, but those of millions of others.
All things being equal, I would prefer not to be one of the ingredients in the socialists’ omelet.
But just as no sensible man would take Darwinism seriously, neither should he take socialism seriously…or any "ism" for that matter. In fact, big, abstract ideas are often entertaining…but they are certainly no basis for organizing your life. I distrust them all – even, or perhaps especially, my own.
But when I look out my office window in Paris, I do not see socialism. I see a very romantic street scene – with the Paradis Cafe on the corner…cobblestone streets… and attractive people wandering around. Every quarter hour the bells of St. Merry’s toll…and in almost any direction I choose to set out at lunchtime, I will find dozens of appealing restaurants within a 10 minutes’ walk.
Also, I like the way the French windows open…so you can look out without the double-hung bars interrupting your view. And I like the way French drivers stay in the right hand lanes…and the way you can drive 100 mph down the highway without getting thrown in jail.
Taxes are higher in France, but where else can you buy a decent bottle of wine for $5? And where else can you see practically pornographic pictures – such as the current ad campaign for Yves St. Laurent perfume – without paying for them?
What I really care about is not the "isms" – but the everyday experiences of my life. Are my children safe? Are they being well-educated? Is the food good? Is what I have to look at appealing to my eye?
What I actually care about is the erfahrung, not the wissen. And the erfahrung isn’t my concern, in any case. I only deal with the big issues.
So, if you really want to know why I live in France, you’ll have to ask Elizabeth.
Your correspondent, back in Baltimore…
April 05, 2002 — Quietly Indisposed In Paris
It’s an amusing recovery.
"A recent poll by the Business Council," writes the Prudent Bear’s Chad Hudson, "showed that 56% of companies plan to either cut their workforce or hold it steady and 53% planned on reducing capital expenditures."
A recent Challenger, Gray & Christmas "layoff report" revealed that employers anticipate cutting 102,315 more workers…that’s 133% higher than the average monthly job-cut figure during the last recession. And initial jobless claims rose to their highest level in 4 months, reports Bloomberg.
Yet Fed cheeses William Poole and Alfred Broaddus, in separate appearances, both affirmed the recovery is right on track. "When unemployment gets down below 5.0%," says fellow Fedster, Fred McTeer, "then…I might be more willing to go with a preemptive policy [of rate hikes]." (Economists polled by Reuters expect the Labor Department to report unemployment has, in fact, risen to 5.6% today.)
An amusing recovery, indeed.
Meanwhile, "Wall Street job cuts highest since 1974," says a headline on Bloomberg. "This is not just laying off entry-level folks, the people just out of business school," Salil Mehta, a managing director at Second Curve Capital, is quoted as saying, "They are starting to lay off managing directors."
Eric…can you smell the fear?
Mr. Eric Fry at the scene of the crime…
– Down in the trenches, times are tough for foot- soldiers and officers alike. "Wall Street shed 43,300 jobs in the year ending February, making the biggest cuts in more than 25 years," Bloomberg News reports.
– Unfortunately, says Bloomberg, "the firing spree may not be over. Credit Suisse First Boston’s John Mack, Goldman Sachs Group Inc.’s Henry Paulson and other chief executives of securities firms are finding they still have too many employees."
– Unlike prior layoff waves that have swept through Wall Street over the years, this one is claiming both entry- level personnel and the seven figure per year investment bankers. It isn’t a pretty picture.
– A couple days ago, I mentioned that an institutional trader I know had said he was growing tired of listening to all the "whining" from traders at Morgan and Goldman about possibly losing their jobs. Yesterday, my friend provided an update: Two traders from Morgan that he knows, and one from Goldman, lost their jobs just this week.
– Meanwhile, the embattled Dow fought back yesterday to reclaim a sliver of the ground it had lost over the prior four days. The blue chips advanced 38 points to 10,236. The Nasdaq inched ahead five points to 1,790.
– Amidst all the chatter about the new ethos of corporate transparency, the old ethos of corporate deception continues to thrive. What has changed, perhaps, is that corporate pooh-bahs must now devise ever-more-creative ways of enriching themselves at the expense of minority shareholders…what a hassle!
– It was so much easier in the old days when all a CEO had to do to mint money for himself was to get a big bundle of "incentive" stock options, then announce some flowery pro-forma earnings numbers for a few quarters, watch the stock go up for a while and not forget to sell. Nobody complained, as long as the stock went up. And even if it fell, few investors complained because they assumed it would head right back up again.
– John C. Bogle, founder of the Vanguard Group, says stockholders have been part of a "happy conspiracy" – consisting of corporate executives, auditors, Wall Street bankers, analysts and yes, the shareholders themselves. The conspiracy’s shared goal has been a rising stock price, says Bogle.
– If it truly is a conspiracy, no single party is culpable. And yet, most of the finger-wagging these days is directed at the accounting profession in general, and at Andersen in particular. That’s probably a very naundefinedve oversimplification.
– As former Fed chief, Paul Volcker, sees it, Arthur Andersen is more "egg" than "chicken" in the Enron debacle. Volcker places Andersen’s role in a broader context. "There are weaknesses, attitudes in financial markets that have not been conducive to reliable financial reporting," Volcker tells Bloomberg News.
– "’I’ve got to make this quarter’s earnings. We’ve got to have higher profits every quarter, keep the stock price up.’ The pressures are tremendous on the executives, and the investment banks are running around telling them how they can cut corners. This kind of thing permeates financial markets and you’ve got all these high-powered financial engineers that are making a profession of finding their way around accounting rules and tax rules and the accountants are kind of at the end of the chain," Volcker asserted.
– Wall Street certainly plays a prominent role in the "happy conspiracy" by habitually accentuating the positives and downplaying the negatives. (The Daily Reckoning is one of the only known antidotes). Wall Street cooked up the now-infamous pro-forma earnings, for example. Those are the "earnings" before subtracting all of those unfortunate items known as expenses.
– "Bad terminology is the enemy of good thinking," says Warren Buffett. "When companies or investment professionals use terms such as ‘EBITDA’ and ‘pro forma,’ they want you to unthinkingly accept concepts that are dangerously flawed. (In golf, my score is frequently below par on a pro forma basis: I have firm plans to ‘restructure’ my putting stroke and therefore only count the swings I take before reaching the green.)"
– "New and Improved" laundry detergent might make your clothes "whiter and brighter." But that doesn’t mean we should expect corporate management to "come clean" in this new and improved era of corporate transparency any more than they did in the old era.
Back in Paris…
*** "The longer the day of reckoning is put off," writes Morgan Stanley’s Stephen Roach, "the more severe the impacts of the adjustment process are likely to be." Roach is referring to America’s coming current-account adjustment…"hints" of which, he says, "are already in the air."
*** Foreign capital inflows into the U.S. have slowed considerably in 2002. "In January, portfolio inflows into dollar-denominated assets slowed to just $11.3 billion, a marked deceleration from average monthly flows $44 billion recorded in 2001."
*** What should we expect if the trend continues? "As I see it," says Roach, "two aspects of America’s looming current-account adjustment should be especially important [to financial markets] – weaker GDP growth and a falling dollar…A correction is coming, and there’s no dark secret as to what that means. It’s just a matter of when the denial finally cracks."
*** When the denial cracks, you might want to take note of investment suggestions being offered up by our own John Myers. "For the first three months of the year, our portfolio was up 24.1%," says John. "Our gold investments powered much of the move. Over the first quarter Franco-Nevada rose 55%, Harmony Gold climbed 73%, Francisco appreciated 111% and Intrepid Minerals soared an astonishing 222%."
*** In an environment where GDP growth slows and the dollar slowly deflates, resource investments like gold, oil and energy are likely to be a nice, safe place for your money.
P.S. What are the 3 biggest lies on Wall Street? According to John Myers, they are:
Lie #1. The rate cuts will have to kick in soon
Lie #2. Earnings will surprise the skeptics
Lie #3. Recovery is here
P.P.S. Bill is quietly indisposed today, so we’ve delved deep into the archives and unearthed yet another Daily Reckoning gem…below.