Dead President's Day

Here at the Daily Reckoning we honor dead presidents every day. But only those whose faces appear on U.S. currency. "Dead presidents," as they say in the ghetto, make the world go round.

People often stretch the truth in markets. Occasionally, the truth actually expands to meet the prevarication. Sometimes it does not. But always and everywhere, the pretension gets marked to market and people get what they deserve.

But if people sometime lie in markets, in politics they seldom tell the truth. That is as true in a democracy as in any other form of government. Maybe worse. For democracy itself has a lie at its very core – that you can lie, cheat, murder and steal…so long as you can get 51% of registered voters to go along with you. People are perfectly happy to vote their way into other peoples’ bank accounts – and feel morally superior while doing so. For they always do so in the name of some high-minded chutzpah, whether it is concern for the environment or the poor…or making the world safe for democracy!

Political lies almost never get the comeuppance they deserve. Instead, they are chiseled in granite, monumentalized somewhere on the banks of the Potomac and revered for generations. On the $5 bill is a portrait of one of America’s most respected politicians – Abraham Lincoln. It is no accident that we celebrate "President’s Day" in mid-February. Lincoln was born on Feb. 12.

Lincoln is held up as an emblem of success. Often cited is the long list of Lincoln’s failures…followed by his surpassing successes: preserving the union as President during the War Between the States and freeing the slaves. Lincoln was not someone you’d want to run your business. Likely as not, he’d run it into the ground. But when the nation needed him, goes the myth, Lincoln hoisted himself up to the occasion like a burglar through an open window. Thus did Abraham Lincoln add a couple major items to the top of his resume…after a string of failed businesses, failed campaigns and marginal jobs…Mr. Lincoln delivered America into a disastrous war – the bloodiest war in its history.

A great president would have kept America from going to war. Mr. Lincoln’s greatness, however, comes not from his achievements, but from his lies. When it came to telling tall tales, nobody surpassed the young Congressman from Kentucky – except perhaps the mythmakers who enshrined him in the national hall of myths.

Thomas J. DiLorenzo makes this point in a recent article entitled, "The Mythical Lincoln." According to the legend, Lincoln nursed his desire to free the slaves for many years – until he finally got his turn as the leading man on the national stage.

Lincoln "was glad to accept on behalf of the Republican Party any votes from abolitionists, but real abolitionists despised him," writes DiLorenzo. "William Lloyd Garrison, the most prominent of all abolitionists, concluded that Lincoln ‘had not a drop of anti-slavery blood in his veins.’"

Lincoln had supported the Illinois constitution’s prohibition of immigration of blacks into the state. "He had once defended a slave owner seeking to retrieve his runaway slaves," DiLorenzo points out, "but never defended a runaway." In fact, Lincoln believed that blacks should be shipped out – back to Africa or to Haiti…anywhere but in the U.S.

And when he finally did free the slaves in January 1863 – his Emancipation Proclamation applied only to the areas of the country where he had no authority, the Southern states still resisting Union armies. Areas controlled by federal troops – where slaves might have actually been freed – were specifically exempted.

When it came to slavery, Lincoln was an opportunist. But that doesn’t mean the man had no long-held opinions. He did. Unfortunately, they were almost all lame-brained.

"When Lincoln first entered state politics in 1832," explains DiLorenzo, "he announced that he was doing so for three reasons: To help enact the Whig Party agenda of protectionist tariffs, corporate welfare subsidies for railroad and canal-building corporations (‘internal improvements’), and a government monopolization of the nation’s money supply. ‘My politics are short and sweet, like the old woman’s dance,’ he declared: ‘I am in favor of a national bank…the internal improvements system, and a high protective tariff.’ He was a devoted mercantilist, and remained so for his entire political life. He was single-mindedly devoted to Henry Clay and his political agenda (mentioned above), which Clay called ‘The American System.’

"Moreover, Lincoln destroyed the most important principle of the Declaration – the principle that governments derive their just powers from the consent of the governed. Southerners no longer consented to being governed by Washington, D.C. in 1860, and Lincoln put an end to that idea by having his armies slaughter 300,000 of them, including one out of every four white males between 20 and 40. Standardizing for today’s population, that would be the equivalent of around 3 million American deaths, or roughly 60 times the number of Americans who died in Vietnam."

Markets crush lies – eventually. Politics merely twists them into hideous new shapes…"Honest" Abe Lincoln rarely passed mendacity without applying some torque. In his Gettysburg address, for example, he spun the situation around so completely, it ended up facing in the opposite direction. Standing on the soil of the battlefield, where thousands died so that the Southern states could be held in submission, Lincoln portrayed the war as a fight for liberty! The North was fighting, he said, so that the nation that proclaimed the principle of self-government as a sacred right "should not perish."

"It is difficult to imagine anything more untrue," wrote H.L. Mencken. "The Union soldiers in the battle actually fought against self determination; it was the Confederates who fought for the right of their people to govern themselves. The Confederates went into the battle free; they came out with their freedom subject to the supervision of the rest of the country."

Lincoln got what he wanted. The South was subdued. Tariffs, taxes and central banking entered a bull market. The average tariff rate was only 15% in 1857. By the end of the Lincoln Administration it had risen to 47%. The National Currency Acts nationalized the banking system. And millions of dollars poured into Lincoln’s railroad and other infrastructure subsidies. An income tax was introduced for the first time…By the time Lincoln died, the foundations of big government had been laid. The nation would never be the same.

Lincoln has been dead for more than 150 years. His legacy remains. Alas.

Bill Bonner, thinking about dead presidents…
February 18, 2002

am down in Nicaragua, where my access to internet is limited. Herewith, Eric’s notes from Wall Street…


Eric Fry, reporting from New York:

– The bookkeeping bogeyman paid another visit to Wall Street last Friday, and investors took fright.

– A New York Times story exposing one particular envelope-pushing accounting entry by IBM sent the shares of the popular tech stock careening almost 5% lower. By the end of the day, IBM looked like "Big Black and Blue."

– The Dow never stood a chance. The blue chip index dropped 99 points to 9,903, while the Nasdaq Composite fell 38 points to close 1,805.19.

– The Times story asserted that IBM failed to disclose a $300 million gain on the sale of an optical unit, and then included the gain as part of its reported earnings. This is not a standard accounting practice. Without the hefty gain, IBM’s earnings would have fallen short of fourth-quarter estimates.

– Like Elan, Tyco and many other "accounting challenged" corporations, IBM’s bookkeeping has been under suspicion for some time.

– For more than two years, both James Grant and Fred Hickey have been exposing IBM’s aggressive accounting practices. Ironically, until now, no one seemed to care exactly how IBM counted its beans – much less whether it included various other foodstuffs in the bean count. But now investors care – both because times have changed and also because the story showed up in the New York Times.

– Over the years, I’ve noticed a curious phenomenon: Many investors – professional and individual alike – fail to heed bad news about a given stock until after the New York Times or the Wall Street Journal puts their imprimatur on the story.

– If its old news you want, the Journal is a great place to get it. But if you are looking for NEW insights, there are better places to cast your eyes.

– Investment research services like Grant’s Investor (with which I am affiliated), as well as other investment research letters like David Tice’s Behind the Numbers, Grant’s Interest Rate Observer and The High Tech Strategist, have all routinely identified difficulties at high-profile companies, well before the Journal ever got around to reporting the story.

– The Grant’s Investor team, for example, pinpointed problems at companies like Ariba, Corning, Elan, Tyco, Cisco and Tellabs, well before their stocks imploded.

– "Forewarned is Better," as Jim Grant likes to say.

– The accounting bogeyman that is haunting the stock market will not likely go away anytime soon. That’s because most of the accounting rumors circulating these days aren’t just rumors; they’re true.

– Someone recently asked New York City Mayor Rudy Giuliani whether the events of September 11th meant that we are living in a changed world. He answered, "We’re not a different world. It’s the same world as before, except now we understand it better."

– The same could be said for the stock market, says Legg Mason’s Ray Devoe (also a regular contributor to The Fleet Street Letter and The Daily Reckoning). Post-Enron, we understand better that some of those responsible for safeguarding investor’s interests might dose off every once in a while. Or worse, the financial market sentinels who aren’t snoozing might crawl into bed with some of the very folks they’re supposed to be guarding us against!

– "Systemic conflicts of interest are more pervasive and corrosive than either Congress, regulators, investors or the press appreciate," Scott Cleland, CEO of the Precursor Group, an independent research firm, said in congressional testimony.

– As the New York Times observed recently, "When Paul A. Volcker Jr., the former chairman of the Federal Reserve, said last week, ‘Accounting and auditing in this country are in a state of crisis,’ he was not just speaking to the man in green eye shades, but to the millions of Americans who hope to pay for their retirement or their children’s educations by investing in stocks."

– History suggests what could happen if we don’t clean up our act quickly and credibly. Investors may shun stocks for a decade or more, just like they did after the 1929 Crash, when they felt cheated by the powers on Wall Street.

– More than two decades would pass before Americans would tiptoe back into the stock market. And more than four decades would pass before they could be found wading waist-deep into mutual funds. Finally, six decades after the Crash of ’29, Americans were fearlessly diving headfirst into anything with a ticker symbol – especially a four-letter Nasdaq ticker symbol.

– "Until Enron’s implosion," the Times concludes, "many investors, both individual and professional, ignored accounting issues. Wall Street’s conventional wisdom held that while a few companies might be inflating their profits, the market as a whole was essentially honest. That is now in doubt."

– Or, to put it more cynically, is there any doubt that the market is far more dishonest than most investors believed? It is no longer enough to assume honesty and integrity within the upper echelons of corporate America.


Back in Managua…

*** "Your [J.P. Morgan] piece inspired me to look at their Q1, 2001, 10Q and their 2000 annual report on their homepage," writes a Daily Reckoning reader.

"As of September 30, 2001, their balance sheet shows Total Stockholders Equity being $42,735 million, of which $14,683 million is "Goodwill and Other Intangibles" and $7,268 million is "Premises and Equipment." If we discount Premises and Equipment by 50% and add the result to the $14,683 of Goodwill and other Intangibles, there are $18,317 of worthless assets, leaving an actual stockholder value of $24,418 million ($24.4 billion).

"Andrew Collins, banking analyst for U.S. Bancorp Piper Jaffray, was quoted in a 12-18-01 Forbes article that he estimated non-performing loans at $3.15 Billion. If we add another $1 billion for Tyco, that brings the total non-performing loans to $4.15 billion. Subtracting that from stockholder’s equity nets their assets to about $20 billion in assets.

"Forgetting JPM’s total derivative book of $29+ trillion for the moment, JPM holds "Trading Assets" (long positions) and "Trading Liabilities" (short positions) which are the derivative positions that they are trading for a profit or loss for their own account. They are long $165 billion and short $58 billion for a total of $223 billion dollars notional value, not include their hedging operations.

"With greatly increased volatility in the bond market since September, and with a short term gold derivative book of $28.5 Billion, it is easy to see that ‘stockholder’s equity’ might be a fleeting memory."

*** I barely recognized my family when I met up with them in the Miami airport. I was admiring a dark-haired lady at a distance…petite, with a certain elegance and grace about her; she looked very different from most of the leisurely dressed women coming through customs. It took a second to realize – that’s no lady, that’s my wife!

*** Maria had a new haircut too. My model daughter looked like Audrey Hepburn in a Touch of Class when I left her in Paris a week ago. Now she looks like Uma Thurman in Pulp Fiction.

The Daily Reckoning