Death Chants, Breakdowns, And Forecasts For 2006

The Daily Reckoning PRESENTS: In yesterday’s issue, Bill promised to give his predictions for the year ahead in today’s essay – but we must warn you: What follows is more of a churlish lament than a real forecast. Read on…


Mercy Otis Warren on the ratification of the Constitution in 1788:

“When fortune throw[s] her gifts into the lap of fools, let the sublimer characters, the philosophic lovers of freedom who have wept over her exit, retire to the calm shades of contemplation, there they may look down with pity on the inconsistency of human nature, the revolutions of states; the rise of kingdoms, and the fall of empires.”

We warn our dear readers. What follows is more of a churlish lament than a real forecast. As we have confessed more than once, and proven more often, we get the news no sooner than anyone else. Still, we have two advantages over most forecasters: We know our limitations, and we don’t watch television.

So, today, we begin by describing the world, not as it will be, but as we think it is. It is a world where individuals who mind their own business can live better than at any time in history. Painless dentistry, air-conditioning, automobiles, the Internet – we are humbled by the majesty of our own creations. Year after year there are more of them. Now we can eat pineapple in London in the wintertime. We can read books written by dead Chinese scholars in our native languages. We can chat with a friend on the other side of the globe, at almost no expense. And we can have an erection where and when we want one (so we are told), thanks to the wonders of modern biochemistry, rather than the mysteries of old-fashioned hoochie coochie. The thought of it is almost too much for us. We swoon, and ask the gods: what next?

While the progress of the world swells up before our eyes, we turn our eyes to the newspaper and wonder what has gone wrong, for there is the story of 100 dead in Iraq. Reading more carefully, we find that the news from Iraq could have been written 100 years ago, when the British Empire was fighting insurgents in the area. It could have been written nearly 1000 years ago, when Baghdad was under assault from the Great Khan. We also might have read it 2,000 years ago, when similar battles were fought with the Romans.

Has nothing changed? Why is our own Texas Tiberius repeating the errors made by virtually every empire that ever was: pushing beyond the limits of its resources, until it finally falls apart? And he does so at the very moment when life seems so sweet in so many ways. We Americans can barely brush our teeth often enough.

Alas, dear reader, while we enjoy real progress in matters of technology, in matters of psychology we remain the same as we always were: prone to panic, backsliding and humbug.

Which is why we expect little from 2006. Technology improves with the passage of time; psychology oscillates like the seasons. While we are sure that the year will bring marvelous new gadgets, we doubt that it will bring marvelous improvements in our mental state. We have enjoyed a long season of calm, comfort and conceit. Bitter weather must follow, as it always does.

Returning to the occupation of Iraq, what should we expect? More bad news is our guess. Psychologically, the nation is sliding down from the peak of “bring ’em on” optimism. It is becoming obvious that the war benefits only two groups: Osama bin Laden and his gang, who were happy to see the posse head off in another direction…and certain well-placed defense contractors. The former, bin Laden’s bunch, are presumably holed up in a cave somewhere. But the latter are living it up in New York. The International Herald Tribune ratted out David Brooks, of DHB Industries, maker of bulletproof vests for the military. The vests are worn by the poor grunts sent on Mr. Bush’s fool’s errand. Mr. Brooks wears silk. The IHT describes a private party for the vest-maker’s daughter, held at the Rainbow Room at Rockefeller Center:

“The bash was headlined by a list of performers that could easily have carried the Super Bowl halftime extravaganza. The superstar rapper 50 Cent and the front men from the rock group Aerosmith were among the night’s many performers. According to the The Daily News in New York, the party [cost] $10 million…”

Brooks can afford it. Prior to the Bush administration’s war to make the world safe for democracy, the man made $525,000 a year. In 2004, thanks to fat government contracts, he made $256 million, in compensation and stock sales.

Good for him. But we suspect that fewer Americans will want to sacrifice their sons and daughters in 2006 so that Mr. Brooks can get rich. In fact, we expect the average working stiff to go a little sour in the year ahead. He’s been losing ground for the last three decades. His wife went to work to help pay the bills, and then he borrowed money to keep spending. But this is the year when the bills begin to pinch.

Home sales will be down 6% to 8% in 2006, says Fannie Mae. Wal-Mart just reported its smallest December sales gain in five years. Auto sales for the Big Three were all off in December. And even, “truck sales stumble in ’05,” says AFP.

It may be true that the new, globalized economy helps everyone get richer. The trouble is that the riches do not fall on all voters equally. The rich – those who own financial assets, and those whose labor is protected from Asian competition – are getting richer. The poor are getting poorer. When the poor finally realize it, they aren’t going to like it, and 2006 may be the year they begin to wise up:

“Millions brace for credit card crunch,” says a CBS headline.

But the lower and middle classes can do nothing about it. They are the ones who have borrowed too much – often taking out interest-only mortgages, with no income verification. They cannot work their way out of the hole; their wages are under constant pressure from Asia. They will have to suffer, along with those who hold their mortgages.

Technology inches forward, but changes in mass psychology can happen by leaps and bounds. That is why the financial markets are prone to panics. Of course, they do not happen frequently. That is why forecasters are usually right when they predict that next year will be like the last. Extraordinary events, like panics, happen rarely. Otherwise, they would be common events. And since they do not happen very often, people generally think they never happen. People build their houses on low ground…knowing that a flood is possible. But they rate the odds so low as not being worth worrying about. Likewise, who worries about a panic out of the dollar? Who worries about a stock market crash? Who tosses and turns at night, sweating the risk of a real estate collapse? After so many years of stability, investors come to think these things can’t happen. They imagine that the monetary authorities have made some fundamental progress – like the progress in microcomputers or gene therapy – that makes these extraordinary events obsolete. They think they will never happen again.

Imagine what they would think…imagine what they would do if the dollar sinks by 5% every day for a week. Imagine how hysterical they would become if their neighbors house stays on the market, even after they cut the price by 50%. Imagine how panic-stricken they would be if interest rates shot up 2%…or 4%…or even to 18% as they were in 1981. All of these things are possible. All are likely, maybe not in 2006, but certainly before the end of time. All are human, psychological reactions…completely foreseeable and completely unpredictable at the same time.

We have no opinion on sectors, markets, or individual stocks. But our opinion of our fellow man is that he is given to fits of desperate sanity. And our instinct is that he is getting close to one now. He will look at his dollars and realize that they are nothing more than pieces of paper. He will look at his stocks and wonder why he ever thought they were worth 20 times earnings. He will look at his house and won’t be able to believe that someone would have willingly paid him so much for it…and that he, damned fool, didn’t take it!

All of that is in the future. How far in the future, we don’t know, but we are happy to own gold while waiting for it. Gold, any broker or financial planner will tell you, is nothing but a “risky speculation.” In our opinion, it is one of the few places you can put your money that is not a speculation. It is there when your neighbors are happy. It will still be there when they sad. It there when the empire is riding high. It is still there when it doth lie so low.

We hold onto it now, because we expect an extraordinary change…as the U.S. empire sinks, and your neighbors start to growl. Gold should not merely stay there, but go up.

Bill Bonner
The Daily Reckoning
London, England
January 6, 2006

Editor’s Note: 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).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

“Now Perhaps Someone Will Listen!”

We have had no epiphanies yet today, but it is still early.

Floyd Norris discusses a new book by William Draves, called “Nine Shift.” The point of the book is that the early 21st century looks a lot like the early 20th century. Both periods were marked by great faith in the future, apparent political and economic stability, and new technologies that seemed to point to a better life for everyone. One hundred years ago, automobiles, subways, internal combustion engines, and electric appliances offered a radical improvement in standards of living. Now, information technology and biochemistry are on the cutting edge.

Both periods were marked by rising stock prices, too, says Draves. In the nine-year period beginning in 1897, stocks went up and down, but ended the period 91% higher than where they began. Since the end of 1996, similarly, U.S. stocks are up 87%, as measured by the NYSE composite index.

And then, as now, people believed that the monetary and economic authorities were ready to deal with any crisis that came their way. The system was different, but no less reliable. The federal government merely deposited money in major banks when they thought the financial system seemed to need it and withdrew it when it looked as though they had too much. But in the Panic of 1907, even the U.S. Treasury did not have enough cash to meet the demand. Depositors were withdrawing so much money – out of fear of a banking collapse – that the U.S. Treasury couldn’t keep up. It took J.P. Morgan himself to calm depositors – by putting his personal money into the banking system. Still, stocks ended 1907 with a 38% loss.

According to Draves, U.S. monetary officials were humiliated by the fact that they had to rely on a private banker to avoid disaster. They began laying plans for the creation of the U.S. Federal Reserve System, upon which the entire world’s financial system blissfully and confidently relies in 2006. No financial system, and no paper money, lasts forever. We wonder what sort of panic awaits the Bernanke Fed…and when.

Elsewhere in the news, we discover that Ariel Sharon is trapped in limbo, between life and death. “Israel faces a political earthquake,” says Le Monde. We don’t know why that is important, but it is on the front page of newspapers in America, France and Britain this morning. Meanwhile, in Turkey, two children have been carried off by bird flu. “Deaths on the doorstep of Europe shock health officials,” says the International Herald Tribune. And in Iraq, more than 100 people died in two suicide bombings.

We recall those immortal and prophetic words of columnist Thomas L. Friedman: You can’t build a healthy society with suicide bombers. Friedman suggested a tactic for dealing with the many explosive personalities in Mesopotamia. “De-legitimize” them, he said. Now there was an epiphany. If only someone had passed the insight along to the U.S. high command! Alas, the generals and hacks never got the message. And they must never have thought of “de-legitimizing” the suicide bombers on their own. And so, now we have a big mess in Iraq. Say, how do you de-legitimize something? We don’t remember ever legitimizing it in the first place. About which, more below…

More news from the pundits at The Rude Awakening…

Bill Bonner, back in London with more thoughts, opinions, and obiter dicta…

*** Gold fell under $530 yesterday. Was it a one-day setback, or the beginning of a major correction? Looking at the charts, it appears to us that gold still needs to correct before marching forward. We expected a correction at least down to the $480 level. We think there is still a fair chance of such a consolidation coming. More on gold, below…

*** Elsewhere in the news, we find both good news and bad news is coming from the pampas. Your editor has just made a large, for him, investment down there. Now he is discovering what he got himself into. He explained it to his old friend, Frank Trotter, who visited yesterday.

“Well, no, we don’t know much about cattle ranching. We raised them in the United States and still have some in France, but we’ve never really known what we were doing.”

“Cattle ranching is at least pretty simple,” said Frank, who has his own cattle farm in Missouri.

“Not quite as simple as we had hoped. When we tried to figure out what the cattle operation would yield, we just took the number of cows and multiplied by the standards we had been given: each cow has slightly less than one calf per year, with a survival rate of nearly 95%, and a sales price of about $150 after a year. The math was pretty easy. But after we bought the place, we talked to someone who really knew the cattle business in that part of Argentina. You see, it’s very poor, dry land. So none of the numbers apply.

“Yes,” he told us. “Cows do usually have a calf a year, but not your cows.”

“Why not?”

“Because, you’re up there in the high country. The cows aren’t as fertile…they have to walk around too much, or they don’t get as much to eat. And then when they do have calves…the calves often don’t survive. It’s just too cold, or too dry, or they get taken by wild animals.”


“And then, if the calves survive, they are still skinnier than calves raised on good land. So they don’t bring as much when they go to market.'”

“It sounds like we’ll never make any money from the cattle operation.”

“No, you never will.”

“Oh…well, at least our record is unbroken. We can now say we’ve raised cattle unsuccessfully on three different continents.”

The Daily Reckoning