Even More Advice to a Young Man
Hast not thy share? On winged feet, Lo! It rushes thee to meet; And all that Nature made thy own Floatin in air or pent in stone, Will rive the hills and swim the sea, And, like thy shadow, follow thee."
– Ralph Waldo Emerson
Men can only be happy when they do not assume that the object of life is happiness.
– George Orwell
She was conceived in a cabin in Northern Ontario, where her father was speculating on a gold mine. The girl was named ‘Unity’ in hopes that WWI would end quickly and well, and ‘Valkyrie,’ after the Norse maidens of war, just in case it didn’t.
Later, Hitler would say of her, and her sister Diana, that they were "perfect specimens of Aryan womanhood." But by that time, another sister was plotting to buy a handgun and assassinate the Fuhrer.
At the time, the Thousand Year Reich looked like a good bet to two of the beautiful Mitford sisters. But the third, Decca, managed to find a rival moronic cause – communism – which she took up with a competitive imbecility.
Such were the nutty goings-on of a smart, well-educated, well-brought-up bunch of upper-class Brits in the between-the-wars period.
We mention the Mitfords to reinforce a point made from time to time here in the Daily Reckoning. Any fool can do something stupid. But it takes real talent or brains to make a complete imbecile of yourself. The Mitfords had all the qualities. In a better world, they might have planted flowers around public monuments, or offered kind words and cookies to invalids. But the Mitford synapses fired left, right and overtime. The times called out for political engagement. And who had more brains, more time, more class to bring to the struggle?
"I don’t understand," Lord Redesdale, father of the Mitford crew, said one day. "I am normal. My wife is normal. And all our girls are crazy."
The girls all seemed to have beautiful minds and beautiful bodies. But they couldn’t seemed to stop making public spectacles of themselves. In 1936, Diana married Oswald Mosley at Joseph Goebbel’s Berlin home. A news photo from that same year shows Mosley, dressed in jackboots and black uniform, strutting like a demented popinjay before a troop of his British Fascist Union.
But at that time, Hitler was famous for having turned around the German economy in just two years. To many of the most beautiful minds of the time, he seemed to be leading the way towards a better future in a new era. Who could blame Unity and Diana for being impressed?
That is the trouble with humans. Even the smartest are easily impressed and readily misled. In pursuit of their own happiness, they are as likely to buy tech stocks at 200 times earnings as they are to take up with some woebegone campaign to make the world a better place. Which makes us suspicious of the power of the human intellect. Not that we’re opposed to reason; it’s just that reason alone is no defense against craven imbecility.
And not that we don’t have an open mind on the subject. In preparing today’s letter, we trudged through Ayn Rand’s "Virtue of Selfishness" in an effort to try to understand a different point of view. Can a person really draw out a personal code of ethics by reason alone, as if he were proving an equation or designing a chicken-gutter?
We still don’t know. We could make no headway with Rand. She writes about reason with the assuredness of an incipient lunatic, nursing the illusion of self- awareness into an adolescent cult figure; that is, into a fiction. A rational man figures out what will bring him happiness and subordinates his whims to his reason, she believes. Man is rational, she says, making us wonder if she ever actually met one. Her men are made of tin.
The men we’ve met use their powers of reason. But they use them in order to get whatever crazy thing they want at the time. They do not always get what they expect, of course. But they generally get what they deserve, we observe. They may or may not be after happiness, intuitively or rationally. They may or may not get it.
What matters is not really what they think – for men think all manner of absurd things – but what they do.
"You cannot know when you’re doing the smart thing," I told my son Jules. "Looking back, some of the ‘smartest’ things turn out to be the ‘dumbest.’ All you can do is to try to do the right thing. That is, remember the essentials. Buy low, sell high. You can try to do it the other way around… but it usually won’t work.
"Likewise, you can try many smart tricks to try to get what you want…but if you contravene the fundamental rules…well, you get what you deserve. And even if you don’t get what you deserve – you should."
"Huh…" said the 14-year-old.
"I mean, when you make an investment, you can’t know whether it will go up or down – no matter how smart you are. All you can do is to stick to the essential rules – buy good things at low prices.
"Well, that’s true in the rest of life too. Work hard. Do your best. Say please and thank you. Do your homework…"
Your helpful editor…
May 23, 2002 — Paris, France
P.S. Poor Oswald Mosley died in 1980. Poor Unity died in 1948 – after she shot herself in the head. But Diana Mitford Mosley is still alive. She lives here in Paris and celebrates her 92nd birthday on June 10th. Is there anything she would have done differently?
"Not at all, I regret nothing," she told the Figaro.
"Euro Soars Against Dollar," says a BBC headline. The imperial dollar may be the world’s favorite currency… but that doesn’t stop it from going down in price. The euro reached a 9-month high against the greenback yesterday.
There has been a "significant shift in sentiment," said a currency strategist at BNP Paribas. Even the Australian dollar is going up – it is at a 16-month high against the U.S. brand.
And gold, the world’s alternative currency, is going up too. It’s up 13% against the dollar so far this year.
Everyone’s talking about gold…still, only 1% of mutual fund industry assets are in gold. Who knows what would happen if mutual fund investors ever wanted 2% of their assets in gold! Or Japanese investors, even…
"Japanese buying of gold is tiny," writes Marc Faber, "when compared to the country’s GDP per capita. Japan currently imports only about 100 tons of gold annually for a population of 120 million with a GDP per capita of more than US$35,000. Compare this to India, which imports close to 900 tons of gold for a population of one billion but with a GDP per capita of only around US$300!
"Compared to India’s purchases with a far lower purchasing power, Japan’s gold buying has so far been very small, but it could rise significantly in the future and become a price-driving factor in the gold market."
"When it comes to gold," says The Poneytailed Pundit, (some guy quoted in Barron’s), "I profess to be neither standard bearer nor bug. Yet gold still has a place in a diversified portfolio. I have personally maintained a position of anywhere from 2% to 4% in a gold fund since the late ’80s."
What would it take to turn average patsy investors into gold holders? We don’t know…but we have a feeling we’re going to find out.
Which doesn’t mean we expect the price of gold to continue rising in a straight line. Most likely, it will pull back first – giving the patsies and pundits an opportunity to point to another gold rally that fizzled out…just like every gold rally for the past 20 years.
Then, the media could turn its back on gold again… giving the yellow stuff a chance to sneak up on us. Over to you Eric…what are they saying on the Street of Schemes?
Eric Fry, reporting from New York…
– Stocks bounced a bit yesterday. But who cares? Gold is the market that everyone’s talking about. The Dow Jones Industrials gained 52 points to 10,158, while the Nasdaq squeaked out half a percent to 1,673. But so what…tech stocks are, like, SO 1999!
– The buzz these days is about gold, and the higher its price climbs, the louder the buzz. Yesterday, the yellow metal coasted to its sixth straight winning session – up $2.20 to $318.30.
– Most of the buzz about gold focuses on that age-old debate: Is the rally almost over or just beginning? No one knows, of course. But everyone has an opinion. Even CNBC is spewing nonstop nonsensical blather about the gold market. From a contrarian standpoint, CNBC’s 24/7 gold market coverage is bad news for the gold price. The good news, however, is that almost all the "experts" appearing on TV dismiss the gold rally as a fleeting event.
– In the eyes of most CNBC talking heads, the gold market’s recent strength is freakish – like a two-headed billy goat. Gold stocks may be more popular than they used to be, but they are far from popular.
– It’s been a lot of fun to watch mutual fund managers and financial journalists try to grapple with something as alien as a gold rally. Much of the "analysis" is comically uninformed. One financial commentator mentioned gold "ig-nots" a couple of times, when he meant to say "ingots." We would have to assume, therefore, that the commentator is an "ig-not-ramus" about the gold market. He seems to have plenty of company.
– Gold ig-not-ramuses come in all shapes and sizes. (In fact, some of us are bullish). But the big financial institutions that are short the gold market might turn out to be the biggest ig-not-ramuses of all.
– At least that’s the speculation of many professional gold investors. For several years many gold mining companies and bullion banks have been selling gold short in ever-increasing volumes. And that’s been a fast track to "easy money" for some time. But if gold keeps heading higher, the pressure to close out forward sales and other types of short positions could become quite intense. That’s why many professional gold investors suspect that this large "structural short position" in the gold market will fuel a short-covering rally that drives the gold price dramatically higher…someday.
– By most accounts, there are more than 800 million ounces of gold tied up in some sort of derivative contract. That’s more than a decade worth of annual mine production. Not all of those contracts represent short positions, of course. Nevertheless, that’s a whole bunch of gold with strings attached to it in some way. It’s anyone’s guess how high those strings might pull the gold price if a short squeeze ensues.
– So who’s sitting on a big pile of derivatives? I’ll give you a hint: A bank whose name begins with the letters "JP." Yes, that’s right, our old friend JP Morgan Chase (JPM) is "big" in the gold derivatives market. Exactly what Morgan is doing with all of these derivatives is a matter of acute speculation because the bank does not provide a single shred of disclosure about this potentially "material" (read: dangerous) activity. (For the record, JPM is one of the current short sale recommendations from my crew at Apogee Research).
– However, the Office of the Comptroller of the Currency does shed some light on the topic in its "OC Bank Derivatives Report Fourth Quarter 2001." According to the report, Morgan had about $41 billion of gold derivatives on its books as of December 31, 2001 – that’s almost six times larger than the hedge book of the next biggest player in the gold derivatives market.
– Furthermore, we don’t know anything about how Morgan has positioned its large exposure to the gold market. But here’s an exciting scenario to imagine: The gold price rises to $350; JPM gets caught "wrong-footed" in the gold market. It is losing hundreds of millions of dollars with each $5 gain in the gold price. Fearing for its financial life, Morgan runs to the Fed and the Treasury and whines for help. After an emergency meeting, the Treasury announces it will "release" some of it monetary gold supplies from Fort Knox to "stabilize" the gold price.
– This scenario is just make-believe…of course.
Back in Paris…
*** "I don’t want to scare you," writes Al Thomas in "Over My Shoulder," but I want you to realize we are in a nasty bear market and absolutely no one knows when or where the bottom is. I sure don’t…"
*** We don’t either. So we don’t worry about it. Instead, we stick to the essentials…buy low/sell high…more Advice to a Young Man, below…
*** John Templeton offered his advice recently. "The other stock markets have been influenced by the great insanity in America," says Sir John, "so there aren’t any world markets that I think are truly bargains. Therefore, the thing to do is to buy bonds and wait for the time when the psychology of stocks is different. So the thing to do is to buy high-quality bonds in nations where the money is likely to remain valuable, such as Canada or Australia or New Zealand."
*** Henry has been on a retreat with the rest of the 11- year-olds in his class, preparatory to his "second confirmation" in church this Saturday. I have not yet figured out what a "second" confirmation is; maybe it will be revealed by the Catholic elders this weekend.
*** Jules is being coached in French and in math by professional tutors. If he does well on his final tests…they may let him go on to the next grade.
*** And poor little Edward got sick at school. Unable to reach Elizabeth by phone, the school called me at the office. So, off I went…and found him in the school infirmary shivering with fever.
*** By the time we got home, however, he had made a miraculous recovery…settling down in front of the new television to watch cartoons.