Fool's God

“What is done by what is called myself is, I feel, done by something greater than myself in me.”

James Clerk Maxwell

On his deathbed, 1879

I labored through a very interesting book last night: “The User Illusion,” by a Danish physicist named Tor Norretranders. The book is not easy. Too much science.

Science books are often difficult to understand. Perhaps the authors do not really know what they are writing about. Or, maybe I am an imbecile. I lean to the former explanation, but who knows?

It was Norretranders’ book that started me puzzling about the role of reason in stock market bubbles – and the rest of life. The Dane provides a history of the science of the Internet intertwined with the philosophy behind it. That, or the saucisse montbeliard, troubled my sleep.

But this morning, I awoke with the illusion of profundity, to which I am particularly susceptible. Like Newton, who united Heaven and Earth, I felt that I was on the verge of connecting some important dots.

Isn’t it amazing how the best ideas arise, unbidden? Even the greatest achievements of the greatest scientists seem to come not from directly conscious effort – but from intuition, chance and inspiration. Einstein, standing on the train platform in Fribourg, had the odd sensation that the plaform was moving while the train in front of him was still. From this momentary insight, his notion of relativity was elaborated.

The mathematician Henri Poincare maintained that his best work was not done by his conscious mind, but his unconscious one. He would work on a problem, go to sleep, and often, have the answer when he woke up.

If this sounds a little too good to be true, remember that Poincare and Einstein worked hard during their waking moments too. Nothing comes from nothing, after all.

Nor does everything come from power of reason alone. The rational mind is worshipped as though it were mankind’s salvation. But in many cases, reason is a trap…and those people most gifted at it are often the most easily snared.

The conceit of the Internet Age is that everything of cutting edge importance to mankind can be reduced to simple binary signals, yes or no, plus or minus, black or white. This data is then communicated, reassembled into information and rationally processed. Even remote sex, so realistic that it cannot be distinguished from the real thing, will soon be available, according to a recent Time Magazine, courtesy of the Internet revolution.

But let us go back a few steps…

Every fool has a reason for what he does. There is always an explanation. The power to reason is supposed to be what separates man from the lower beasts. This is pure nonsense, of course. Many four legged animals seem smarter that the average game show host. And dogs are infinitely more dependable than Congressmen.

Nevertheless, people think that if they just had enough information and enough time to reason it out, they could have anything and everything they wanted. But there’s the rub – Norretranders explains scientifically what is intuitively obvious. “Knowledge costs,” he says. It costs time and effort. Like the difference between real profits and virtual ones, it requires the investment of time and effort to transform data, or information, into knowledge.

Which brings me back to my friend Michel’s observation: the more information you have, the dumber you become. Michel, too, arrived at his conclusion intuitively, or perhaps by observation. Norretranders confirms it by reference to the curious 2nd Law of Thermodynamics. As energy is used up, it produces a condition of ‘entropy’ – in which the energy, though still somewhere in the universe, is unavailable. It takes energy to turn data into knowledge. Thus, “in reality the ‘information society’ is an ‘entropy society’ – a society of ignorance and disorder.”

If it took no energy, that is to say, no investment, to turn data into knowledge, the Internet would be not only a first order innovation…it would be promethean. Gain could be had without pain. A perpetual motion machine – which requires no energy inputs – would be possible. Finally, there really would be a new era, a new world.

But the actual world we live in, rather than the virtual world of the New Era imagination, is a world in which knowledge and wisdom come only at great cost. For every tiny bit of it, as Mencken points out, some poor soul lies on an ash heap in Hell.

You can get knowledge by reason, experience, insight, or maybe even divine inspiration. Reason is only one route – and probably not the most important one.

In the 1800s, August Comte, founded a na?ve school of philosophy known as positivism. The idea is that you begin with known facts and provable assertions and build, rationally. Anything that cannot be proven from experience or logic should be rejected – just as my son rejects going to church. “What’s the point,” he says.

Positivism has been wildly popular, as people like to think they can reason things out for themselves. It underlies the whole Internet pretension – that reality can be broken down into binary impulses, transmitted, stored and sorted out logically.

If only life were so simple! If only everything could be reduced to true or false, black or white! Man’s faculties of reason are so snaky that he can prove everything he wants to prove – and nothing. Eminent scholars have ‘proven’ that Jews are inferior to Aryans, and that the world would run out of oil by the year 2000. Experts have ‘proven’ that the price of gold would rise to $5,000 and that the dollar would disappear.

Meanwhile, even simple statements, such as “I am a liar” confound us all. If it is a true statement, it disproves itself. If it is untrue, well…you’ll have to figure it out…

Mathematics, the most rational of all pursuits, stumbles too. Bertrand Russell’s Principia Mathematica tried to establish the logical foundations of all mathematics. Kurt Godel, a brilliant mathematician, however, pointed out the inescapable contradiction in Russell’s work in 1931. Years later, Russell, who had moved from one dubious proposition to another over the years, recalled, “I realized, of course, that Godel’s work is of fundamental importance, but I was puzzled by it. It made me glad that I was no longer working at mathematical logic.”

Kurt Godel, one of the world’s most gifted mathematicians, died in 1978. He starved himself to death, crouched in a fetal position, refusing to allow nurses to enter his room…fearful that they were trying to poison him.

All he had left were his powers of reason.

Your very positive correspondent,

Bill Bonner

Paris, France June 29, 2000

P.S. Tomorrow…if not reason, what?

*** As predicted, the Fed did nothing…and Wall Street followed its lead. The Dow rose a piddling 23 points. The Nasdaq, where irrationality tends to be more exuberant, rose 81 points.

*** The market looked healthy, though. There were 1785 stocks advancing on the NYSE, while only 1113 fell back. 77 stocks hit new highs; 58 hit new lows.

*** So, it was a nice ‘summer of love’ day. Even gold, seemed to arise from its crypt and buff itself up a bit. The metal rose a healthy $6.80.

*** Ultimately, the Nasdaq and gold are not likely to go in the same direction for very long. Gold varies inversely with the dollar. And the Big Event of the future will most likely be a crashing dollar and rising gold.

*** Gold, by the way, is cheap. It is down 65% in nominal terms from its high in 1980. Of course, the high occurred in an atmosphere of lunacy little different from the recent Nasdaq peak – though I may have forgotten to mention it at the time.

*** In those heady days, it looked like the dollar was doomed and gold would soon rise to $1,000 an ounce. One prediction was that gold would hit $5,000 an ounce before the end of the century.

*** But here we are at the end of the century. Gold is hardly $5,000/oz. And the dollar is not-quite worthless. You can buy an ounce of gold, in real 1980 terms, for about $150. The number of dollars, meanwhile, as counted by the Fed’s Adjusted Monetary Base, has nearly tripled. Or as Rick Lombardi of Citadel Research put it in Barron’s, gold “is as inexpensive relative to the Monetary Base in the year 2000 as it was at $35 an ounce in 1970.”

*** “In the United States,” says economist Paul Krugman, writing in the NY Times, comparing our ‘summer of love’ to Japan’s nuclear winter financial situation, “we have come to rely on Alan Greenspan’s knack for doing the right thing in an emergency.” The right thing, according to Krugman, is flooding the world with money after the crash of ’87 and the panic of ’98.

*** But the Japanese tried to do the right thing too. Interest rates were reduced to zero and the government provided enough fiscal stimulus to awaken a corpse. Japan now has the world’s largest government debt – and an economy that is still comatose.

*** What is it about Greenspan’s little trick that it works only in America? I don’t know, but I think we are going to find out.

*** Down, down, down, down…a Washington Post story quotes Amazon critic Eric Von der Porten: “Amazon is looking more and more like other concept stocks such as Boston Chicken, Discovery Zone and Planet Hollywood – all of which took on a lot of debt and ultimately had to file for bankruptcy.”

*** But raising money seems to immunize companies from criticism. “No analyst wanted to tell the truth [about Amazon],” said the president of Gramercy Capital, “because their firm would lose out on the prospect of vast underwriting fees.” AMZN carries $72 worth of debt for every active customer – which must be some kind of a record.

*** Jeff Bezos, AMZN’s founder, was Time Magazine’s ‘Person of the Year’ in December and applauded for “one of the smartest strategies in business history.” His stock was $87 at the time. Now, it is below $40…with much farther to go.

*** “Kaufman & Broad is a great co.,” Lynn Carpenter corrected me, “but it’s not #1. Centex is the largest. Plus, it’s our FSL pick for a couple of reasons. Valuations are almost the same on both these good companies, except for debt levels. KBH’s debt is very high, 1.8 X total equity. Centex’s is much lower, 0.8 of total equity. This is an interest rate sensitive business, and high debt isn’t helpful. Plus, Centex maintains a higher profit margin, which allows it to take a hit somewhat better. And if you look back over the numbers to 1996, a bad year for construction, you’ll see negative earnings for KBH, but only a slight drop for Centex. Both are good companies, but I’d go with wise and steady Centex for the long run.” (See: the advertisement below)

**** “The undeveloped Costa Maya region in Mexico” writes International Living’s Ken Layne “is following the same route to development as Belize: eco-tourism and $50,000 dive-tours marketed to yuppies.” Real estate on the beach will skyrocket… but right now, you can still get quality beachfront property there for $39,000…

*** Today’s headline in the Financial Times: “World Needs GM (genetically modified) Crops, says UN Food Chief.” But a lot of people in rich countries take a “let them eat granola’ attitude. So, while Celera is worth billions, companies that tinker with the genes of plants are scorned. James Passin, former employee of mine and now manager of a small cap fund in New York (, providesa little history…and a recommendation . *** Elizabeth and I had dinner last night with friends – people who had recently moved from London to Boston. “I’m a bit disappointed,” said David. “The Americans we meet are obsessed with working day and night in order to make as much money as quickly as possible. People are the same in London – but at least they’re not proud of it.”

The Daily Reckoning