Ignorance is Bliss

When a man begins to think he knows something, his wife will remind him that he knows nothing at all. In fact, if she has a good head on her shoulders, she’ll show him that he knows less than nothing, for even what he thinks he knows is wrong.

"Oh Lord, it’s hard to be humble…"

– Mac Davis

A speech given yesterday at the NY Institutional Gold Show:

It is a great honor to be here in front of you. We do not feel worthy of it. What can we say to this audience? This is a convention of gold mining investors and experts; we know nothing about gold mining.

Then again, we know nothing about practically everything.

If there is one virtue we have at the Daily Reckoning, and we say this often, it is humility. And even that is insincere.

People think we are joking when we say so…as if it were some form of false modesty. But the modesty is genuine; we just think it makes us better than other people.

Humility is a great virtue…probably the greatest of all virtues. It helps you in all of life. In investing, it is essential. There is no better insight, no more precise tool, and no surer shield against folly. So, we are proud to be humble. In fact, we are almost arrogant about it.

We don’t know anything, we say with pride, and we can prove it. Just a few weeks ago, for example, we thought gold had permanently moved above the $400 mark. It was likely, we said, that "we would never again see $400 gold." A few weeks later we wondered the same thing; gold had dropped to $375 and we wondered if it would ever come back!

Humility: I’m the Most Humble Man in the Room and I’m Proud of It

In the office we used to argue with one another about who was most humble:

"I’m more humble than you are…" Addison would say.

"No you’re not," we would reply. "You just pretend to be humble because you’re so competitive."

"Oh yeah…well, you’re far more competitive than I am…"

"No I’m not."

"Yes, you are."

…and so forth.

What do we have to thank for this surfeit of humility? The answer is obvious: our daily attempts to understand the markets. After many years of humiliating efforts, we have been humbled. We finally realize that we know almost nothing.

When we were very young and just starting out, it was a different story. We were sure of almost everything. We knew how the world worked. We knew what tomorrow would bring…and had no doubt about it.

But now that tomorrow has come and gone many times, we take a different view of things. It seems that, with each year that passes, we become less sure…we know less and less…now, it is our teenaged children who are sure of things.

And if this process keeps up, we will soon know nothing at all.

But that is why marriage is such an important institution — especially for men. When a man begins to think he knows something, his wife will remind him that he knows nothing at all. In fact, if she has a good head on her shoulders, she’ll show him that he knows less than nothing, for even what he thinks he knows is wrong. If she succeeds in this, she has done the man a great favor, in our opinion…for only now he is prepared to enter the investment markets with a clear view of his own abilities.

Humility: No One Knows Anything

When it comes to investing, no one knows anything. They don’t know what is happening today…and they certainly don’t know what will happen tomorrow. They have some idea of what happened yesterday…but they have no idea why.

But the average economist, central banker, TV presenter, investment advisor or Wall Street gambler has no idea. He knows nothing…not even that he knows nothing. Knowing you know nothing, that is being humble, is a great advantage. See, humility makes you superior…that’s what we mean by being insincere about it.

In fact, most people you meet in the investment world have become the contrary of humble. Like 15-year-olds, they puff themselves up and tell you exactly what is going on in the world…and where it will lead. The lack of humility and modesty is breathtaking. But that is the main difference between a modest investor and an arrogant one. The know-it-all believes everything is as it should be…as he thought it would be. He thinks he knows what is going on and what will happen next. Nothing surprises him. Nothing shocks him. Because he saw it all coming. "It’s all under control," he says. "It’s all going the way I thought…tomorrow will be pretty much like yesterday."

We humble people, on the other hand, find a lot of things simply astonishing. We are like a bumpkin arriving in New York City. We crane our necks up at the pile of debt, the trade deficit, the price of a pathetic bungalow in Southern California, the explosion of money and credit…a 1% fed funds rate…the $52 TRILLION federal government financing gap…the latest estimate for the cost of the war against Iraq ($500 billion)…rap music…reality TV…auto financing…John Kerry…

…and we say, like Gomer Pyle, "well go..o..lly!"

Most economists see nothing alarming in any of these things. If you asked them, they’d say they predicted them.

Humility: The Low Price of Gold

But even the price of gold gets a ‘go..o..lly’ from us. Not because it is so high, but because it is so low. It trades about the same price that it did a quarter century ago. And what happened during those 25 years? The biggest explosion of dollar-based money and credit in history! Alan Greenspan has created more new money than all the other Fed chairmen and all the Treasury Secretaries combined. Debt, as a percentage of GDP, has approximately doubled. By every measure we can think of, the dollar should be far, far weaker against gold than it was 25 years ago. And now, even as the broad money supply increases by $155 billion per month, gold only inches up…or barely moves at all. And it’s still below $400…which we thought we would never see again!

The arrogant economist…the self-sure investor…the know-it-all analyst will tell you that this is all perfectly normal. Don’t even think about it.

But we humble know-nothings can’t help but wonder why. We don’t have a good answer…but go..o..lly, it’s strange!

But the whole financial world is full of amazing and wondrous things, isn’t it? At least, if you’re humble enough to notice. The trade deficit, consumer debt, the government’s $50 trillion financing gap…we mentioned these things earlier. But our mouths drop open every time we think of them.

And probably the most astonishing feature…the biggest go..o..lly of all…is this: the past quarter of a century could not have been better for the U.S. We defeated the Soviet Union without a shot. We invented the Internet. We enjoyed the biggest stock market boom in history. During that time we must have gotten richer, right?

Wrong. And here you might want to make sure you’re all sitting down. Because the average man in America now earns 6% less than he did in 1977. Is that progress? Is that getting rich?

He thinks he is richer because his house is worth more. But this is an illusion. He has to live somewhere. He can sell his house, but he’ll only have to buy another. The real measure of how rich a society is…or how valuable a company is… is how much it earns. And earnings, in the world’s biggest, most dynamic, most flexible, most high-tech, most forward-looking and most innovative economy went exactly nowhere over the last 25 years!

Clearly something is wrong. The American consumer economy has turned out to be a fraud. It doesn’t work. It doesn’t make Americans richer, it makes them poorer. It puts them deeper in debt and more dependent on the kindness of strangers than ever before.

In the last 25 years, the nation has been transformed. A quarter of a century ago, we were a nation of producers. Now we consume more than we produce. We were a nation of savers. Now, we spend more than we make. We were a nation to which the rest of the world owed money. Now, we’re the ones who owe money overseas – more money than any people ever owed in the history of the world.

But the biggest transformation is the way we Americans think. We used to watch the money supply figures, for example, and get excited. Now, the money supply is growing at an alarming rate – 20% per year, annualized from the last 4 weeks’ figures. But no one seems to notice or care. We used to worry about inflation. We used to be amazed, alarmed and astonished by all manner of things.

But now, we know better. We’re all super-sophisticated know-it-alls who never, ever say ‘go..o..lly’ about anything. Nothing shocks us. We’re in awe about nothing. We know everything with work out. We know there’s nothing to worry about because we live in the most dynamic and flexible economy in the world. And we know Alan Greenspan is on the job, making sure that we grow richer and richer, day after day, forever and ever, amen.

We, the humble, on the other hand…we have no idea what will happen. But we think, sooner or later, something will happen. And we think it will take our breath away.


Bill Bonner
for The Daily Reckoning
June 4, 2004

Yesterday we made the journey to New York…by rail.

As soon as we had boarded the train in Baltimore, the laptops came out and the fingers started tapping. Cell phones rang too…and people chattered away.

The fellow behind us spent almost the whole trip trying to close a real estate deal. The woman in front of us talked about how much her neighbor’s house just sold for. It reminded us of the last time we noticed people on a train getting so worked up about something. It was 5 years ago, and they were talking about tech stocks. The know-it-alls thought it was perfectly normal that people were buying tech stocks at outlandish prices. In fact, they didn’t even notice that prices were outlandish. Everyone knew it was a new era and prices would go up forever. You couldn’t pay too much for AOL/Time Warner, they said.

Now they see nothing odd about real estate prices doubling every three years.

Even in Baltimore a kind of real estate mania has gotten a grip on people. The Baltimore real estate market hit a peak in the 1920s. Since then, it’s been going downhill, in real terms. And the population of the city has been falling for the last 40 years…a third of the city has left, with whole blocks boarded up.

But now, houses that no one wanted to own a few years ago find several owners – every year. They are flipped like tech stocks…leveraged 100% and more…with adjustable rate mortgages that no one ever expects to pay off.

We heard about a house around Patterson Park that doubled and doubled again – flipped twice – before anyone settled on it. Patterson Park, by the way, used to be a place where you would take a stroll in the evening and not come back. The police would find your body in the morning…with multiple stab wounds in the back. They’d call it a ‘suicide.’ "Nobody goes walking in the park at night unless they wanna die," the cops would say.

But now, a house on the park is no longer a health hazard; it’s a ticket to wealth.

How could this be? ‘The park is a nice attraction,’ say the newspapers, trying to explain the mania. ‘It’s close to the hospital,’ say the neighbors. ‘The bars are just down the street,’ say the residents. But the bars, the park and the hospital have all been there for at least 150 years. Why are prices going up now?

We don’t know, but we can take a guess. The Fed has been giving away money for less than the inflation rate for more than a year…and now the money supply is rising at a $2 trillion per year pace. All this EZ credit has triggered an old-fashioned speculative bubble in residential property.

Not only in Charm City are prices rising absurdly. In California, people pay more than a million dollars for what might have been a starter home a few years ago. In London, property prices dominate every dinner party conversation…and have suckered the public into some of the highest debt levels in the Western world.

Only twice in history has the central bank’s key lending rate dropped to 1%. The first time was during the Great Depression. The emergency, then, was clear and present. But today, the only emergency we see is sordid and electoral. But as a result, more people owe more money than ever before. They’ve leveraged their own houses at the lowest interest rates in nearly two generations. And now more of them are going broke than ever before.

But who cares? The houses sprout wings and fly. Even in Baltimore, speculators are making money. [Ed. Note: As Bill notes above, real estate is in the grips of a good old-fashioned speculative frenzy. And like all bubbles, it must pop. When?

We turn to Addison, in Baltimore, for more news…


Addison Wiggin, from "Charm City"…

– Fed fund futures give a 100% probability that the Fed will raise interest rates by 25 basis points at their next meeting, in the final week of June, and a 100% probability that rates will have risen by 50 basis points by the 10th of August. The futures market is rarely wrong with its predictions.

– Are higher interest rates about to prick the bubble? We don’t know when this whole credit-induced madness will come crashing down, but we suspect that the end can’t be too far away, can it?

– But 50 basis points are unlikely to cause too much alarm at this stage. In fact, as you will no doubt be aware, markets have already adjusted. We saw gold dragged back down – kicking and screaming – from the lofty heights above $428 an ounce. Today the ‘relic’ trades at $388. Even the stinky dollar has managed a small rally over the last quarter.

– Either way, there can be no doubting that recent Federal flatulence has brought deflation back onto the agenda. For some reason, investors have actually started to worry that the Fed might let, or even cause, deflation to get a toehold on the market.

– Yesterday, investors showed their fears, whatever they may be, by selling stocks. The Nasdaq suffered the greatest shellacking, dropping the best part of 30 points, or 1.5%, to 1,960. The other senior indices followed the tech stocks’ lead…the Dow dropped 67, to close at 10,195, while the S&P gave back 8 points. It closed the session at 1,117.

– Have they forgotten who the chairman is? Do they not remember the Greenspan Put and comments like "The United States is nowhere close to sliding into a pernicious deflation" or "We at the Federal Reserve recognize that deflation is a possibility…the potential consequences are very substantial and could be quite negative."

– And so it is against this backdrop of deflationary sentiment that we analyze the latest money supply figures. As Bill reported yesterday, the bean counters report M3 increasing at a 20% annual rate. In the last 4 weeks, M3 has gone up by $155 billion! Predictably, with numbers as mind-boggling as these, we weren’t the only sleuths to notice.

– Conspiracy theorists came up with all sorts of explanations for this. "There must be a crisis of historic proportions coming," cries an alarmed essayist at Safehaven.com, "and the Federal Reserve Bank of the United States is making sure that there is enough liquidity in place to protect our nation’s fragile financial system. The amazing thing is, the Fed’s actions mean they know what is about to happen. They are aware of a terrible, horrific imminent event. What could it be?"

– "I reject the notion that the Fed is acting irresponsibly," continues our worrywart, "No, something is up, bigger than we have ever seen in the history of the United States…the amount of liquidity is too large. The Fed is deflating the value of the monetary base by a fifth! Why are they willing to do this? Wisdom says something bad is up – big time."

– Please retake your seat, dear reader, there is no need to panic. If there is something a-brew, you won’t find it in these figures. The reason is simple. The M3 expansion is only a continuation of the current multi-decade trend in consumer indebtedness.
– "The components of the total money supply over which the Fed has direct control – M1 money supply is a reasonable proxy for what the Fed is doing in the money-printing department – did not experience unusually-large gains over the past 4 weeks," explains Steve Saville, editor of the excellent newsletter ‘The Speculative Investor.’

– "When we look at the money-supply components," points out Mr. Saville, "we see that $86B of the aforementioned $101B growth in M2 resulted from increases in household savings deposit and money market deposit accounts. In other words, the recent surge in money supply growth was caused by the same thing – consumer borrowing – that caused the surge in money supply growth last year, and the year before that, and the year before that…the latest jump in the money supply simply tells us that nothing has changed…yet."

– Paradoxically, a good dose of deflation is exactly what the doctor ordered, because the problem with deflation is not deflation, but the preceding inflation. Just don’t expect it to happen on Greenspan’s watch.


Back in Midtown Manhattan…

*** News just in: The Department for Labored statistics has just released May’s employment data. 248,000 jobs were added. Job numbers have been upwardly revised for both March and April. Nearly 1 million new jobs have been added since March, the strongest quarterly growth since the recession began in 2000.

*** Your red-eyed editor just gave a speech at the Institutional Gold Conference in New York…and then rushed off to get on a jet plane…we don’t know when he’ll be back again.

He left a copy of his speech, below…and not much else.