Limbic Medals

Recently, research shows that the brain has two centers for decision-making. This data has been said to explain why Americans save so little – one part of the brain told them they should put their paycheck in the bank, but the other insisted on buying a new wide-screen TV. Bill Bonner explores…

A new piece of research from Princeton’s Center for the study of the brain came out last week. While poking around, the scientists thought they found something new.

Decisions are made in two parts of the brain, the researchers told us. The first part is the lateral prefrontal cortex. This is where advanced, logical thinking is supposed to happen, such as when a person decides which investment to make or which automobile offers the most value for the money. Deeper down in the grey matter is another decision center, the more primitive limbic system, which is where the real thinking takes place. Researchers describe this part of the brain as deciding our likes and dislikes…and telling us how to react to immediate stimuli. When a dump truck cuts you off in traffic, for example, the limbic system practically has your right arm and middle finger cocked in the traditional salute before your lateral prefrontal cortex has time to weigh out the pros and cons.

The research was said to explain why Americans save so little. One part of the brain told them they should, but the other insisted on buying a new wide-screen TV. Though the report was circulated in the media as though it meant something, it left us only more puzzled than before. When did Americans acquire this limbic system, we wondered? Up until 1980, American savings rates were around 10% of incomes. Was there some kind of evolutionary mutation that occurred in the early years of the Reagan Administration?

The Limbic System: What About the Chinese?

And why don’t the Chinese seem to have the same problem? They are said to save 25% of their incomes, while we save less than 1%. Someone ought to pry open a Chinese skull and take a peek to verify this, but our guess is that the Chinese have limbic systems too.

At least the scientists were wise enough to realize that not every thought that passes through the human brain makes any real sense. The most powerful thoughts – strong enough to put the average American’s retirement in jeopardy – are not logical at all, but instinctive, atavistic, primordial…and often practically insane.

When Woodrow Wilson stood before Congress and asked for a declaration of war against Germany, the words came out of the advanced part of his brain. They were nice, multi-syllabic, Latinate words, the kind of words you’d expect from a former professor of government. But they were greasy and meaningless, also just what you’d expect. The kind of bosh you find on a typical high-minded editorial page. It was as if what came out of the president’s mouth were brightly colored bubbles…that floated, airily…lightly…above the crowds. His talk of "making the world safe for democracy" was nothing more than gas. He was proposing to go into the war on the side of the English – who were at that very moment making sure there was no popular democracy in the Empire. The Irish…the Indians…the Egyptians…the American president didn’t even mention them. Had the upper brain been allowed to do its work, surely it would have told him that if he wanted to make the world safe for democracy he ought to go to war with the nation who suppressed it most widely; he might just as well have entered the war on the side of Germany against England.

But deeper down in Wilson’s limbic system were idealized pictures of the Magna Carta…the robes and wigs of English courts…High Tea…Dickens and Thackeray…and all the trappings of the English upper classes as they were imagined by a naïve and admiring college professor from Princeton, New Jersey. The president, his advisors, his cabinet, and his leading allies had such bad cases of anglophilia they practically stuttered and drooled. And when they stirred the mob, the gaudy balloons they sent aloft meant nothing more than a signal that the fight had begun. The poor schmucks’ blood was up already. Wilson’s big words merely unleashed them.

The Limbic System: Who’s In Charge Here?

We are not rehashing the history of WWI, dear reader. Instead, we are reaching for another, sharper point. One moment of reasonable thought would have shown what a losing proposition the European War would likely be, but the thinking was taking place in the limbic system, not the lateral prefrontal cortex.

Wilson’s limbic system had already made his decision. And the public, too, was soon engaged. The cannon were being drawn up for war. Medals were being readied. They looked up at Wilson’s empty words and must have thought they saw the image of the Virgin Mary. In no time at all, they were on their knees…pledging all they had to the war effort, giving up their purses, their sons, and their integrity. The super-patriots were drilling holes through their walls so they could spy on neighbors with names like Bauer and Feldgenhauer. In Tulsa, a Bulgarian was hung when a mob mistook him for a German. In Baltimore, a former mayor blew his brains out after being charged with being a German sympathizer. And woe to anyone who dared to laugh or cry.

"War is the health of the state," said Bismarck. War appeals to the limbic system even more than a new pair of shoes. Connoisseurs of Big Macs and reality TV see the bright shine of polished brass, and bombs exploding in air and they are drawn to it like sinners to the sparkling gates of Hell. Politicians feel the need to explain it, to justify it, to dress it up in respectable clothes to hide the jackboots and to slosh on perfume to cover the stench of death. But the words mean nothing. The common man is often as ready for war as he is for an extension of his line of credit.

WWI turned out to be a catastrophe as meaningless and senseless as Wilson’s words. But the limbic system still functions. Could it be setting us up for another catastrophe? Once again, the yahoos cheer a new group of "Wilsonian" officials. Once again, they think they are making the world safe for democracy. And for the first time ever, their leading economists hold out cheap credit like a waiter offering free piece of apple pie to a fat man.

The brain may have two centers of decision making. But only one of them makes the important decisions. The other is merely a lackey and a stooge; he does what he is told.


Bill Bonner
The Daily Reckoning

April 15, 2005 — Paris, France

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).

It’s not over until the fat lady sings. She has not sung yet. But yesterday, her chest heaved…

The Dow sank below its January low and appears to be headed below 10,000. Who’s making any money in stocks? Only brokers, dealers, insiders, money managers – in other words, the pros. We read in yesterday’s news, for example, that Exxon chief Lee Raymond got a 37% pay hike last year, bringing his compensation to $38.1 million. Was there no one willing to do the job for $37 million? Every penny came out of the pockets of shareholders, of course.

The poor lumpeninvestors have been losing money for years. The big stocks are down big time. The most popular funds have lost billions for investors. And even when stock prices remain stable, the insiders take the money.

It amazes us that people hold onto stocks at these prices. The only way they could hope to make money would be if the market began a sustained bull run. What could possibly keep the old boy going? Will consumers go even further into debt? Will foreign investors want to buy even more U.S. assets…at even higher prices?

Of course, there is more under heaven that is contained in our philosophy. Nobody ever knows anything. Still, as we’ve noted before, market cycles are like women. They are all the same in the basis configuration; but each one is completely different. Prices go up; then, they go down. Typically, they go way down…to P/Es of 5-10 and a Dow/gold ratio of 1/1…before they begin another major move to the upside.

After the bear market began five years ago, stocks rallied beginning in October 2002. That rally reached a peak of 10,940 on March 4, 2005. It now looks as though that was the peak. Prices are working their way down – with a long way to go.

In the first leg down of the bear market – Jan. 2000 to October 2002 – investors were remarkably calm. They saw prices falling, but didn’t believe they would stay down for long. It has now been more than five years since the stock market peaked out. Investors have made no money. They must be getting tired of it.

Our advice five years ago was to sell stocks and get into gold. We figured we had little to lose by not being in stocks…and a lot to gain. Perhaps the bubble market would go on longer…perhaps investors would lose their minds completely and stocks would go even higher. But the odds were against it. They still are. And what have we lost by not being in stocks these last five years? Nothing. Meanwhile, we have gained a little in gold – it’s up from under $300 to $425 yesterday, right on our latest buying target.

We don’t know when the end will come. But the fat lady is gargling…clearing her throat…and getting ready to break a glass or two.

More news, from our team at The Rude Awakening…


Eric Fry, reporting from Manhattan:

"The oil-stock sector has become a financial slaughterhouse – grisly, chilling and littered with the carcasses of herding animals. Even so, the long-term investor with a strong stomach might want to consider sifting through the "renderings" of the sector to find tidbits worth salting away."


Bill Bonner, back in Paris…where spring is in the air.

The parks are in bloom…and warm rain stirs roots all over town…

*** "Arthur Sulzberger, Jr. paid for my lunch yesterday at Sotta Sopra," writes Addison Wiggin from Baltimore.

A writer, doing a story for the New York Times Magazine, took our intrepid co-auteur out for lunch yesterday and plied him for his opinion on what the rising price of gold signals.

We wondered: does this mean that the NY Times is doing a story on the rising price of gold? Hmmmn…

"So how’d it go? What did you end up talking about?" we asked Addison.

"The housing market."

*** The fat lady may be singing for the real estate bubble soon too. Last year, mortgage debt increased by $885 billion. Since 2001, $3 trillion worth of mortgages has been refinanced.

The average house is up 50% in the last five years. But average income has barely budged. In real terms, incomes fell last year – while house prices rose more than 10%. Fewer and fewer average Americans can afford to buy the average house.

What Americans are doing with their houses is not so different from what they are doing with their whole national economy. They mortgage it; giving up ownership of capital assets – houses, companies, securities – in order to be able to spend money now. Ben Bernanke, said to be the smartest man at the Federal Reserve, (except, of course, the maestro himself) believes the real problem is nothing more than a surplus of savings worldwide. Foreigners save too much. Americans, always ready to help, forego savings so that the foreigners will have something to do with their surpluses: lend them to us. It is just one more little piece of the global division of labor, apparently. They sweat, we think. They save; we borrow. They make; we take. We add one more, not usually mentioned by Bernanke: They get rich; we grow poor.

We don’t know what to make of it, so we turn to the dead for a wise opinion. But it is hopeless, the corpses know even less than we do. They can’t even imagine what is happening. Borrow against your house when you don’t have to? Buy a house as an investment? Take out equity? Depend on foreigners to balance your budget? Live beyond your means and expect Third World wage earners to make up the difference?

The ideas that Americans once took for absurd they now take for granted.

What was wrong with our parents, grandparents and long-dead ancestors? Why weren’t they smart enough to realize that they could have a brand new house…with all the modern conveniences…without paying for it? Why didn’t they figure out that they could all get rich by buying each other’s houses? Must have been something in the water that turned them into morons, right? But now, thank God, we are all geniuses.

*** Dan Denning, reporting from London:

"I was recently asked why I don’t recommend more mutual funds. This is a good chance to give a short answer.

"First, expense fees on mutual funds are higher because they are actively managed. Most ETFs simply mimic an already-established index, meaning the management fee does not eat into your after-tax return. Second, most mutual funds regularly under perform the S&P 500 anyway. And because the S&P is a benchmark for fund performance, a fund can beat the S&P on a relative basis but still lose on an absolute basis. For example, losing 5% one year while the S&P loses 10%. You beat the S&P, but still lose money.

"There is also the risk that in a truly bruising trade war, the biggest casualty would be liquidity and that all the world’s stock markets would suffer. America’s market would continue to have at least some liquidity. But when you factor in the volatility in the currency and bond markets, not to mention the implications of rising interest rates in America, you’d be hard pressed to recommend buying any stocks at all.

"It’s certainly not in anyone’s interests to have a global meltdown. But markets do not obey the wishes of policymakers. And when markets are as structurally out of whack as they are now, their rebalancing often leads to an elegant and painful crash, not a graceful transition to something newer and better.

*** "Dad, you are just too negative and pessimistic," said Henry last night, after a political discussion over the dinner table. "They’d never let you volunteer for one of those suicide-prevention hotlines. Everybody who called would blow his brains out. Even people who got the wrong number. People who just wanted the weather forecast…"

The Daily Reckoning