Misleading Knowledge, Part I
The Daily Reckoning PRESENTS: There’s no way of knowing what will happen
in the future – in fact, our investment approach is founded on ignorance.
But what if you could see what will happen, a la Back to the Future? Would
it make a difference? Bill Bonner explores…
MISLEADING KNOWLEDGE, Part I
Readers will recall from what we said last week at New Orleans Investment
Conference that rules are what we turn to when we don’t know what to do.
And most often we don’t know what to do. Hence, our investment approach –
like our philosophy of life – is founded on a bedrock of ignorance. Sure.
Constant. Unyielding. Ignorance is something you can count on. A man is
wise, and here you may quote us, only to the extent that he is aware of
his own ignorance. The wiser he is, the more he sees himself as an
ignorant fool. The real fool, on the other hand, thinks himself wise; he
thinks he knows things he cannot possibly know.
It is not given to man to know his fate, said the ancients. We can never
know what the future will bring – neither in our investments nor in our
private lives. Since we cannot know the future, we cannot hope to improve
it…except in the most marginal, modest ways. ‘We will be better off,’ we
say to ourselves, peeking ahead just a few seconds, ‘if we don’t step off
the curb quite yet; let us let the bus pass first.’ But will we be better
off next year if we buy Google today? Will the world be a safer, better
place in ten years if we bomb Tehran today?
The gift of clairvoyance is not something you can give at Christmas. But
what an awful gift it would be. Yes, we could read tomorrow’s newspapers
today. And yes, we could see what direction the gold price was going, for
example, and adjust our investments accordingly. We could read about
natural disasters…strikes…revolutions…and make sure we were
somewhere else! But what a boring life it would be. There would be no
pleasant surprises. And no chance to improve or achieve. You might win a
Nobel Prize, but so what? It was foreordained. All of your striving,
sweating and stretching would make no difference; the whole thing was in
the bag even before you began.
And imagine the tediousness of it. Day after day, going through the
motions of life without the serendipity…the sheer chanciness… of it.
Every action…every word…every event…already written out for you in
bold relief. And you, just muttering your lines like a brain-damaged
celebrity, not even bothering to think about what they mean; for what does
it matter? The whole show would go on anyway with our without you…you
are just playing a bit part in it.
You could look ahead, too, and foresee your last gasp. You hope for, at
least, a small crowd of weeping friends and woebegone relatives…gathered
round your bed…as you bid them farewell. Perhaps you will even get to do
a grand death bed oration: “The evil that men do lives after them,” you
will remember from Julius Caesar, “The good is oft interred with their
bones.” You will look at your children…grandchildren…your wife…your
mistress…your creditors…your drinking buddies…and say: ‘Please
remember the good that I was…the good that I did…and the affection I
have had for all of you. And remember…I’ll be waiting for you all, with
open arms…on the other side.’
At this suggestion, the grandchildren will get quizzical looks on their
faces. They won’t know where the ‘other side’ is…but they have no
intention of getting there any time soon…and the thought of grandpa’s
hairy arms waiting for them will not make them want to hurry.
But what’s this…you turn to the future…you look ahead…and see
yourself crushed by the same cross-town bus you avoided today! Or done-in
by a jealous husband in Santa Monica. Darn, no deathbed scene! ‘I never
get good scenes,’ you complain to yourself. And at that moment, you will
be tempted to do a little rewriting. ‘Ah,’ you say to yourself… ‘I think
I’ll stay out of Santa Monica.’
But could you? Even if we could know what the future will bring, we
probably still could not reach ahead and improve it before it happened.
There are simply too many possibilities. Change one today, and tomorrow’s
lines don’t make any sense. Soon, the whole performance changes in ways
even the fortune teller cannot foretell. Even if you could look into the
future as it will be…you couldn’t possibly look into all the futures
that could be. In other words, as soon as you departed from the script,
the ending would change in a way you couldn’t predict. You would have lost
the power of clairvoyance…and will pop right back into the same
impromptu low comedy you’re in now…ad libbing from one day to next,
ignorant of how thing will turn out, but hoping they sort themselves out
better than you have any right to expect. You will have your appointment
in Samara, no matter how far you think you are from fate.
If you look at the many mistakes and bamboozles of history, what you find
is that the leading characters were misled not by ignorance, but by
knowledge. What they thought was so… turned out to be not so. Hannibal
knew the Gallic and Lombard tribes would rally against Rome. Hitler knew
his master-race could beat all the rest of Europe. Investors in ’29, ’66
and 2000 knew that stocks always went up in the long run.
No one has ever been let down by ignorance, on the other hand. Because
ignorance forces upon a man a kind of modesty that rarely fails him. He
has to retreat to the few things he really does know best…and follow
rules that keep him from getting into too much trouble.
“I always tell the truth,” Congressman Andy Jacobs once told us. “That way
I don’t have to remember what I said.”
Likewise, a man who follows rules neither has to remember what he
did…nor wonder about the consequences.
“Did you kill John Brown?” the prosecutor asks him. “I don’t think so,”
says our modest hero, “It’s not something I would do.”
“Why not?” the lawyer follows up.
“Because I would never know how it might turn out.”
If you knew that you would be better off by telling lies or killing
people…you would go ahead and do so. If you could look into the
future…and if you had the power to improve it before it happened…why
wouldn’t you? Imagine that it was 1920…and you, for some unexplained
reason, had the entire history of the 20th century in your brain. You are
traveling in Bohemia and happen to be sitting in a railway car when a
young man, recently discharged from the German army, enters the car. His
name, you discover, is Adolph Hitler…and you have a loaded gun in your
pocket. Pull the trigger. Why not? Whatever happens, it is not likely to
be worse than what did happen.
Alas, we have no histories of the future – ignorance is all we can count
on…and rules are all we have to go on. We do not kill…we do not
steal…and we do not lie. We follow rules because we are ignorant. Nor do
we buy investments that are overpriced. They might go up, of course. But
we can’t know that. So, we stick to the rules.
To be continued tomorrow…
The Daily Reckoning
November 24, 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 – now available in
paperback – just click on the link below:
The Most Feared Book in Washington!
The dollar is backed only by full faith in America’s faithless central
bankers, who have not only wiped out half the dollar’s value in the last
20 years…but the credit of the world’s biggest debtor as well. What is
the greenback worth? No one really knows.
But whatever it was worth yesterday, there is general agreement that it is
worth less today. We say that because we’ve noticed it slipping –
yesterday, it was trading at just less than $1.29 per euro – at a
Currencies go up and down, it is true. And this isn’t the first time the
dollar was at $1.29 per euro. But if our memory is right…the last time
it was at this level, the Fed funds rate was 425 basis points lower. Now,
despite much higher short term rates, the dollar is falling again.
As the Fed raised rates, the dollar rose too. But where will it go now?
The U.S. Central Bank is already giving lenders considerably more for
their money than either the Bank of Japan or the European Central Bank.
The ECB’s key lending rate is still only 4.25%, and
Japan’s equivalent rate is only 0.25 %.
If these higher returns fail to bring in enough wampum, what is the Fed to
do? The United States must borrow. It depends on the kindness of foreign
lenders to keep going. And when the foreign lenders fail, the dollar
As a theoretical matter, the Fed could raise rates some more to attract
lenders and support the dollar. But as a practical matter, two of the
major industries in the country are already desperate for lower rates, not
higher ones. Housing and auto-making are both in trouble. The housing
industry, alone, represents a huge threat. It could drag the whole economy
down with it; frankly, we’re surprised it hasn’t done so already. It would
take an unusually bold, or unusually reckless Fed to raise rates now.
So keep your eye on the dollar. For many, many months it has defied the
most fundamental principles of international commerce – going up, even as
the current account deficit rose to $800 billion a year. But markets
always do what they’re supposed to do; just never when you expect it. When
people expected the dollar to fall – it rose. Now, no one is watching it.
They’re all convinced that the dollar is indestructible…as eternal and
unblemished as granite countertops.
And yet, a fall in the dollar is just what you’d expect. It is the normal
way to balance out America’s trade and current accounts. It is the normal
way to undermine Americans’ wealth with hardly anyone noticing. And what
better way to stop people from living beyond their means – cut their means
down even further!
Few Americans pay any attention to the value of their currency on world
markets. They earn their money in dollars…and spend in dollars. Only we
poor exiles have to suffer the consequences of the buckling buck on a
daily basis. We go to buy a bottle of wine and we find it costs more than
it did, in dollar terms, last week. We go out to dinner and we’re shocked
at how much we spent. We pay for our new granite countertops and wonder
how prices could have shot up so much.
Back in the Homeland, the fall in the dollar is cushioned by a number of
things. Most expenses are homegrown; they don’t go up just because the
dollar has gone down on global markets. And even imports do not fully
react to the lower currency, because so many of them come from China,
which holds its own money close to the American brand. What’s more,
Wal-Mart and other discounters are finding new and better ways to cut
costs…somewhat softening the blow.
In terms of gold…and euros…the dollar is already worth less than half
what it was a few years ago. Keep your eye on it; a few years from now, it
will probably be worth only half what it is today.
Happy Black Friday!
And more views:
*** Kevin Kerr, reporting from Connecticut:
“I get asked all the time: ‘Exactly how risky are futures?’
“The truth may surprise you.
“For example, Gary Gorton of the University of Pennsylvania and K. Geert
Rouwenhorst of Yale researched commodity futures contracts between 1959 to
“Their first major finding commodities are negatively correlated with
stocks. That is, they often move one way when stocks are moving another,
and vice versa. So diversifying a stock portfolio into commodities can
significantly reduce your risk.
“Of course, that’s something I, and many others, have been saying all
along. But there were some surprises in the professors’ findings. Previous
studies have shows that commodities are able to match equities’ returns.
But the index model they constructed showed commodities were about 19%
less risky than the S&P 500.
“That’s right – buying futures contracts was less risky than buying
stocks. Thus, on a risk-adjusted basis, they outperform stocks by a
“They also discovered something very interesting about the different
markets’ volatility. It turns out that a disproportionate amount of
stocks’ volatility came from months in which they lost significantly.
Meanwhile, an outsized portion of commodities’ volatility came from months
in which they scored big gains.”
*** The further from the facts and consequences you get, the worse the
results, we have remarked.
“Did you know that during the Athenian Democracy…a period that did not
last very long…” said Michel, “they had a way of punishing people who
tried to meddle in others’ affairs. If you proposed a new law, and the
measure was rejected, you would be killed.”
“That must have cut down on unnecessary legislation,” we offered.