Even More Advice to a Young Man
I’m just a teenaged dirt-bag, baby…like you. Man…I feel like mould…
It’s a funny old world, Maggie Thatcher observed. So funny is it that intelligent people come to very different conclusions about what really matters.
Osama bin Laden, for example, is no dumber than the average congressman. But look at the mess he’s gotten himself into. A rich man’s son, he could have moved to Las Vegas and taken an entire floor of the old Desert Sands hotel, where he would have felt right at home. He could have taken his wife out to a show – a different wife and a different show – every evening. And by day, he could have pushed quarters into a slot machine and pumped the handle to his heart’s content.
Instead, the poor man haunts some god-forsaken hole in the ground in the Hindu Kush, like a gopher with a turban waiting for a spring thaw.
Where did Osama go wrong? Sure, the man labors under a delusion. But it is the same delusion urged on all of us by the do-gooders. He believes he is making the world a better place…In the parlance of existentialism, he has become "engaged" and thinks he can make a difference in the world. On this last point, he has succeeded. He has made a big difference. But not a good one.
Not that bin Laden couldn’t make this comic ball a better place. Perhaps he could figure out a way to improve the taste of an "Americano"…an orange-colored Italian drink I imbibed at a sidewalk bar in Paris last Friday. It tasted like leaded gasoline with a twist of lime, leaving much room for improvement.
Maybe, if he applied his talents to the job, he could develop some way of making Irish houses look more inviting…or he might have targeted the Denver Public Library rather than the World Trade Center. If Forbes is right – that the building is one of the 10 ugliest in the world – Osama could have done the world a big favor…getting rid of suicidal fanatics and an eyesore at the same time. At the very least, he could say a kind word from time to time and brighten up the lives of his fellow terrorists.
No, the world is not short of avenues for improvement. But neither is it lacking in highways to hell. Jules is at an awkward age. At 14, he is almost as tall as his father and thin as a bamboo pole. Yesterday, I judged it time to share with him our Daily Reckoning secret. He has already been told the secrets to success in life – work hard at the margin…and keep at it for as long as you can. Like compound interest, those little, marginal, extra efforts grow into something big.
"But Dad…how do you know what to do? I mean, like, I could work harder on my math…or on my Spanish…or I could try to create my own video game, sell it and get stinking rich. But I can’t do, like, everything great."
"That’s right, you have to make choices," I tell him. "There are only three important ones: what you do, whom you do it with, and where you do it."
"But how do you decide?" he wanted to know. "How do you know what will really make you happy?"
"Jules," I explain. "You can’t worry about happiness. You don’t know what will make you happy. And what difference does it make whether you’re happy or not? For all we know, Osama bin Laden is perfectly happy. There are people who have terminal cancer who are happy…and others, who are young, healthy, rich and handsome…who are miserable. And suppose there was some drug that you could take that went right to the happiness center of the brain and made you completely happy all the time… should you just take the drug and not worry about anything else?"
Happiness is greatly over-rated, dear reader. Along with democracy and freedom, it is inscribed in the nation’s founding documents. But the pursuit of it is largely an illusion. You can chase it all you want; but you will not be happy until it sneaks up on you from behind.
Ask any man on the street. He will tell you that he is solidly in favor of democracy; he treasures freedom and he makes his decisions based on what will provide him with the most happiness. If he is married, he will add that he intends to make his family happy too. But this is like an investor who says he aims to "make money". It confuses choice with result.
Happiness, I told Jules, is out of his control. He will do what he wants to do; whether it will make him happy or not, we can only guess. Likewise, an investor has no control over whether he makes money or not. The stock market goes up…or goes down…through no fault of his own. All he can do is to take what Mr. Market gives him and try not to bear a grudge. Buying a stock, he cannot, neither by force of will or intellect, force it to go up. Nor can he know in advance which direction it will go.
When a man makes his most important decisions, he may say that his choices were made for "happiness’" sake. But he usually has little idea whether his choices will result in happiness, and often a good deal of evidence to the contrary!
When he chooses his life-mate, for example, does he expect his bride to make him happy? Maybe. More likely, he doesn’t even consider the matter; he gets married for reasons that he can’t explain and doesn’t bother to try. And as far as looking into the future, his brain may cradle some vision of domestic bliss 20 or 30 years later. But if the cherub actually matures in keeping with his imagination it would be a miracle.
Not only do people not know what will make them happy, they often do things that will almost certainly bring them grief. Why would people sign up to go off to war; why would they buy stocks in today’s market – at 44 times earnings – except that they wanted to suffer? And just look at the oafs some women marry! What purpose could they have in mind but sorrow?
And what of the brave soldier who dies in battle at the age of 19? If the idea is to choose happiness, would you say that he made the wrong choice? Did he do the wrong thing?
"No, Jules, people do not really make their decisions based on how much happiness it will bring them," I wound up. "Nor should they… "
"Then, what should they be doing…?" the teenager asked.
"More to come, Jules."
And so it will…tomorrow…
May 21, 2002 — Paris, France
Doesn’t anybody care about stocks anymore?
Suddenly, everyone’s talking about gold and the dollar. Gold shot up on Friday…rising to its highest point since October ’99. The Gold Bug index rose 10% to its highest level since ’98.
The dollar, meanwhile, eased off. It now takes 92 U.S. cents to buy a euro – a big jump up (in currency terms) from the 87-cent euro of a few months ago.
"Au Revoir, Dollar," says a headline from UPI economist Ian Campbell. Say bye, bye to the buck, says Campbell; here’s why:
"Does it make sense now for foreign investors to pour funds into U.S. assets? We would say not, and their very reluctance to do so will be what takes the dollar down."
Taking the Amtrak from Washington to New York, you will see (I presume it is still there) a large sign in Trenton, N.J. "Trenton Makes, the World Takes." But the sign was put up at a different era in American history – when U.S. manufacturing was robust and the nation ran a current account surplus. Those days are long gone. Now it is the rest of the world that makes and Trenton, Sacramento, and every American town, burg and Middlesex farm that does the taking. "It is always the same," explains Campbell. "In the boom years the imbalances are ignored and the boom goes on. Even now, U.S. Treasury Secretary Paul O’Neill and under-secretary John Taylor say that they cannot understand why the International Monetary Fund is concerned with the U.S. current account deficit. But, eventually, imbalances demand correction.
"The correction in the U.S. economy will come about through a fall in the dollar and weak growth in the United States. For the rest of the world that is in most respects bad news. European and Japanese exports to the United States will suffer, while U.S. exports receive a boost to competitiveness. But in a slow world economy it is not exports that are going to help the United States to the recovery investors are looking for. And a weak dollar, by adding to import prices, will tend to depress U.S. consumption and make for a weak economic recovery, or even the dreaded "double-dip" whereby the U.S. economy heads back towards recession."
Over at the Christian Science Monitor they seem to have reached the same conclusion. There was a "double bubble" in the U.S., says the paper – stocks and the dollar. The dollar is "unsustainable" at the current price – which is 20% to 30% too high, they figure.
Here at the Daily Reckoning we’ve been expecting the price of gold to go up…and the price of the dollar to go down…for so long many readers began to see them not as market forecasts but as character flaws. Of course, we’re happy to see the trends we’ve been anticipating for so long finally getting underway. But we’d be even happier if they weren’t headline news.
Eric Fry in Manhattan…
– The stock market stumbled yesterday, but gold stocks soared on the wings of feverish investor demand. Wall Street fashions are changing: The Nasdaq is "out" and Newmont is "in."
– Yesterday, the Dow slipped 124 points to 10,229, while the Nasdaq fell more than 2% to 1,701. But gold stocks shined, as the precious metal jumped more than $5 to a new two-year high of $316 per ounce. Silver rose 11.5 cents to $4.78 an ounce.
– The XAU Index of gold and silver shares put on a decent show by gaining about 3%. But the "intermediate" and "junior" gold stocks took center-stage yesterday with some truly sensational performances. Names like Randgold, Cambior and Bema Gold soared more than 20% each.
– Year-to-date, the XAU Index has vaulted more than 55%, far outdistancing the S&P 500’s 5% drop. Amazingly, therefore, one of the oldest investments known to man is the hottest investment of the year. Gold stocks are the "growth stocks" of 2002.
– My friend Michael Martin, who has been dealing in gold stocks for more than two decades, says that investor interest is definitely picking up. Even some of his "non-gold-bug" clients are upping their exposure to gold stocks. "With so many investors establishing new positions in gold stocks," says Mike, "the demand is surprisingly strong, and it just keeps picking up."
– What kind of a world is this, where investors sell Cisco to buy Agnico? For one thing, it is a world in which the Vice President of the United States calls another terrorist attack against the United States a "near certainty."
– But the gold price probably owes most of its recent strength to less sensational stimuli, like the weakening US dollar and the widening current account deficit. Additionally, the gold derivatives market is probably adding fuel to the fire.
– Warren Buffett’s partner, Charlie Munger, calls the use of derivatives "an insult to sewage." In the eyes of most gold stock investors, derivatives are not merely an insult to sewage, but to toxic waste as well. To the gold-investing purist, there is nothing more sacrilegious than a "forward sale," a.k.a. a "hedge." About $63 billion of gold derivatives sit on the books of U.S. banks and trust companies (as of Dec. 31).
– That’s bigger than the entire gold share market itself. Barrick Gold is the most infamous of the heretic hedgers. Thanks to its heresy, however, Barrick has enjoyed enviably consistent prosperity for more than 15 years – despite a falling gold price. Over this same time frame, many of Barrick’s gold mining brethren struggled to hang on for dear life.
– But that was then. What about now? What is the prudent course of action from this point forward? Might Barrick have done too much hedging for its own good? Maybe lots of forward selling – like lots of cotton candy – only SEEMS like a good thing.
– "One way or another," says Douglas Pollitt at Pollitt & Co. in Toronto, "[Barrick] is short about 23 million ounces of gold. This is a fantastic number…"
– The result of Barrick’s "fantastic" hedging activity, says Pollitt, is that each $1 an ounce gain in the gold price causes the "mark-to-market" value of Barrick’s hedge book to fall by about $21 million. "At $350 an ounce," Pollitt estimates, "the mark-to-market [loss] would be over $1 billion." Even for Barrick, $1 billion is a lot of prospective profit to forgo.
– Barrick’s chief financial officer, Jamie Sokalsky, does not dispute Pollitt’s calculations, but calls the perception that Barrick is afraid of a rising gold price, "nonsense." Sokalsky points out that more than three-quarters of the company’s gold reserves remain completely unhedged. True enough, but it takes time and money to pull those ounces out of the ground. So who knows, maybe a rapidly rising gold price would cause Barrick more financial stress than it has bargained for.
– As usual, Barrick is adamantly unrepentant about its forward selling. Even so, the company has undergone a partial conversion to a non-hedging strategy by promising to gradually reduce its existing forward sales.
– Barrick is not alone in the growing ranks of semi- converted hedgers. And many gold insiders consider this anti-hedging movement to be the single most bullish trend in the gold market over the near-term. In other words, if the large, chronic forward sellers like Barrick Gold and Anglogold become net-buyers, the supply-demand dynamics could shift dramatically in favor of higher gold prices…Let the fireworks begin!