No Expectations

Once I was a rich man
Now I am so poor
But never in my sweet short life
Have I felt like this before

The Rolling Stones

The Daily Reckoning offers no forecasts nor predictions. Not that we are too modest to pretend that we can see into the future.

On the contrary, we are immodest enough to pretend that we can know, at least better than most people, how the world works. But over many years, we’ve learned our lesson about forecasting: it is far safer to try to describe how things ought to work rather than what will actually happen.

Curiously, it is more profitable too.

For the last 3 years, we have been telling you what ought to happen, not what would happen. To everyone’s astonishment, including our own, much of what we though ought to have happened, did happen… though not exactly when we thought it should.

Today, we return to the subject. What ought to happen to gold, we ask ourselves?

It ought to go up, we conclude. What follows is not a logical discourse on the gold market so much as a long, windey road of cogitation leading to gold’s door.

Crowd Thinking: The Whole Truth

The problem with this silly old ball we live on is that life is infinitely complex. The closer you look, the more you see. What seems simple from a distance…say, disciplining a teenager or the politics of South Africa…is alarmingly complicated up close. The whole truth, being infinite, is unknowable. And for every tiny little piece of it there’s a revolver in some poor fool’s mouth…and a special corner of Hell waiting for him.

“Nobody knows anything,” they say in Hollywood, recognizing the complexity of the film business. A studio might spent $100 million on a block-buster movie…and the thing might be a complete dud. Or, a young guy with $20,000 might make a big hit.

The old-timers know that even a life-time of experience is no guarantee. Even the pros often guess wrong about which films will box office hits.

But walk up to an investor on the street and he is likely to have an opinion. He may have even bought stock in an entertainment company…after hearing about the block-buster films they had planned for the summer. Of course, he has not read the scripts, nor met the actors, nor ever earned a dime in the cinema business…nor even worked as an usher. Yet, he has an opinion — based on what he has read in the paper or heard on TV!

People have opinions on everything — especially things they know nothing about. Voters in Baltimore during the ’80s could hardly figure out how their own municipal government worked and could barely get it to pick up the trash. Yet, though very few had ever been there….and almost none spoke the languages or could identify the major ethnic groups of the country….they nevertheless had strong opinions about how to reorganize the government of South Africa!

Crowd Thinking: A Qualifying Hesitation

Yet, the more you knew about the situation in South Africa the harder it was to have a simple opinion. A knowledgeable man, asked to comment on the situation, preceded his thoughts with “I don’t know…”

Even statements of ‘fact’ need a qualifying hesitation. A woman may say she loves her husband, and mean it sincerely. But she will surely hate him too…in some manner, at some time.

“The dollar is the world’s most valuable currency,” an economist might say, for there is more of it than any other. But he might say the very opposite too – “The dollar is the world’s most worthless currency” — for the very same reason, because there is so much of it around. Both statements could be ‘true’.

Or take an historical ‘fact.’ As we have remarked in these letters, everyone knows that the Allies won WWII…but it might just as well be said that they lost it, because Germany emerged the clear winner in Europe — economically, politically and militarily. We’ve also observed that the statement about the outcome of the American Civil War, which everyone recognizes as true, “Lincoln preserved the union”, is a much a lie as a truth. For while his armies defeated the southern states, his policies destroyed the very heart of the union, the liberty of its member states to decide for themselves what kind of government they would have.

“John crossed the road,” you may say, confident of disproving our point. But Einstein showed that this was not so. “John did not cross the road, the road crossed John,” is just as accurate. “And who knows if John really crossed the road or not,” Heisenberg would add.

The more you think about it, the less you know for sure. Here at the Daily Reckoning we grow more ignorant every day.

Crowd Thinking: Knowing Nothing at All

Opinions we felt pretty confident about a few years ago are reprised with “Did we say that?” Now, we begin our sentences with… “We don’t know…but…” Soon, we will know nothing at all. Perhaps we already do.

The rise of the modern communications …most recently, the Internet…vastly increased the amount of information available to the average person. But it was not the sort of information they got on their own — from direct experience. Instead, like the investor in the film business, the new information was public, not private…it was information based on statistics, not individual numbers…and organized according to collective abstractions, and not on an individual’s own observations or his own ideas.

Now, men could know less and less about more and more subjects — and have opinions about nearly everything. A man in Strasbourg could have the same opinions as one in Bordeaux… participate in the same discussions…invest in the same markets and vote in the same elections! It was the ‘Era of Crowds,’ wrote Gustave Le Bon, anticipating, in 1895, the largest trend of the 20th century.

Crowds have their own way of thinking. They cannot think the truth, because they cannot know it any better than we can. But crowds lack patience with irony, nuance, complexity. Ideas need to be dumbed down and vulgarized so they can be taken up by the masses. They end up as dumb as campaign slogans or war jingos, that is, little more than stupid lies.

The crowd makes no attempt to see the complexities of a modern economy. Its idea of an economy is as simple as an internal combustion engine. If the Fed wants to speed it up, it has only to “push the pedal to the metal,” opening up the money spigots as if they were a fuel line. If the Fed wants to slow it down, surely there are knobs and switches it can turn to do the job.

Nor does the new lumpeninvestoriat have any better idea of how the stock market works than the average voter has of how his laws are made. Instead, they are satisfied with the advertising themes – “Bullish on America,” says Merrill Lynch; “Protect the Homeland,” says George W. Bush. The crowd asks few questions… for fear it might get drawn into complexity.

Thus are the little guys set up to be the chumps of Wall Street and the patsies of Washington. Both are encouraged to believe that they are in control. (“We are the government,” wrote Hillary Clinton in her opus. “Wall Street is investors,” a brokerage might claim.) But neither voters nor shareholders have any control at all — outside of the great mass movements of which they are part. Neither the individual shareholder nor the individual voter has enough at stake to justify the time and effort it would take to actually figure out what is going on. If he looked hard he might discover that government programs are a waste of money….and that corporate executives are overpaid and that most stocks are overpriced. But what could he do about it? What matters is the direction of the crowd. Like it or not, he is swept along, as ignorant as a congressman, with the mob. If the crowd drives up stocks, his stocks go up….if they elect a Republican or Democrat he must put up with the fool along with everyone else.

And if he reaches in his pocket, he finds no gold. Instead, he sees green pieces of paper. He’s been told they are worth something. Everyone seems to agree…for he can exchange them for the things he wants. Today, he can buy an ounce of gold for less than $350. The crowd judges it a fair trade today. Will it tomorrow?

More to come….

Bill Bonner
Paris, France
January 8, 2003


The leftist French newspaper, Liberation, predictably described the Bush tax plan as a ‘giant gift to the rich,’ which made us like the tax cuts even more. The paper found an economist who predicted that the results would be ‘negative.’

We don’t doubt that he is right, but it could be worse. The administration could be proposing to spend more money without tax cuts. At least this way, people will be able to waste their own money rather than have the government waste if for them.

For every negative there is a positive, we say to ourselves, like an electrician in an reflective mood. We’re even ready to look on the bright side of depression — after all, it will be easier to get a table at a good restaurant…and more people will spend more time at home, rather than clogging the nation’s highways with their SUVs, en route to buying more of what they don’t need with money they don’t have. What positive is there in rap music or Lyndon Larouche?

We don’t know. But probably if we looked hard enough we could find something. That is the problem with this world, dear reader. There is always more to see – if you’re willing to look. (More on life’s aggravating complexity, below…)

In the meantime, what we find most interesting in the financial news is the dollar. Though it lost ground last year, it is still judged to be worth nearly as much as a euro…and about 1/350th of an ounce of gold.

Since Alan Greenspan took over as the chairman, the Fed has added $5 trillion to the world’s supply of dollars, and may add another $1 trillion this year. During that same period, gold about 800 million ounces of gold were added to world supplies…or one for every $6,250 new dollars. Yet investors took up the new dollars readily…and the new gold reluctantly. Yesterday, they priced an ounce of gold at less than $350. That might change in 2003, we keep thinking.

“A ‘strong’ dollar policy, however, has been part of the U.S. economic mantra ever since Robert Rubin first uttered the words in 1995 after succeeding Lloyd Bentsen as Treasury Secretary,” explains Bill Gross of PIMCO. “His presumed (although never directly stated) belief was that a strong dollar would attract foreign investment and lift all market boats. Mr. Rubin succeeded beyond anyone’s most bubblish dreams, but now with the trade deficit at 6% of GDP, and our need to attract nearly 80% of all the world’s ongoing savings just to keep the dollar at current levels, an end to the party is clearly in sight.”

“Future investment by foreigners in anything with a $ sign attached is at risk,” Gross continues. “In addition, Rubin’s policy succeeded so famously that our bonds and our stocks now have lower yields and much higher P/Es than most other alternative markets. Rubin and his successors have painted us into a corner from which either a falling dollar, depreciating financial markets, or both are nearly inevitable… 13% of the U.S. stock market, 35% of the U.S. Treasury market, 23% of the U.S. corporate bond market, and 14% direct ownership in U.S. companies are now in the hands of foreign investors.

“It’s a theater crowded with foreigners and if someone yells ‘Fire, Feuer, or Kaji’ there could be a rather crushing stampede for the exits,” he concludes.



Eric Fry from New York City…

– The Dow Jones Industrial Average took a well-deserved breather yesterday, dipping 33 points to 8,741. But the younger, more energetic, Nasdaq Composite continued to power ahead, gaining 10 points to 1,432.

– Gold stopped to catch its breath as well, as the yellow metal stumbled $4.40 to $347.70 an ounce. (Does Mr. Gold Market read the Daily Reckoning?) Gold stocks retreated in sympathy with gold, as the Philadelphia XAU Index fell 3.5%.

– President Bush took to the airwaves midway through the New York trading session to emphasize his concern for the economy and to explain all the wonderful things he’s going to do to pull us out of our “soft patch.” Like most Presidential proposals, Bush’s “growth and jobs” plan is a “borrowing and spending” plan. And like most Presidential proposals, it is certain to succeed in borrowing and spending, but uncertain to succeed in producing either jobs or growth.

– At the outset the Bush plan may be better than a poke in the eye with a sharp stick. But it might end up being worse that a poke in both eyes with a turkey thermometer… of course, only time will tell. From our vantage point, the likeliest consequence of the Bush plan is resurgent inflation — the monetary love-child of “Borrowing” and “Spending.”

– Although the economic landscape has changed substantially over the last 12 months, the main issues confronting investors have changed very little. Stocks are still expensive, the dollar is still vulnerable and the consumer will still – someday, we think – stop buying things he doesn’t need with money he doesn’t have. In fact, a few consumers seem to have reined in their spending already, as evidenced by the dismal recent sales trends of Home Depot, Radio Shack, Restoration Hardware and many other retailers.

– “What’s the outlook for consumer spending? Dim, in my view,” says Northern Trust economist Paul Kasriel. “If baby boomers want to retire before they expire, they are going to have to start saving more. The personal saving rate troughed in 2001 at 2.3%. In the first 11 months of 2002, it has averaged 3.9%.

– “My bet is that the personal saving rate will trend still higher in 2003. Why? Because households are significantly poorer…after the bursting of the stock market bubble….Net worth as a percent of disposable personal income (DPI) has fallen back to 1995 levels. I would expect that consumption as a percent of DPI also would start to gravitate back down to 1995 levels. (Another way of saying this is that the personal saving rate ought to levitate back toward its 1995 level of 5.6%).”

– But even if folks aren’t buying as many tool-belts and curtain rods at Home Depot, they’re still binge-buying expensive stocks from time to time. Folks can’t seem to get their fill of stocks, no matter how many of the things they might already own. But if the current bear market rally fades like all of those that have preceded it, investors will wish they’d purchased housewares instead of Intel shares.

– Stocks are still pricey, not simply because they boast lavish PE multiples, like 30 and 40 times earnings, but also because the economic hangover from the bubble years is still with us. The economy is still beset by the twin ills of excess capacity and feeble demand. No amount of interest rate cuts or tax cuts or Dow points will heel these maladies overnight…At least, that’s the bearish point of view. Alan Greenspan offers a much cheerier post-bubble post-mortem. As he has asserted repeatedly, “It was better to have boomed and busted than never to have boomed at all.” Nice theory, but it’s probably not true.

– “The Fed’s defense is waged in the arcane locution of macroeconomics,” the Washington Post’s Steven Pearlstein explains. “But essentially it boils down to this: The economic dangers involved in trying to pop a stock market bubble are greater than the risks of letting the bubble pop on its own and then lowering interest rates to try to limit the economic damage after it does.”

– That’s the phase we’re in now — the post-bubble-interest- rate-reduction-to-limit-damage phase. Unfortunately, Greenspan’s rate-cutting extravaganza has not succeeded either in restoring economic growth or in limiting the post-bubble economic damage. The problem with busted bubbles is that — like chest colds — they tend to hang around for a while.

– Thirteen years into its colossal busted bubble, the Japanese economy is still coughing up mucous, financially speaking. Here in the States, we’ve only endured three post-bubble years. So it may be too early to declare the Fed’s radical 12-step interest rate reduction program a complete failure. But it’s not too early to declare the program a non-success…

– But fear not! The “growth and jobs plan” is on the way!


Back in Paris…

*** European consumer confidence is at a 5 and a half year low…

*** Germany’s economy is “unlikely to recover this year,” says a Financial Times report.

*** ‘Central bankers on trial!’ Literally. Bank of France head Jean-Claude Trichet faces charges of covering up problems at Credit Lyonnais 10 years ago.

*** Back in the U.S.A., the percentage of mortgages in foreclosure rose in the 3rd quarter of ’02 to 1.15%, a new record.

*** What else…? Nothing much. More thoughts on what to expect in 2003 below…

The Daily Reckoning