Pilate Error

The Daily Reckoning PRESENTS: “Past performance is no guide to future performance,” is the idiom heard throughout our nation…but how true is that? Don’t we learn from our mistakes of the past? Apparently not…


“I have but one lamp by which my feet are guided, and that is the lamp of experience. I know no way of judging of the future but by the past.”

– Edward Gibbon

As a member of parliament, Gibbon was an ignominious failure, but as a historian of the Roman Empire, he told the story so vividly that generations of readers have taken it for gospel, even though it was full of the author’s prejudices, half-truths, and misapprehensions. What history isn’t?

Today, our office is silent because of something that happened under imperial Rome. A Jew was brought before the Roman governor of Judaea, accused of disturbing the peace. Upon looking into the matter, the governor concluded that the accusers erred. The accused had made an admission in public: “To this end was I born, and for this cause came I into the world, that I should bear witness unto the world.” But, so what? The Roman, Pontius Pilate, saw nothing in what Jesus was saying that posed a threat to the empire, or even to Roman rule in Judea.

“I find no fault in him at all,” he concluded.

That wasn’t good enough for the local authorities. Jesus may have been no menace to Rome, but he was a troublemaker in the Levant. The elders wanted to get rid of him. The mob wanted his blood.

“Crucify him. Crucify him,” they yelled.

So be it, said Pilate, but the blood won’t be on my hands. “Take ye him and crucify him, for I find no fault in him.”

This history has been retold every year for the last two millennia. Like any history, we have no way of knowing what part of it is humbug and what part is true, but like the Jesting Pilate, whom Francis Bacon invented, when the question is posed, we don’t wait for an answer. Whether history or not, the story itself is a masterpiece.

We pay attention to it as we pay attention to all masterpieces – to all art, tradition, and culture. We pay attention to everything that comes to us bearing the solemn freight of history.

We fear that if we do not, we might miss learning something… even if we are not quite sure what.

But the financial authorities in England and America have a different idea. “Past performance is no guide to future performance,” they say.

You can argue about the meaning, relevance or accuracy of this pronouncement. On both sides of the Atlantic, such a statement is required by law, usually affixed to an ad for a mutual fund, partnership, or – in England – even an investment analysis. What you can’t do is argue with those who pronounce it – the financial regulators themselves. The regulators won’t give an inch; the past is not indicative of the future, they say, no matter what.

This Good Friday, we pose the question to ourselves. Is history indeed useful? Does it bear on the present? We want to know. Or, is it simply a legal dead letter that says nothing about future performance? You, on the other hand, may want to know if this perambulation is worth reading. Where does it lead? We will tell you right now – it tells us that the regulators are Pharisees.

Of course, the bureaucrats, regulators, world-improvers and Pilates think they are doing the public a favor. They are delivering us from evil. The SEC, for example, believes investors need reminding that the future is a chancy and perfidious thing. Even though a mutual fund registered 20 solid years of above-market gains, this doesn’t mean it will do it in the 21st year. Maybe it just got lucky.

It is also true that history can be deceptive, misleading and coy. So can life, but the average investor – like the average voter – is much more likely to be deceived by too little history than by too much.

What does history show? It shows that things don’t stand still. They go up and down…back and forth. What goes around, comes around. There are short cycles and long ones – circadian and imperial. Rome rose for 500 and fell for 500. As near as we can guess, property prices rose in central Baltimore from its founding in the 18th century until 1929. Then, they went down at least until the end of the century. They seem to be rising now…we won’t know until later if this is a genuine interruption of the trend. Farmland in Western Kansas experienced a real bubble in the 1880s. One hundred and twenty-five years later, it is still not as expensive as it was then But, who looks that far back?

Major cycles in the stock market seem to last about 30 to 40 years, peak to peak or trough to trough. Stocks hit a high point in 1929 and then collapsed – bouncing around for a while but not recovering until the 1950s, in nominal terms. Stocks hit a new high in the late ’60s, then it was down for another spell, until 1975 or 1982, depending on how you look at it, until a new bull market took over – bringing prices to another cyclical high in 2000…34 years after the last one.

If history is not helpful, then we are completely lost. The only events we have any knowledge of are those in the past. Those in the future are as unfamiliar, unknowable and unsavory to us as local cheese.

“Those who do not study history are doomed to repeat it,” say earnest history teachers and terminal optimists. But, it’s not that easy. Studying history is a little like learning a foreign language; until you really get the hang of it, there are likely to be some misunderstandings. They come, as you might expect, in the compound tenses and subtle, subjunctive moods. The casual reader understands the major verbs, but misses the veiled meaning. He is like a Hudson River hustler trying to do business in Hyderabad – or a man trying to reason with his wife. The words will be deceptively familiar; but he’ll miss the real sense of the conversation completely.

On the other hand, cut off from history, the lumpeninvestor is encouraged to not even try. He’s supposed to believe that every new day is as detached from the last as Mars is from Jupiter. He is not supposed to notice that they both revolve around the same star, and repeat the same cycles over and over until the crack of doom. Taking the regulators at their word, he sees the planets in heaven and has no reason to think they will ever be anywhere other than where they are right now.

The lumpeninvestor looks at the prices on Wall Street, or those of houses in his neighborhood. Those too must be permanent, he reckons. He has no frame of reference, no theory to tell him otherwise, and no way to make a reasonable guess about where they will be tomorrow. He is as misled as a voter, but he’s not the complete moron the authorities make him out to be. Warning an investor not to trust history is like a warning sailor not to go near brothels when he is on shore leave. He’ll probably end up there anyway.

Today, the typical stock market investor probably feels as old as Metushélach. He entered the market in the mid-90s. He thinks he’s seen it all. The market went up and then went down, didn’t it? It should be ready to go up again. He can’t help but notice that stock prices have gone up in the last five years, but he’s discouraged by the authorities from looking any further. It’s not worth the trouble, they tell him. Past performance is no indication of future performance. The past doesn’t count. Forget it.

The little bit of recent history he picks up without trying, cheats him. It is as though he had noticed Mars zipping through space, without realizing it is merely retracing its steps from millions of years ago. He hasn’t enough history. He has never heard of Copernicus. He thinks Pontius Pilate led a peasant revolt in Mexico. And so, he draws conclusions that are both erroneous and preposterous. Whatever he sees, he can only imagine that nothing like it has ever happened before. History has come to a dead stop. This really is a New Era on Wall Street. He sees Mars heading out into space. And, he imagines himself going where no man has ever gone before…when, actually, he never left home.

Bill Bonner
The Daily Reckoning
April 14, 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 at a discount – just click on the link below:

“Now Perhaps Someone Will Listen!”

America is going broke…in style. We say that not to alarm you. It’s just one of those certainties in life that you should point out to your children, such as “the dollar will be worthless” and “we’re all gonna die.”

There’s not even any great shame in it. Going bust is what every great empire does sooner or later. Besides, it may not happen for another quarter of a century – or maybe sooner.

Last month, ominously, the U.S. government registered a record deficit of $85.47 billion. That is, for every dollar the feds sucked in, they managed to burn through a $1.50. But, why run up such hefty losses now? After all, the nation revels in “full employment,” does it not? The economy is going like gangbusters, is it not? And, housing and stocks have soared to near all-time highs. If the government can’t break even now, when will it ever break even?

If you have to ask the question, you must be out of step with the times. Every policy wonk, number abuser, and budgetary contortionist in Washington knows the U.S. government will never run a genuine un-manipulated surplus. Every Beltway buffoon in a suit is counting on it. Every parasitic politician knows that the positive numbers touted during the Clinton years were a ripe fraud, achieved only by pretending that Social Security was not a government program. Now, even that larcenous legerdemain won’t change the ink color; the numbers are red from top to bottom, and getting redder all the time.

Among the seven wonders of the modern world is that lenders and merchants world over are still not only willing to accept U.S. paper, but they are positively craving it. Last year, China alone racked up more than $200 billion in its trade surplus with the United States, and what did they do with all that money?

“China is on a buying spree in U.S.,” says a headline in the Houston Chronicle.

“See,” we can almost hear gorgeous George Gilder whisper in our ear, “the money comes back to us. What’s the worry?”

No worry…just an observation. The money leaves home a servant; it comes back a master. The dollars are spent on consumer items. In other words, Americans use paper to buy junk while the Chinese hold on to it as capital and use it to pocket U.S. debt, U.S. factories, and U.S. assets. Americans used to be able to say what they wanted to the Chinese. Now they must say, “Yes sir.” And it wouldn’t hurt to learn to kowtow; the Chinese like that sort of thing.

Another observation: the dollar is losing ground against the things that aren’t junk. The price of oil edged up to nearly $70, yesterday. A headline in the Financial Times tells us, “Gold could reach $850.” That is the top price the metal reached in the last bull market, when Jimmy Carter was still president. Well, duh.

More news from our currency counselor…


Chuck Butler, reporting from the EverBank trading desk in St. Louis:

“Check this out: if you calculated the trade deficit on a ‘daily deficit,’ (or Double D!) you will find that January’s ‘daily deficit’ was $2.2129 billion per day and the ‘daily deficit’ for February was $2.3464 billion.”

For the rest of this story, and for more insights into today’s markets, see The Daily Pfenning


Bill Bonner, back in London with more views…

*** The office in London is as quiet as a Quaker’s grave. Today is a holiday in England. Outside, the streets are almost empty…it is as if they had been abandoned to the rain.

We are still here…still keeping a close watch on housing, reading the news, chuckling to ourselves, and wondering how it will all turn out.

“American borrowers’ rush into debt has been accelerating,” writes colleague James Ferguson in this week’s MoneyWeek. “It took more than 30 years to raise the debt-to-income ration 30 percentage points, from 40% to 70%. It then took only 15 years to raise it the next 30 percentage points to 100%. But is has taken just five years since the end of 2000 to jump the most recent 30 percentage points, to a new all-time high of 129%. This has surely been one of the most remarkable debt-financed spending sprees in the world, ever.”

This debt, says Ferguson, is largely concentrated on a single sector – and a single consumer asset: housing. It is debt that has made house prices rise – not new families or higher incomes. But, debt cannot rise forever. Ferguson thinks he sees the end of it:

“Now there are signs of a concerted, possibly even coordinated, monetary tightening by the world’s central banks…” whose consequences are already apparent.

“The data of new family houses in the U.S. in February was shocking. U.S. new homes sales fell 3.4%. In the economically vital Western U.S., new home sales in February plummeted 29% compared with the same period last year.

“According to David Rosenberg…in the last 309 years there have been eight such double-digit drops in new home sales. Six times, these drops signaled recession the next year and one drop led to GDP growth halving from 4% to 2%.”

And here, from the Contra Costa Times, comes more bad news:

“The housing market in California has fallen into a visible slump, and the downturn could erode economic expansion in fast-growing regions such as the East Bay, economists warned Wednesday.

“Existing home sales have skidded, houses now languish on the market for longer periods, and the rate of home building has slowed, according to the report issued by Wells Fargo Bank.”

Richard Benson offers further thoughts on why housing is about to go to Hell:

“Consumer debt is up to $2 trillion (not including $440 billion of revolving home equity loans and $600 billion of second mortgages). Not only do consumers owe a whopping $9 trillion in mortgage debt, but home equity extraction has reached $600 billion annually. Homeowners have basically received, and spent, in excess of $2 trillion that they never earned (Just take a look at the increase in total mortgage debt in the Federal Reserve’s Flow of Funds Data since 2000).

“Home prices are under horrible pressure. There are probably a few million property owners, including speculators, flippers, and second-home buyers, who are in way over their heads. We’ve all heard stories about second-home buyers who really couldn’t afford the luxury and high expense of a second-home priced at $200,000, yet they purchased one for $250,000 and rationalized its affordability because ‘the value would only go up to $300,000 or more.’ Besides, they naively believed ‘it could always be sold quickly in a bidding war for a profit.’ In resort areas – given the number of days people actually use their second home – staying at the Ritz for $500 a night could be a much better deal. Do the math; it’s not pretty.

“So, welcome to Housing Hell. Now that buyers are willing to wait one or more years before buying, there are more sellers than buyers. Interest rates, in the meantime, continue going up. Let’s also not forget the Existential Equity Extraction. With $700 billion of sub-prime mortgages written (of which 10 percent could default), $2 trillion of ARMs set to reset, and mortgage delinquencies near five percent, equity to extract is vanishing.

“As the refinancing game ends and borrowing costs increase, a significant rise in foreclosures could put a few million more homes back on the already-saturated market! When these foreclosures come, many of the homes for sale will have no equity and the seller will want a quick sale. Buyers will still be choosey, unless there is a real deal and the prices are marked down big time. The entire structure of housing prices will move lower with these forced sales. With mortgage foreclosures mounting up, it could get unbearably hot in Housing Hell.

“Our estimate is it will take about six months for sellers – particularly speculators who never intended to live in their properties but whose sole intention was to “flip” them for a profit – to realize they are toast.

“Based on the logic of history, those who rent for a few years, rather than buy, will be rewarded the most (even though rents should increase with general inflation). Yes, the day will come again when it will, indeed, cost less to buy than it does to rent. When that day comes, it will signify the return, once again, of Housing Heaven.”

[Ed. Note: Dr. Kurt Richebächer has been telling his readers for quite a while now to steer clear of investing in real estate…mutual funds…and stocks. But all is not lost. The Good Doctor has uncovered the only five investments you should own over the next 12 months.

*** There’s a property boom in India, too. “Real estate prices are soaring,” begins a story in Business Today, of New Delhi. “Consumers are stretching themselves to buy the second and third apartment, and never projects are popping up every day. Everyone agrees the price increases are unsustainable. So when is the crash coming?”

Around Delhi, prices have shot up 200% in the last three years. We’ll report prices to you, as soon as we figure out what a Crore is.

The Daily Reckoning