Predictions For 2000 And Beyond

Voters have already lost interest in the next presidential election — and it is still 10 months away. They are bored with the candidates and tired of the whole numbskull process of electing them.

Columnists cite all kinds of reasons — the quality of the candidates, the need for election reform, too much media coverage. But the real reason is that the appeal of politics itself is waning.

“Elections,” said Ambrose Beirce, “are advance auctions of stolen goods.” But voters have caught on.

The voters have come to realize that much of the election booty is stolen from themselves. The rich are already pretty well soaked. The blood has already been squeezed out of the turnips. The geese have been plucked. Choose your own metaphor — voters who want to vote themselves other peoples’ property have run into the limits described by Arthur Laffer so eloquently on a restaurant napkin: “The more they try to take, the less they get. Raise tax rates — and people dodge, move, or loaf.”

Stalin would have had them shot. But even that didn’t work. Force works in football, but not in economics. The voters are on to that too — they’ve spent the last 50 years watching the failure of politics to deliver the goods. Even the dimmest bulb on the national front porch has lit up to the fact that the more politics a nation allows itself, the poorer its people become. Look at North Korea. Albania. The Soviet Union, R.I.P.

Those countries have, or had, more politics per person than any place in history. They claim(ed) nearly 100% of the resources — both human and material — within their franchise territory. But who would want to live there? Smelly, dirty, poor, trashy, ugly — all you have to do is visit these places and you know you want no part of them.

On a flight to Minsk a few years ago I was seated next to an attractive young woman holding a toilet set in her lap. I asked what it was for.

“Stupid question,” she answered. “Everyone knows what toilet seats are for.”

So, I tried another approach with my literal-minded companion.

“Why are you carrying a toilet seat on a flight from Moscow to Minsk,” I asked directly.

“Oh,” she replied cheerfully, “they’re out of toilet seats in Minsk.”

And guess what? The airfares were so mispriced that the 3-hour flight cost her less than the toilet seat.

“Hey, aren’t you going to put on your seat belt,” I asked as the plane took off.

“Nah, look,” she said as she showed me that hers wasn’t attached to anything anyway.

As the appeal of politics wanes, the appeal of the market increases. The market can at least produce a toilet seat.

Washington can’t deliver the loot, so people turn to Wall Street. What the mob can’t get by theft, in other words, it hopes to get by fraud.

Fraud may be too strong a word. This is a fraud in which everyone seems to believe — especially the perpetrators. Perhaps delusion would be a better word. In any case, it is a collective bamboozle — in which the bamboozled and the bamboozlers are working to the same end… buying and selling dubious stocks from each other in the belief that they will all get rich.

The idea of good investing is — to return once again to George Soro’s words (because they seem to describe so well what I try to do in these letters) “is to identify the trend whose premise is false.”

The premise of 20th century politics was false. The world was not made a better place by the Third Reich, the Bolshevik Revolution or the Great Society. It is made a better place by the hard work and common decency of ordinary people.

Now, we face the premise of the Rocket Chips — and of American capitalist triumphalism. The premise is that there is a New Era… born and nurtured in America, because of its flexible, dynamic economy… and that the world will now be a better place because of it.

I have tried to show you, in many different ways, that that premise is false too. The productivity and economic growth that the New Era supposes has not materialized. It is like a chimera in the desert — always receding as you approach it.

The Internet itself, the focal point of the new technology, has proven itself to be a valuable communications tool, but not an easy medium in which to make money.

And the American economy, supposedly the main creator and principal beneficiary of the New Era, still looks a lot like an ordinary economy — with one major difference — one heck of a lot of credit.

When the US economy was compared to Japan and Germany by the Economist, for example, it looked anything but extraordinary. Measured in GDP per capita, from ’89 to ’98, the US performed about as well as Japan and both did worse than Germany.

And compared to it’s own recent past the US economy has been far from spectacular. GDP increased by 5.5% in 1992. The figure is only 4.7% in ’99. What’s more, as Dr. Kurt Richebacher has shown, 78.5% of that GDP figure for this year is computers.

Uh… do you think computer sales really account for 78.5% of economic growth? Not a chance. The whole thing is a fiction, if not a fraud. The computer figures are enhanced — because the statisticians adjust the numbers for computing power. What they’re really figuring is not economic activity in dollars and cents — but in gigabytes per second. If they did the arithmetic the way they did in 1992, computers wouldn’t make up 78.5% of economic growth, but only 2.3%.

“Putting it straight,” writes Dr. Richebacher in his December issue, “the exploding computer power… has accounted entirely for the US economic ‘miracle’ since 1996…”

But it doesn’t stop there. Not only do the statisticians compute misleading figures for the computer industry… they then use the figures to distort the inflation adjustment. Here’s how it works: The nominal GDP is deflated by an adjustment to take into account inflation. This deflator was 2.8% in ’92. But it was only 1.5% in ’99. So, after adjustment, including the trumped up computer figures, ’99 looks like a better year.

But the deflator itself is “weighted by the changes in the composition of the GDP growth,” according to Dr. Richebacher. So since computers make up a fictional 78.5% of GDP growth… they are given extra weight when figuring out the inflation adjustment. And, of course, computers have gone way down in price per gigabyte. You can get about 5 times as much for your money. So the statisticians adjust inflation downward accordingly.

To make a long story short, investors are bamboozled twice on the same set of numbers. Once when we’re told GDP is growing at a decent rate. And again when we’re told that inflation is declining. These are the falsehoods and lies that undergird the whole New Era.

The real story is that the average person earned the equivalent of $315 a week in 1973. He now earns $272. He may think he is getting richer — on paper — because his house and his stocks have gone up. But they only stay up as long as the premise of the New Era has not yet been discredited.

But sooner or later, it will happen. The average investor will realize that the frauds and falsehoods of Wall Street won’t make him any richer, any faster, than the lies and brute force of Washington.

My second major prediction (which, of course, you already know): the premise of the New Era will be discredited. The Rocket Chips will fall to earth.

Watch your head.

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

*** The big news today is that there is news today. The world did not come to a halt over the weekend. We went to a New Year’s party in Magnac Laval… in a practically deserted hamlet. Arriving back at home at 4AM — the lights still worked.

*** In fact, not much happened at all. Oh, there was a video rental place that gave a guy a bill for $91,250 when he brought his flick back. And cash registers at some 7-11 stores in Norway were said to be malfunctioning. But, otherwise, the Y2K bug has turned out to be a dud — at least so far.

*** One exception was an area of rural Arkansas which has been without power since midnight Friday, after a man in a 3-piece suit blew up the power lines. The man’s name was not released but he is believed to be a newsletter writer, whose letter is managed by a Baltimore-based publisher.

*** I know what you’re thinking — poor Gary. He staked his reputation on the millennium computer problem… and then the little bugger pooped out. But Gary was right. It was a calculated risk — and no one knew what the odds really were. Gary’s work revealed the theoretical fragility of the modern computer-reliant division of labor. He warned readers to take precautions. We don’t know how close we came to a total collapse of the system.

*** Now that the Y2K problem is thought to be behind us… investors should feel even more bullet proof. The markets should breathe a sigh of relief today and rally. That is the conventional view of how today will go. Relief? I saw almost no sign of any worry. So it is hard to imagine that they will be relieved.

*** Instead, they might begin to worry about what will happen to the extra $107 billion that the Fed added to its balance sheet last year as a precaution against Y2K problems.

*** But so far, the markets in Europe this morning seem to be shooting up. The Paris Bourse was up very strongly on Friday. Up 2% for the day. So far this morning — it is up another 2%! Whew… the rocket chips are going to where no man ever went before.

*** The Dow, the S&P, the Nasdaq — all up on Friday.

*** But this was chicken feed. Remember how I suggested that it would be better to buy Russia at low prices than the Rocket Chips at lunatic levels? Well, since October the Moscow market has more than doubled. And Friday, after Yeltsin stepped down, the Moscow stock market lit up as though it was downtown Grozny. Stocks rose 17% in a single session.

*** Meanwhile, in New York, Qualcom gets the prize for the most hallucinogenic stock on the market. It is up 2,390% since a year ago.

*** The Fed must be thinking about how it could drain away its extra loot. The bond market — which had a terrible year in ’99, with the 30-year Treasury falling 14.4% — suspects that the money will show up as inflation.

*** The booms and busts of the past 30 years seem to coincide with the decades themselves. So says George Gilman in Barrons. The gold boom of the 70’s ended in the first days of ’80. The Japan boom of the 80’s ended in early ’90. Gilman also estimates that the P/E for the Nasdaq is really near 200.

*** Vladimir the Terrible may not have a mustache or an armband, but he’s rediscovering the rhetoric of the fascist 30s. He is very popular in Russia because he is restoring “pride and respect” for the home team. “In Russia,” he says, “the attraction of the collective way of life has always been stronger than the desire for individualism.”

*** Of course, the church, the corporation and the Kiwanis club are also collective undertakings. Mr. Putin refers to the Russian state… the institution that gave the world serfdom and the gulag.

*** It is 3 days into the New Year. There are still towns in France that have no power, no water and no electricity. But the cause was natural, not digital. Here in Paris, water comes out of the spigots. The lights are on… and I’m going to take the kids to see the new Schwarzenegger movie this afternoon.

Your Correspondent,

Bill Bonner

Paris, France January 3, 2000

The Daily Reckoning