Reckoning Or Redemption?

The Daily Reckoning Presents: A Guest Essay in which the author sneaks in the back door to challenge one of the basic assumptions of the Daily Reckoning…while Bill is on vacation.

RECKONING OR REDEMPTION?

“Investors don’t get what they expect, but instead what they deserve.”

Bill Bonner

Boy, it’s easy to believe that Bill is exactly right, because there are lots of things about America thatdon’t make any sense…

For example, the pretense that you can live at the expense of your neighbor has never been more popular in America. Just look at the recent tax refund. Everyone gets $300 back – no matter how much tax they originally paid. That’s not even remotely fair – but it’s very popular, isn’t it?

Of course this kind of thing can’t last. A reckoning is coming. The rich in this country, as has always been the case, will move their assets offshore. Like Bill, living in France. And the taxes on the middle class – whether direct or indirect (inflation) will rise.

For financially savvy people, the scariest reckoning to come relates to the current housing market. The government not only has a monopoly on money, but they’ve also created a system whereby most of nation’s debt resides in mortgages, which are owned by government- backed agencies. The Fed-backed Fannie Mae and Freddie Mac – which borrow short maturity debt at lower interest rates than their competition because of their de-facto government guarantee – now hold debt equal to 66% of our national debt.

By 2005, it’s estimated that this will outgrow the supply of Treasury bills.

In other words, the stability of our currency and the value of your savings, your stocks and your property, will depend on your neighbor’s willingness to repay his mortgage…the same mortgage he keeps taking equity out of to buy big screen TVs and tech stocks like EMC, JDSU and Sun Microsystems.

“Why not?” he says, “We owe it to ourselves…” And besides, he doesn’t expect to have his house foreclosed upon – it’s illegal in some states. Unfortunately, reckonings don’t follow local ordinances.

If you spent any time looking for these kinds of trends – the serious mistakes and wrongdoings of our society – you’ll find them almost everywhere. I know. I am the former editor of one of Bill Bonner’s favorite newsletters – The Fleet Street Letter.

But I don’t work there anymore. And instead of spending my time finding out what’s wrong with America – the reckonings to come – for the last several years, I’ve been focusing on trying to find out what’s right in America – the opportunities to come. I made the switch because, despite all that’s wrong with the world, things are getting better all the time. Somehow, over time, the opportunities overwhelm the difficulties.

The reckonings don’t last. Redemption follows.

Don’t get me wrong. I’m sure we’ll undoubtedly have continuing economic cycles – booms and busts – but I’m more convinced than ever before that Bill’s view of the 20th Century as a period of ruin for humanity is totally wrong. And, more importantly, I’m convinced that the coming years will be better for us than we could possibly imagine. Better financially. Better physically. And vastly richer.

How do I know that things will get better, despite the reckonings that will surely occur? Because the rate of wealth creation continues to accelerate, despite all of our mistakes.

There’s simply no doubt that we’re a lot wealthier as society than we used to be. The average lifespan has nearly doubled since 1900. And the real, inflation- adjusted cost of electricity has fallen 99.9%. Wheat is now 98% cheaper.

In real terms, according to the Julian Simon, one of the most well respected economists of the 20th century, the typical American worker produced about $2-$3 worth of output every hour in 1900. Today that figure is between $20-$25 – a ten-fold increase. America continues to have the most productive work force in the world – 80% higher than European workers, for example.

When confronted with evidence of falling commodity prices (in real terms) over time (the best evidence of the economy-wide creation of wealth), Bill is likely to respond: “in which currency have commodity prices fallen?”

He raises a very important point. Milk used to cost $0.05 per gallon. Today, it costs 50 times more. But the figures I cite above are in “constant dollars.” They have been adjusted for the inflation that Bill recognizes. The bottom line is that the average worker today has to work considerably fewer hours to buy thesame gallon of milk, or any other good.

We’re getting richer, not poorer, despite our reckonings.And that means that for the long-term holders of equity, there is no reckoning – only redemption. You see, common stocks afford individuals the opportunity to own the means of production – the machines and organizations that have produced this amazing trend towards wealth. And this is a system that, despite its best efforts, the government hasn’t yet been able to destroy.

Capitalists and entrepreneurs continue to make the world a better place… and for this, they make a profit and their investors earn a return.

Let me give you one example of a company that’s actively working to create a better future…

New health-care technologies are creating cancer treatments without side effects. These new “cancer vaccines” use your body’s immune system to fight tumors so that radiation and chemotherapy isn’t necessary. And the leading company in the field is Antigenics.

Besides its cancer vaccines (which are in final, stage III FDA trials) this company also has a slew of other top-notch, next-generation genomic-based medical technologies. This stock could soar by ten times next year if just one product in its pipeline hits big.

Best of all, its balance sheet is impeccable. Despite being a research and development company without a salable product since 1994, this company has ended every single year with more cash than the year before through research agreements and a very savvy Wall Street veteran and CEO, Garo Armen. (Garo has personally been buying up huge blocks of the stock, another bullish sign).

The company has trended higher this year, despite the bear market, moving from $11 to over $17 today because its success isn’t tied to our economy, but instead to the technological prowess of its scientists.

It’s people like Garo Armen and companies like Antigenics that will make our tomorrows richer. And despite the ups and downs of the stock market, backing companies like Antigenics can make you personally wealthy. That’s the point of investing. And the truth about reckonings.

Good investing,

Porter Stansberry

Porter Stansberry is the editor of the Porter Stansberry Investment Advisory. For more information about other opportunities in the medical, technological and distributed power generation fields, please click here.

*** Well…it didn’t happen. The BLS reported their productivity numbers. But Mr. Market barely noticed. No big crash, as the boys at Dresdner warned their clients would happen.

*** Still, journalists, cheerleaders and analysts set out to earn their pay. Opinion, interpretation, analysis bellowed forth. And the question was asked: ‘Miracle’ or a ‘Myth’ – which is it?

*** “Productivity – like faith in things unseen – is one of those things that’s tough to get your arms around,” says Eric. “The Government says we’re more productive, but does anyone actually see any supporting evidence? Is the post office more productive? Is the box-boy bagging groceries in the market more efficient? Are lawyers accomplishing more lawyering per billable hour? Believe the government’s numbers if you want. I’m agnostic on this one.”

*** Growth purportedly accelerated in the second quarter to an annual rate of 2.5%, well above the 1.6% or so increase that most economists had expected. Of course, “much of the improvement can be found in Old Economy companies,” says the FT, “which have applied technological solutions, but do not trade under the New Economy banner on Wall Street.” Still, the ‘miracle’ myth lives to see the light of another day…

Let’s see what else happened on Wall Street yesterday:

*****

Eric Fry reporting from New York:

– “Are we there yet? Are we there yet?” writes Richard Leader, “[like children on a summer road-trip], many investors are beginning to ask the same question about when we’ll see an economic recovery and some stock market profits.”

– To judge from earnings reports like Cisco’s and asset write-downs like the $47 billion doozy JDS Uniphase produced, we’ve got a ways to go before we get to bull market land.

– “These numbers are just something, don’t you think?” asks the New York Observer’s Chris Byron. “Bigger and bigger, and more outrageous by the week!…We’re speaking, of course, of Wall Street’s whole new game of “Can You Top This?” balance sheet write-downs.”

– “It was only a couple of weeks ago,” Byron reminds us, “that Nortel Networks Corporation-that big networking company from up in Canada-shocked everybody by announcing a $19 billion write-off on the rationale that the slumping economy had rendered the company’s balance sheet more or less 50 percent worthless.

– “And now comes a write-down-courtesy of JDS Uniphase Corporation, a Nortel supplier based in San Jose, California, that makes the Nortel charge-off look like chump change. Are you ready for a write-down of a whole, entire $47 billion?”

– “How big is a nearly $50 billion write-off?” Byron wonders.

– “Well, let’s say we got up one morning and decided to throw away the American Express Company. That would be a $53 billion write-off. Or say we decided to get rid of the Boeing Company, or Sony Corporation, or the Ford Motor Company. Those would all be $50 billion write- offs, give or take.”

– Despite the massive write-offs and collapsing profit margins to boot, JDS Uniphase still boasts a $12 billion market cap. The bull market mentality lives.

– After the close of yesterday’s trading, Cisco reported that its revenues fell “only” 25% to $4.3 billion. But the company somehow produced “pro-forma” earnings of two cents a share – just like it promised.

– CEO John Chambers characterized Cisco’s previous projections of a long-term growth rate of 30% to 50% as “a stretch.”

– “If high technology companies have been truly ‘flying blind’ with pea-soup visibility,” writes Fleet Street Letter contributor Ray Devoe, “my question is, why should they have such high P/E multiples before they hit the wall? The huge write-offs are bothersome. They show that previous earnings were vastly overstated, that these companies overpaid badly for acquisitions – and had no idea what was truly taking place in their core business.”

– It was hot in Manhattan yesterday. Unfortunately, not even 98-degree temperatures could lift the chill over Wall Street. A few Dow stocks managed to bounce a little, but the Nasdaq shed another 6 points to 2,207.

*****

To Addison, back in Paris…

*** “Preparing for retirement or not, boomers are spending as though they will be young forever,” writes Bill in the DR Blue, engaging in a little “literary self-loathing” all his own. “It is more likely they will just be old for a very long time.”

*** But while medical advancements keep him alive…what will our hero live on? “He has stocks – but they have gone nowhere but down over the last three years. His other major asset is his home. Housing appreciated last year at a rate of 11%, adding more than $1 trillion to homeowners’ wealth – at least on paper. But since 1995, homeowners have also added almost $2 trillion to their mortgage debt. And in order to realize this ‘wealth,’ they will have to sell. But to whom? And for how much?”

*** Bill, fresh back from Nicaragua, will be speaking at the 2nd Annual Retire Overseas Conference in Paris on September 7-10, 2001.

*** Today in Paris it is cool…and quiet. Parisians, for the most part, take the month of August off and vacation in the country. The City of Lights then settles in for a somnambulant summer siesta.

*** From time to time, this morning, a cool breeze ruffles papers on my desk and I can hear glasses clinking and laughter rising from Le Paradis caf? on the street below. The bells of St. Merry – the oldest cast- iron bells in the city – ring on the hour.