Res Ipsa Loquitor

Your editor attracts some unwanted attention. Now he’s surrounded by lawyers, federales and the local press. Here’s the full scoop:

Res Ipsa Loquitor

“Thank God for the judiciary,” said our lawyer.

The federales caught up with your editor on Wednesday.  He was hauled before a couple of lawyers from the SEC and asked to explain himself.

At issue was the incident that we reported more than 2 years ago. A colleague, Porter Stansberry, had discovered a uranium processing company he thought for sure would go up.  He even interviewed an official of the company.  The spokesman told him to ‘watch the stock on May 22,’ when a new arms agreement with the Russians was supposed to be concluded.

Asked about this conversation by the SEC…

“Did not,” said the aforementioned official.

“Did so,” said Porter.

Before we knew what had happened, the SEC had made a federal case out of it.

“Well, these government agencies are getting out of control…but at least the courts still protect us,” continued our Consigliore. But this week’s brush with the law made us wonder.

“No one needs to remind me that our government, at all levels, is becoming bigger, stronger and less concerned individual liberties,” began an email received here last week.

Defending the First Amendment: Identify Yourself!

“One of the most appalling and amazing examples was the recent U.S. Supreme Court decision upholding a state law (which about half of the states have) requiring people to identify themselves to law enforcement if asked and imposing a fine or jail time if convicted of refusing to do so. The background is this:  A cop (I recall it was in Nevada) got a vague call about a domestic disturbanceinvolving a man, truck and woman. He came upon a elderly man standing outside a truck. There was a younger woman inside the truck. The cop asked the man to identify himself. The man, a crusty old rancher (not to be confused with a Jolly Rancher), refused. He was arrested solely for refusing to give his name (and of course his name was obtained soon after the arrest), convicted and fined. The man was not connected in any way with the disturbance that prompted the cop’s inquiry. As I recall it, he and his daughter (the woman in the truck) were waiting to meet someone.

“The U.S. Supreme Court held that the law was constitutional on its face and as applied in this situation, though some of the justices allowed that onewould not have to identify one’s self if to do so would beself-incrimination. How’s that for a Catch-22? If you are completely innocent, you commit a crime by refusing to identify yourself. If you are guilty, however, you are free to refuse to identify yourself and thereby confirm for the cops that you are a criminal.”

Has America become less free? Looking around…the evidence is mixed. Eighty years ago, you couldn’t even take a drink without risking a visit from the cops. Books were banned in Boston if they were considered too racy. And shacking up with a woman other than your wife — especially if she was the wrong color — was likely to get you arrested on a morals charge.

Defending the First Amendment: Sordid Spectacles

All that is history. There are no morals charges anymore, because there are no morals worth charging. What used to be sin is now not only permissible — but actually fashionable. The most sordid spectacles make their way to prime time — on the evening news.

But while sinners have been let loose, the honest man can hardly make a move without running into someone who wants to protect society from him. Giving his name to the fuzz on the scene is the least of it. He has to reveal every detail of his life — for tax returns, passports, medicare, social security, insurance, business licenses, gun licences, hunting licenses, professional licenses, building licenses, dog licences, liquor licenses…

It may be a licentious age, but never have so many licenses been required to mind your own business. Except for the First Amendment, guaranteeing the right to say what you want, nearly every protection of the constitution has been swept aside so the do-gooders, regulators, politicians, inspectors, gendarmes, world improvers and snoops can get a grip on you.

The team from the SEC were there to help, of course. They were bright and attractive people. We could not help but like them. But what they want to do…as near as we can determine…is force our company to get the equivalent of another license. They want to be able to determine what we can say and what we can’t. Otherwise, the case makes no sense.

Defending the First Amendment: A Pure first Amendment Case

Porter says one thing. The guy at the uranium company says another. Even before talking to Porter, they chose to believe the other guy. Makes no sense…until you realize that their real objective is to pry open the First Amendment, reach down and throttle financial publishers.

Typically, the local press got the story all wrong. They figured if the SEC is after you, it must have something to do with manipulating stocks or insider trading. Au contraire, if there had been any stocks manipulated this case would not have been of such interest to the SEC.  Everybody knows the SEC can throw its weight around in a front-running or insider trading case. What makes this juicy to both sides is that there was no stock manipulation involved. This is a pure First Amendment case. It is a gem for the courts…a brazen opportunity for the SEC…and a gold-mine for the lawyers.

“Remember, you’re not just fighting to protect your own right to publish what you want,” said our attorney. “You’re fighting to protect the First Amendment; it’s the most important freedom we have.”

But you have no reason to be interested in our legal issues…  We wouldn’t mention it, except it illustrates the status of the judicial system in America, 2004.

“Don’t be so gloomy,” our lawyer advised. “The courts will do the right thing. They’re not going to throw away the First Amendment. It’s the last one standing. And remember, this is an important, landmark case. Lawyers will cite this case for many years.”

Let’s hope it is cited by the defense.

Bill Bonner,
The Daily Reckoning
July 23, 2004

Tom Dyson, from Chiswick, underneath London’s principal flight path…

– Here at the Daily Reckoning, as regular readers will attest, we love finding different angles from which to view the markets. “We are,” said Bill yesterday, “what is known in the profession, derisively, as ‘literary economists.’ We believe more in words, ideas, metaphors – and what we see with our own eyes – than in the numbers themselves.”

– It’s no surprise, therefore, that Mother Nature often plays an important part in this analytical process. Whether it’s something as simple as using a phrase such as “the storm clouds are a-gathering over Washington” or “today, the sun shone on investors” to describe the market action…or for more spurious applications, like attempting to use the Fibonacci ratio for predicting stock prices. (The Fibonacci sequence is very common in nature. Shells, flowers, pinecones and even the human body are all constructed in Fibonacci ratios. But in finance, it just seems to help one lose money.)

– Just the other day, our favorite perma-bear, Stephen Roach, titled his weekly offering “The perfect storm.” He was, of course, referring to the hat-trick of evil forces he sees bearing down on this year’s market. More on this nasty weather system, below…

– And yesterday, the cold wind, which has been blowing down Wall Street of late, let up. Or maybe investors just decided that they had already sold enough stocks. Either way, they turned up their collars and pushed the leading averages higher – just. The Dow added a meager 4 points to 10,050 while the S&P mustered up a three-point gain to close at 1,097. The Nasdaq made the best of the weather, gaining 15 points or 0.8% and closing at 1,889.

– The dollar didn’t do much yesterday, but overnight, the heat was back on. As of writing, the euro has now been pushed all the way back to $1.125. Before the mayor of E-Z County opened his pie-hole, it was trying to break $1.25.

– “More SIRT (Recall, Stupid Interest Rate Talk),” explains Chuck Butler, editor of the Daily Pfennig, “…And the dollar gets bought…what are these dolts doing? Don’t they realize that higher interest rates are only going to shut down the economy? Don’t they realize that higher interest rates are being implemented to combat inflation? Don’t they realize that higher interest rates are going to make all the Treasuries that Foreign Central Banks own worth less?”

– Still, an avalanche of selling has really battered gold downhill this week. Not only has it broken decisively below key resistance at $400, dropping $17 in the last five sessions, but it has also fallen relative to euros and pounds. The last time we looked, the barbarous relic was trading for $391 an ounce.

– But using nature as an analogy for goings-on in the business world is actually far more appropriate than many would imagine. Look beyond the flashing neon ticker boards in Times Square and the huge trading floors, where flat screen TVs are used like wall-paper. Look beyond the banks of supercomputers, the Brooks Brothers’ suits and the neat haircuts. The markets, and even the economy, are actually natural phenomena and are governed by the same laws that drive nature. The important dynamic they share is, of course, randomness, and the way it impacts a large number of independently functioning variables.

– Of all natural manifestations of randomness, waves have a particularly close relationship with the market. Of particular interest, to marine and market scientists alike, is the “rogue wave.”

– Rogue waves are defined as monstrous deviations from the normal sea state. They are huge, sometimes as high as ten-story buildings, says an article by AFP. The QEII came across one of these waves in 1995. It was a wall of water that rose 95 feet high. The captain described it as looking like ‘the White Cliffs of Dover.’ Supertankers and containerships have been sunk by these waves.

– Although there are reams of anecdotal evidence that attest to the existence of these rogue waves, marine scientists have clung to their statistical models that show that, statistically speaking, these waves should only occur on average, once every thousand years.

– But they were wrong. Not satisfied with the stories, the European Space agency decided to use their satellites for something vaguely useful…for three weeks, they monitored the surface of the world’s oceans.

– What they found amazed even the most gin-soaked old sea dog. In just three weeks, they spotted 10 different waves at least 80 feet high.

– The waves exist “in higher numbers than anyone expected,” said Wolfgang Rosenthal, senior scientist with the GKSS Research Centre in Geesthacht, Germany, who pored over the data. “The next step is to analyze if they can be forecasted.”

– We won’t hold our breath, Wolfgang. In fact, you’ll probably have about as much success as the average Wall Street analyst. Our recommendation: don’t bother trying.

– But somewhere in all of this, there is something useful. There’s a strong implication for the stock market and more worrying, for America.

– Just ask John Meriwether and the eggheads at Long-Term Capital Management; in 1998 his fully loaded supertanker was hit by a rogue wave and sunk. They knew that waves existed, but they thought that the probabilities of one occurring were so small that they didn’t bother building any leeway in their calculations.

– And what about that perfect storm we mentioned earlier? “A nascent recovery in the world economy is now threatened by an ominous confluence of wild cards,” says Roach. “Three such forces loom most prominently – surging oil prices, the China slowdown, and the onset of a Fed tightening cycle. A general sense of geopolitical angst is an obvious and important overlay to the economic factors – underscored by the quagmire in Iraq, a related anti-American backlash, and the ongoing threats of global terrorism.”

– Ripples, dear reader? Maybe. But the ingredients for a rogue wave or three are certainly present. Translating our rogue wave theory into the language of chief-economists, Roach says, “The risk is that we focus on each of these developments in isolation. It’s the interplay, however, that matters most of all.”

– The message must be this: don’t blindly assume that the gentle waters on which the U.S.A. floats, will always be so gentle. There are many rogue waves out there, far more than you might have imagined. Balance your portfolio accordingly…


Bill Bonner, back in New York…

*** “Well, bravo to the Amish,” said our friend from yesterday’s remarks. “While practically all the other tobacco farmers in the state have caved into the government…you know, they’re taking the payments for NOT planting tobacco…the Amish don’t go along with any government program. They’re the only ones with any integrity. They’re still out there in the tobacco fields – sweating like crazy. But since they’re the only ones still working, the price of tobacco is going up. They’re making money. Isn’t that great?”

The Daily Reckoning