The Day the Earth Stood Still

Here’s a cleaned-up and improved version of the speech Bill gave last Saturday at the Agora Wealth Symposium in Vancouver…enjoy!

What you see depends on what you have seen. And breathed.

You may want to write that down. Just remember us when you quote it.

We say that after spending a few weeks driving across the country…and giving an interview to a local financial show. The reporter had set up a camera on the steps of the Art Museum across the street and asked us what we thought was happening in the economy. We began by describing all the terrible things that we see heading towards us…and explaining how the end of the world is coming. But behind us, a group of bums had lit up. Soon, great clouds of marijuana smoke billowed over us. We continued to explain the many terrors of the dark night ahead. The debt bubble. The trade deficit. Federal liabilities. The rise of China. Peak oil, and so forth. The smoke thickened.

And by the time we finished the interview, things didn’t seem nearly as bad as they had at the beginning.

As for our drive across the country…by the time we reached the Western states, Elizabeth had read a book on geology – The Roadside Geology. She saw precambrian, Cambrian, Paleozoic, Mesozoic, Cenozoic, Triassic, Jurassic, Cretaceous and various other geological formations that we can’t remember. In the back seat, the boys saw only rocks. And by the time we had reached Arizona, they had seen enough of them, they thought, to last a lifetime. Henry could barely be persuaded to look up from his Isaac Asimov books. For his part, Jules had draped a towel over his head so he could watch reruns of Seinfeld shows on his portable computer without the interference of the bright sun.

Belief in Fate: "I Am the Captain of My Fate"

Our speech topic – America’s Revolt Against Fate – requires a little introduction. Because Americans no longer believe in Fate. They believe in themselves – at least they have since the Reagan revolution helped them out of their Carter-era funk. They believe that they are the captains of their own fates. "Everything is getting better," wrote Michael A. Ledeen, a neo-conservative dreamer at the American Enterprise Institute. "And if not, we’ll fix it."

There are some things beyond fixing, we note. Precambrian, Cambrian, Paleozoic, Mesozoic, Cenozoic…all the great epochs of the Planet Earth knew no fixing. There were no votes taken. No opinions asked. They just happened.

Many things just happen, without anyone’s say-so. A man gets struck by lightning crossing a field…or by a crosstown bus while making his way to the other side of the street – accidents happen.

As do major events of history, largely beyond anyone’s comprehension, let alone anyone’s control. Who wanted World War I? Who gained from it? Whose fault was it? Looking back, the answer is no one. And yet, it was the most costly war in human history. After a couple of years, it was plain to everyone that nothing would be gained…that it was a lose-lose proposition. Newspapers spoke of peace. Soldiers on all sides threatened to take matters into their own hands and lay down their arms. And then, Woodrow Wilson stepped into the breach to "fix" it. He managed to prolong the war…add millions of names to the casualty list… practically destroy Western civilization. Every major government of Europe fell in the aftermath. In their place came the ugly "isms" of the 20th century – communism, Bolshevism, fascism, syndicalism, modernism, abstract expressionism – and the world was a different place.

Who wanted the Great Depression? Who made it? Who gained from it? Whose fault was it? We do not know the answer. But we know it got worse after Franklin Roosevelt stepped in to "fix" it.

Not only are events largely beyond your control, but Fate has a way of bringing you what you least want, least expect and most deserve. There are patterns to life, some of them inescapable…some of them inexorable.

Every man born is fated to die. Every breath inhaled is fated to come out. And even the brightest day that dawns is fated to end in a dark night.

Belief in Fate: Actions Have Consequences

So, too, does Fate decree that acts have consequences. Invite the wrath of the gods…and you will regret it. Sow the wind, says the Bible, and you will reap the whirlwind. Give and ye shall receive.

There seem to be certain natural laws that govern life. What goes up must come down. What goes wrong must be set right.

The last time "natural law" was discussed in public was during the confirmation hearings for Supreme Court Justice Clarence Thomas. In an unguarded moment, Thomas had made approving remarks about natural law. The politicians recoiled in mock horror – as if they had found a moth in their soup. The idea that there could be any authority higher than the U.S. Congress was as abhorrent to the politicos as term limits.

But natural law used to be something people believed in. The old English common law had no lobbyists’ fingerprints on it…no congressional sponsors…no pork-barrel amendments. Instead, judges and juries merely tried to "find" the law. They assisted Fate, rather than trying to straighten it out. They saw it as their duty to make sure that what ought to happen did happen. People ought to get what’s coming to them; a common-law jury of 12 men "good and stout" helped make sure they did.

But it is a new world, we keep saying. Now a congress of men – neither good nor stout, but conniving and willowy, grasping…whose convictions rarely go beyond drunk driving or sodomy – make all the laws. And a whole nation is convinced that there is no gravity. We can get not what we have coming – they say – but what we want.


"The best news about our future," says the neo-con scholar, "is that it’s still in our own strong hands." The U.S. economy – and by derivation, the economy of the entire world – is thought to be in the strong, bony grasp of Alan Greenspan and the Federal Reserve. This too is a departure from former times – back in some paleo-time before the earth cooled…before there was rap music…before even central bank of the United States was formed – under the selfsame President Woodrow Wilson who almost single-handedly derailed Western civilization…and even before there was a United States of America – the two Adams…Adam Smith and Adam Ferguson…began what was to become the study of modern macroeconomics. But the two men were hardly economists of the modern stripe. They called themselves "moral philosophers." They believed that their mission was to study economies as naturalists studied birds and bees – and to discover the laws by which they operated. The two ur-economists believed in fate…that an "invisible hand" – which they took to be the extended hand of God himself – made sure that things worked as they should.

Belief in Fate: The Hand of Greenspan

But in this new world, it is the hand of Alan Greenspan that is supposed to make sure things work out – not as they should, but as they wish.

Markets make opinions, as they say. Markets, for the last quarter of a century, have been so delightful that they have encouraged in Americans a delightful opinion of themselves. They believe themselves capable of just about anything – including controlling their own fates. What they have seen over the past 24 years leads them to see a future as rosy as daybreak. The "new dawn" that the Reagan era began, they believe, will last forever.

As markets make opinions, it should not surprise us that opinions are as cyclical as markets themselves. Technological progress is cumulative and universal. An internal combustion engine is the result of many generations of accumulated progress in metallurgy, chemistry, mechanics and so forth. It will work as well in Vancouver as in Calcutta.

But in other things – love, war, markets and central banking, for example – there is little real progress. Instead, we merely repeat the same mistakes, over and over again, in patterns that are cyclical and local.

The internal combustion engine works as well as in Paris, France, as it does in Paris, Texas. But war is far more popular in the hollows of West Virginia and the plains of West Texas than it is in France. This was not always so. Napoleon Bonaparte had led the most expansionist, action- oriented, pre-emptive-attacking foreign policy in history. His large, enthusiastic armies – often coalitions with his allies – had beaten every enemy in Europe. Finally, all Europe made common cause against him, rallied by France’s hereditary enemy – England. Americans, whose cause of independence had been won with French help only 36 years before, did not come to his aid.

Then, France began a long, bad experience with war. The French were beaten in 1870 by the Prussians. Then, in World War I, no nation suffered more – except perhaps the Russians. In World War II, France had the biggest army in Europe, yet it surrendered in six weeks. Then France was booted out of Vietnam…followed by Algeria. Americans were puzzled and indignant that the French did not follow them into Iraq. But given what the French have seen of war, it is hardly surprising that they were not eager to see more.

Belief in Fate: A Taste for War

Meanwhile, Americans have a taste for expansion…for war…for debt. Weare "conquerors," says Ledeen. We can’t imagine that the wheel still turns, that Fate still waits for us as it has for so many before us.

"Remember the vogue of Japanese-style capitalism in the ’80s, which, according to a bevy of fashionable intellectuals, was destined to buy America and leave us in the dust?" writes Ledeen, triumphantly.

"Remember the oil sheiks of the ’70s who, according to the usual suspects, were going to by America with the petrodollars?" he continues. "Remember the fanciful European expectations of dominating the world market with the euro"? he went on in 1999.

Ledeen was able to see the blockheadedness of others, but not of himself. He was unable to imagine history would continue grinding down the ambitions and pretenses of the world’s success stories…and that Americans would be next on the list of those brought low by Fate.

Precambrian, Cambrian, Paleozoic, Mesozoic, Cenozoic…


Americans seem to think that history has come to a dead stop – with them on top of the world.

To be continued…


Bill Bonner
The Daily Reckoning
August 20, 2004

For months

…the stock market has teetered back and forth at 10,000.

…gold has teetered back and forth around $400.

…and the economy teeters on the edge of "recovery." A real recovery requires real spending of real money. But real money must come from real jobs. And there are not enough of them. Real incomes are still going down.

But it’s still summer, and people have better things to think about.

But recently, the price of oil has been attracting attention. People go on summer vacations. They load up the car and take off – to the nearest gas station. There, instead of paying 25 cents a gallon – as we did in the early ’70s – the price has risen to over $2.

Gas may be an incidental for you and us, dear reader, but for many people it is a major expense. And many Americans’ family budgets are already wrapped so tightly there isn’t room to crowd in another expense.

But thank God for credit cards. The family sets out as planned – it will figure out how to pay for it later.

Oil closed over $48 yesterday. Soon, it will be over $50, say analysts. How they know these things is a mystery to us…but oil does look as though it is headed that way.

"It’s going up because they don’t have as much of it as they thought," explained Merryn Somerset-Webb yesterday. "Remember when OPEC set up its quota system, after the last "oil crisis"? The quotas were set on the basis of how much each country had in reserve. So naturally they all lied about their reserves. And even though they’ve been pumping like mad for the last quarter of a century, they’ve never lowered their reserve estimates. Some have actually gone up. Now they are being forced to admit that they only have about half the oil they claimed."

If we were selling oil, we’d want more than 48 measly dollars for a barrel of the stuff, too. Adjusted for inflation, that’s still less than was paid for oil at the end of the Carter years.

But it was a different world back then…as we explained to our audience in Vancouver last Saturday (more below…). That was before Ronald Reagan…before the U.S. trade balance went negative…before the United States became the world’s biggest borrower and its biggest debtor…before the Republican Party had its lobotomy…and before the Earth Stood Still.

Here we are in 2004 already…wondering when the teetering will stop and which way things will fall. Stocks will drop, we guess. Gold will stay steady or rise. And when they get back from vacation and have to face their bills, Americans’ standard of living will decline. More news…Tom?


Tom Dyson, 100 yards from the Washington Monument, Mount Vernon…

– Caveat lector. Our friend and colleague Porter Stansberry sends us warning of a new "pump and dump" scheme. "Beware if you’ve gotten a "breezy, intimate" voice mail message from a female caller with a hot stock tip who sounds like she’s dialed the wrong number," cautions the AP.

– The SEC said these tantalizing voice mail messages were being left all over the country. They have received hundreds of complaints. The female caller appears to be mistakenly leaving a message for a girlfriend – "I’ve got a hot stock tip from the stock exchange guy I’m dating," she confides. The idea is to ramp up the price of the company, at which point the con artists bail, leaving the suckers high and dry.

– "Jeez…" exclaimed Addison, nearly spilling his second cup of coffee. "Check out oil…it’s going nuts." Your old Parisian editor had just noticed oil had broken above $48 a barrel.

– "Damn. You know, Tom…when I first started writing for The Daily Reckoning, oil was selling for less than $10 a barrel and gold was at $235 an ounce." Addison was lamenting missed opportunities.

– "I know, it’s a shame you didn’t put some money down," your misplaced British editor agreed. "And what about the Nasdaq? You were telling people to sell the Nasdaq when it was trading over 5,000…if you’d taken your own advice, you wouldn’t be sitting behind that desk…"

– You see, dear reader, here at The Daily Reckoning, your editors pump, but we never have anything to dump…except the occasional coffee maybe. "No – I ‘d definitely still be here…or more likely in Paris," countered Addison, "I would just be more cavalier about it all…you know, with my opinions, whether or not they’re correct…"

– Oil gained $1.48, to end the session at $48.75 a barrel, and then continued higher into after-hours trading…to $48.98. "$50 [a barrel] is, I would say, a foregone conclusion," said a spokesperson at Platts, the energy market analysts. "Now the market is thinking $60, possibly." [There’s an energy crisis in China, and it’s affecting the oil price. Here’s Dan Denning’s take on the situation:

Not Enough Grid, Too Much Lock

– Gold followed suit, adding $2.60 in New York. An ounce of the yellow metal is now worth $407.

– Surging oil costs are bad news for stocks. But so far, investors have turned a blind eye. Should oil hit $50, it’ll feel more like a black eye. Over at the stock exchange, traders cringed, and pushed equities lower. The Dow lost 42 points, to close at 10,041, while the S&P dropped 4, to 1,091. The Nasdaq finished the day at 1,820, 11 points off.

– Speaking of pumping and dumping, Google made its debut on the stock exchange yesterday. And as predicted right here in The Daily Reckoning, the shares did well…they jumped over $15 a share, to $100.34. "We think that all the negativity surrounding the auction is bullish," we stated yesterday.

– Of course, it’s all just hot air. The media pumps, Wall Street dumps and the lumps get humped. Is Google worth $100 a share? At these prices, Google has a market cap of $27.22 billion, making the search engine 17% more valuable than General Motors.

– And here’s news from someone else with the inside track…Chuck Butler, our favorite currency analyst. Chuck always has the jump on the currency markets…and now he thinks the dollar is about to be trumped. "Guess who got an invite to the G-7 meeting," he gossips…

– "There’s a story circulating around this morning that China is going to be invited to the next G-7 meeting…" elaborates Chuck. "That’s October 1…you can smell this, can’t you? Yes…why else would they invite China to a G-7 meeting other than to talk revaluation? I don’t know of any other reason…so let the rumors, lies and video begin!"

– "But doesn’t this smell like the scenario I presented to you before? In case you missed class that day…my thought was that China would do something before the U.S. election to revalue their currency in a "payback" to the Bush administration for providing protection of their oil tankers in the Gulf… So… October 1, eh? Hmmmm…"


Bill Bonner, back in the heart of France…

*** "Perhaps you can explain why anyone would want to own stocks in the first place?" asked a Daily Reckoning reader. "No one has ever been able to do so to my satisfaction.

"Say I’m an ‘owner’ of Coca-Cola or GM or whatever – so what? I’m not getting a salary out of them. They can do fantastically well and rake in profits up the wazoo, but for my 1,000 shares, I get absolutely nothing – except perhaps a paltry dividend every quarter.

"The theory that people own stocks in the expectation of income from a future dividend stream seems absurd. Who in his right mind would hold a stock for 10 years awaiting such an unguaranteed boon?

"It all seems to be based on the ‘bigger fool’ theory – that someone down the line will want my shares more than I do and be willing to pay a higher price for them. But why? On the hope that someone else will want them even more later? Tell me, how does this differ from the "Tulip Mania" that gripped 17th century Holland?"

We have wondered the same thing.

When you buy a company, you study it carefully and decide whether or not the sum of all its parts is worth the money you pay. It may produce no profit, but you may like the way the morning light filters through the curtains in the president’s office. Or maybe you can drive around in the company car…or take a business trip to Milwaukee and stay – at company expense – in a nice hotel.

But when you buy a share in a company, you have only the slimmest hope of ever getting anything out of it. The dividend yield on the Dow is only a hair over 2% – that is, considerably less than the rate of inflation. All other things being equal, you will lose money. Buying stock at today’s prices, investors are betting that all things will not remain equal…they are betting that they will somehow change for the better! It’s a remarkable bet.

Before the Reagan Era…that is, before people became so optimistic and positive that they couldn’t think straight…stock buying was limited to people who had a fair idea of how stocks worked. They knew that stockholders were minority owners – with little information and no real power. They knew that the businesses whose shares they bought would be unlikely to make any money and that they would be last in line to get any of it – after the insiders, the employees, the government, the lawyers and the managers.

The old-school investors were no fools. They demanded low prices and high dividends to make up for what they saw as a risky investment.

"Markets make opinions," however. As the boom of the ’80s and ’90s proceeded, more and more people saw stocks as a way to make money without working for it. Popular books on stock market investing crowded the bookstores. People such as Peter Lynch became "household names." And gradually, more and more people were suckered into stocks…with more and more illusions about how stocks work.

"People buy stocks, first for the right reasons," Warren Buffett once explained, "and then for the wrong reasons."

People who buy stocks now are buying them for the wrong reasons, we think – because they think they will go up. Good luck to them.

The Daily Reckoning