The Division of Labor…and Gold
“Look,” said Mr. Deshais proudly, pointing a finger at the shelf. There were jars of red balls in some sauce, various shades of jam, green beans, pickles. Dozens of them. Hundreds maybe.
“Ah,” continued the gardener, “you won’t have to worry this winter.”
I had not been worrying about not having enough to eat this coming winter. It had not even crossed my mind.
Mr. Deshais is fighting the division of labor.
It would be cheaper just to buy the tomatoes and lettuce at the local market.
And Mr. Deshais, fanatic as he is, produces far too much. I am getting stuffed with radishes, squash, lettuce, and green beans at every meal. Occasionally, my nose twitches.
So bountiful is our garden that Mr. Deshais has taken to canning the surplus. A caldron of water boils almost all day long, as various legumes get tortured – scalded, cooked and canned. We are preparing for famine.
Legumes: An Inventory of Food
A few years ago, everyone maintained an inventory of food. Only a fool would have trusted completely in his ability to buy what he wanted when he wanted it. But now we all seem to have an unshakeable faith in the division of labor…and the supply channels upon which our lives depend.
Progress has made Mr. Deshais’s canned golden squash unnecessary.
The question I raise in this letter concerns not golden squash, however, but squashed gold. If it is no longer necessary to keep an inventory of food, does it make sense to store cash? Is gold, the ultimate store of value, no longer necessary?
Readers of these letters may recall the words of the portfolio manager, quoted by Reuters, who explained that gold was finished as a financial asset.
It was easy to dismiss the voice of ‘progress’! The world has been making progress for thousands of years. But the cycles of greed and fear – and the self-interested reasoning of central bankers and politicians – do not change. Human wealth grows. Not always, but usually. Year after year, new innovations…new technologies…further insights and refinements accumulate.
But homo sapiens sapiens, an animal of whom taxonomists were so fond they had to name it twice, are still the same near-ape creatures who wandered off the African savannah 100,000 years ago. Now, these same creatures fill the seats of London restaurants, the plastic spectator seats of the Baltimore convention center when the World Wrestling Federation puts on its show, and the benches of sweatshops in Bangkok, where the latest fashions are stitched.
This animal, whether dressed by Kenzo or Benetton, is still subject to the same hard-wired instincts that beset and enabled his ancestors. And not just his close kin in the human species – but the entire line of evolutionary tissue, from the lowest amoebic bacteria to the most highly refined matron in the 16th arrondissement of Paris.
Legumes: Gold Hasn’t Changed
This animal, whose collective wisdom priced gold at $825 an ounce two decades ago, now considers it worth only $280 [and today, $355]. But, an investor’s view of what things are worth is not a consequence of rational, computer-like analysis. An investment may be worth $15 one day and $30 the next – without any real change in the underlying asset. An ounce of gold is still the same element, occupying the same position in the periodic table that it did when George W. Bush was at Yale. It is not gold that has changed.
These marvelous animals undefined investors – episodically become expansive and optimistic…filled with the hope of riches far in excess of what is likely to come their way. Then, they reverse themselves, spasmodically, and fear that the sky is falling.
And yet, progress continues. And progress, too, is a result of the most basic process of nature – specialization and the division of labor.
From the beginning of life, millions of years ago – with single-celled bacteria floating in a sea of primordial soup – to the crown of creation, the human being, nature has become increasingly specialized. The human body has billions of cells – liver cells, brain cells, blood cells – all cooperating to replicate themselves in a competitive, unforgiving world. If the liver cells go on strike, or the brain decides to cease functioning, it’s over. Unless the person has already produced offspring, every cell in the body will soon be history, and the genetic material that gave them life will have reached an evolutionary dead end. Every cell of the human body depends on every other cell to do its duty.
A Roman senator, Menemius Agrippa, used this analogy to head off a revolt of the Plebes:
“Once upon a time, the members of the body began to grumble because they had all the work to do, while the belly lay idle, enjoying the fruits of their labor; so the hands, mouth and teeth agreed to starve the belly into submission, but the more they starved it the weaker they themselves became. So it was plain that the belly also had its work to do, which was to nourish the other members by digesting and redistributing the food received.”
Against all odds, this argument worked. The Plebes were given a couple of seats among the tribunes and the rebellion was called off.
Not only do cells cooperate within a single body; individuals cooperate within a society. The society of bees has been studied for hundreds of years. Some bees collect honey. Others guard the hive. And one – the queen – reproduces. Since there is only one reproducing female, all the bees are closely related. Sharing nearly identical genetic material, they all cooperate to make sure that it survives – gracefully sacrificing their own lives for the good of the hive, as necessary.
Humans have much more diverse genetic material. Most people breed. Still, they have specialized to such an extent that most are completely dependent on others.
One man produces bread. Another produces wool. And still another writes the code to produce electronic games, such as Grand Theft Auto, which Jules was playing this weekend. (In the game, contestants steal cars and then get points for running down pedestrians. They get extra points for killing policemen and wrecking police cars.)
If the bread-makers and everyone else involved in the chain of food production – from the farmers to the waiters at the Tour d’Argent – were to go on strike for a very long time…millions of people would die. But it doesn’t happen.
Farmers go out of business. Waiters quit and become actors. Truckers go bankrupt. Whole areas of the world suffer droughts and other natural calamities. But the food keeps on coming. The division of labor in the agricultural sector expands.
Legumes: Gold Mining Companies
Even farmers would starve to death if the division of labor were to break down – for few of them produce more than one or two crops. And few keep an inventory of their production for personal consumption. Instead, they find it easier and more economical to drive to the local grocery store.
Likewise, not even gold-mining companies stock gold. They typically sell it as soon as they can. As we learned when the price of gold jumped a few months ago, they actually sell it before they mine it. Many gold mining companies actually own less gold than you and I do. They’ve sold everything they’ve produced – and then some.
Specialization has been given a big boost lately – from the Internet and economic globalization. Do these things mean “it’s over” for gold?
Our guess: when something has retained value for thousands of years, it’s not likely to give it up anytime soon.
July 31, 2003
P.S. “For most of the 20th Century gold has been under assault,” we wrote in the introduction to a 3-volume set called The Case For Gold. “A war against it has been waged for the last seven decades. The struggle has gone back and forth…with gold gaining ground in some years, losing it in others. Never has there been any doubt about the final outcome.”
The handsomely bound, three-volume “Case For Gold” is edited by Lord William Rees-Mogg, published by London-based Pickering & Chatto and has already been hailed as “a first in publishing history”. The first edition we offered was quickly snapped up…but through our affiliation with Pickering & Chatto, we’ve arranged for a second to be made available to you at a great rate. If you’re interested…
Are we harping, dear reader?
Yes, we are. We are harping on what we think is the Big Picture…the real effect of the Dollar Standard system and what is likely to become of it.
Why? Because we believe it is the key to understanding this economy.
Most economists seem to have no idea of what is going on. The most preeminent among them, such as Alan Greenspan, think that all they have to do is lower interest rates and the economy will spring back to life. They cannot understand what is wrong; interest rates have been cut 13 times…and still no real recovery.
And what next? The last cut seemed to go all wrong. Instead of lowering lending rates, it seemed to trigger a near-collapse in the bond market. Trillions have been lost already.
“Do you remember when we were down at Amelia Island?” began Porter Stansberry yesterday. “We were getting on a bus with some other people, and you struck up a conversation with one of them…She told you that her money manager had lost a lot of money in stocks during the last three years, but that now he had put her into bonds…She said something like, ‘Now I’m in bonds because that seems to be what everyone is doing with their money.’ I remember, because we all looked at each other and we knew the bond market was soon going to head down. You turned and whispered ‘Sell!’ When ordinary people say things like that, you just know it’s time to get out. Well, guess what? That day must have been the very top for the bond market. It’s been down every since.”
Bonds yields fell yesterday…but one rally does not a new trend make. Mortgage rates have risen to the point that they are stifling refinancings. They were down 32.9% last week, says a Bloomberg report. Has the bond bubble popped? Has the refinancing bubble popped?
We don’t know, but it looks more and more like the economy has taken the turn we thought was months…even years…ahead. It may have already turned decisively to the South…That is, away from its route to Japan and towards Argentina. Instead of a long, slow, soft sushi depression…we may face a fast-paced, painful salsa depression, with inflation…and then hyper-inflation…
What could stop it? Someday soon, the nation may need a tough rate hike…and a tough man at the Fed, like Paul Volcker, to pull it off. We don’t see either. Instead, waiting to replace Greenspan, we see Ben Bernanke with a map of Buenos Aires in his hand.
Over to you, Eric…
Eric Fry, reporting from Manhattan…
– The stock market did a little running in place yesterday, as the Dow Jones Industrial Average dipped 4 points to an even 9,200 and the Nasdaq Composite dropped half a percent to 1,721.
– “It’s halftime,” declares a defiant Dan Benton. “The second half of the year has just begun.” Benton’s declaration is a thinly veiled taunt that the bears will “win” the second half. As Benton sees it, stock prices undefined especially tech stock prices – will be much lower at year-end than they are today.
– Why should anyone care what this guy Benton thinks? Well, truth be told, maybe we shouldn’t. After all, he’s just a hedge fund manager who has steered his fund to an 11% loss so far this year. On the other hand, maybe we shouldn’t summarily dismiss Mr. Benton’s outlook. His curriculum vitae includes the fact that he has guided the funds under his management to 40% average annual gains since 1944. In the process, his management company has grown into a $9 billion behemoth undefined the largest U.S. hedge fund firm that invests solely in equities.
– “The biggest technology-stock investor in the hedge fund world is getting clobbered betting against tech,” the Wall Street Journal gloats. “Mr. Benton’s $9 billion hedge-fund company, Andor Capital Management LLC, is down a hefty 11% this year while the tech-heavy Nasdaq Composite Index is up nearly 30%…So why don’t Mr. Benton and his team believe the [tech stock] rally is for real? They see no evidence corporate spending is reviving, in the tech world and in the rest of the economy.”
– Benton isn’t panicking just yet. Indeed, he is more defiant than defeatist. “You’re going to take us out on our shields if the market is changed forever and fundamentals and stock prices are now disconnected,” Benton recently told his investors. Such noble words may not be very comforting to his investors, given the fact that their capital would be riding out on the same shield.
– But maybe Benton’s fortunes will soon improve. If we were forced to hazard a guess, we’d say that Benton won’t be carried out on any shields this year…although he may yet wear a laurel wreath…
– OK, so maybe the invasion of Iraq has not been the most masterful geo-political maneuver in U.S. history. For starters, the most conspicuous MIAs of the war are the “weapons of mass destruction.” Perhaps we will find them still. But meanwhile, our military “victory” in Iraq has gained us the privilege of spending about $1 billion per week to police a distant land where the citizenry while away the days launching grenades into columns of American soldiers.
– Sure, there are a few drawbacks to having invaded Iraq, not to mention a few nettlesome complications to occupying the country. But at least we can tap the country’s vast oil reserves, right? Shouldn’t that count for something? Well, it might count for something if it were true.
– Unfortunately, the major oil companies are none-too-eager to set up shop in the new-and-improved Iraq. “Top oil companies executive have told the U.S. they will not make large investments in Iraq while the security situation remains so dangerous,” the Financial Times reports. “They have also expressed concern about the lack of political legitimacy for the U.S.-backed authority in Iraq.”
– “The industry’s concerns were amplified [recently when] Sir Philip Watts, chairman of Royal Dutch/Shell said, ‘The safety of our people is paramount. There has to be proper security, legitimate authority…with a level playing field and a transparent process by which we will be able to negotiate agreements that would be longstanding for decades.'” Apparently, as Mr. Watts sees it, the Americans leveled almost everything in Iraq EXCEPT the playing field. The Iraqi oil bonanza may have to wait a while.
– While stocks sagged yesterday, Treasury bonds rallied to halt a bruising four-day losing streak. The 10-year Treasury note rebounded a hefty 1 1/32 points to yield 4.31%, down from 4.41% on Tuesday. But one day’s rally hardly changes the fact that yields are soaring. The sting of higher interest rates is being felt acutely in the mortgage market. “Where’s the fork? Refis are done,” one analyst quipped.
– Demand for refinancings as measured by the Mortgage Bankers Association’s refinance index dropped 32.9% in the week ended July 25, and have tumbled a whopping 58% from the record high set in the last week of May.
– Now that the refi activity is screeching to a halt, how on earth will consumers continue to live beyond their means? How will they borrow the money required to buy the things that they so desperately (do not) need?
– In the first half of this year about $50 billion of consumer spending was due to cash-out refinancings, according to Freddie Mac. For all of 2002, the amount totaled $96 billion. That’s a lot of cash that will not be making an encore appearance in the second half of this year, unless rates drop substantially from current levels.
Bill Bonner, back in Ouzilly…
*** “I’m only interested in deep value,” said a very successful German investor last evening, as we drove him to the airport.
“What I look for is a company selling for less than its cash. And I’m pretty tough about it. I do a Ben Graham analysis. I begin with only cash and near-cash…that is, stuff that can be easily liquidated for real cash. You know what value I put down for the factories, plant and equipment, office supplies and that sort of thing? Nothing…zero. Then, I subtract debt, other liabilities, and the value of the outstanding shares. It doesn’t matter particularly whether the company is private or public, the analysis is the same. If the resulting number is positive, I look further.
“I want to know who’s running the business and what they’re trying to do. It is amazing how stupid business managers can be. Often you find a little company selling very cheaply. But then you discover they are about to do something really dumb, like buy another business or diversify into another industry. Or, they’re just using the company as their own piggy-bank. Then, I walk away.
“What I want – and I learned much of this from Warren Buffett – is a solid company, with solid management. Then, I only buy if I can get it with a margin of safety. I’ll buy companies if I can find them selling for less than 66% of the cash they have on hand. And even then, they don’t always work out.”
*** And here, a letter from another reader with a similar interest in value:
“Don’t know about anyone else out there in investor land, but I can’t complain. My little piddly portfolio contains mostly high-yield, moderate growth stocks, with an average P/E around 12! The average yield is in the 3.6 range. And, their annual up/down range is in the $3-5 range. Since 9/11 my overall value has remained, and even increased somewhat. Meanwhile, just for a bit of leavening I have been playing the penny dreadfuls, gaining with some, loosing with some. But best part, my ‘losses’ have been offset by my gains and dividend income, resulting with Uncle having to pay me a REFUND for last year (first time in a long time he ever gave me one). So, in terms of net advance/gain (including the refund), I’m ahead. Not by a hell of a lot, but still, ahead. Forget the techs, forget the big industrials, they ‘don’t get you nothin’ but the blues’ as an old, old Jo Stafford song said it.
“By the way, one of those stocks is an old-line bank stock with the following record: since 1850, it has never missed a single dividend payment, excepting in 1868 (post-war recession) and 1932 (big Depression). It just closed at $33.89. I got in around $25 +18 months ago.”
*** Readers worldwide write with more comments on Americans and their special place in the world:
“I have to write in response to your reference to Father Richard Neuhaus. He claims…’In America, people are energetic, vibrant and filled with technical expertise, whistles and bells.’
“I suspect Father Neuhaus quotes from another time…If only what he says were accurate. I have just left the USA after living in that country 18 years to live in Australia. The American people no longer run on energy, instead propelled today by desperation, frustration and a short fuse. Today the vibrancy I see is a scramble by the majority of the working class and middle class to pay their bills, whilst shaking from fear of loosing a diminishing pool of jobs.
“My work took me to all corners of the USA…the U.S. is home to a growing cancer of communities closer to third-world status. No longer is the social machinery holding, with rudeness and arrogance in customer service and retail stores the order of the day.
“As a rule, I regret that American adults and children today possess the worst manners and demonstrate an almost chronic laziness towards thinking!
“So far as being filled technical expertise – you are kidding! The average American has less curiosity and capacity for technical expertise than citizens of other Western nations, and in comparison with Asian nations, the gap of technical and social skills is even wider. No…I regret, there was once a day America possessed energy, technical expertise and was vibrant. Today what exists is whistles and bells…Americans have know-how, which remains intact, but have lost expertise.
“My sense is that America is becoming the back-water of the world…a country with lots of whistles and bells – but few in America today have much energy to blow the whistles and ring the bells. I hope it changes!”