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 that 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.

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?

“It’s over.”

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 the 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 Worldwide 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 ameobic bacteria to the most highly refined matron in the 16th arrondissement of Paris.

This animal, whose collective wisdom priced gold at $825 an ounce two decades ago, now considers it worth only $280. 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, 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 an 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:

“One 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 coming. The division of labor in the agricultural sector expands.

Even farmers would starve to death if the division of labor breaks 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?

More tomorrow…

Bill Bonner

Ouzilly, France August 7, 2000

*** So far, the biggest financial story this millennium, according to the WSJ, is that “Bonds are Leaving Stocks Behind.”

*** Back when dot.coms were booming, and you could say ‘New Era’ without smiling…that is, back at the end of the 2nd millennium, I recommended bonds to you. And they’re doing pretty well. Long-term treasuries are up about 12% (total return).

*** Did I also suggest buying utility stocks? If not, I should have. Utilities hit a new record high Friday. They’re up 22% so far this year.

*** What’s going on? Many analysts believe the rise in bonds, utilities and financial stocks is caused by a growing hope for a soft landing. Friday’s employment numbers showed a decrease in payrolls…which encourages Fed watchers in their belief that there will be no further rate hikes this month.

*** “Prices are currently reflecting a firmer belief that the Fed is done,” Reuters quoted one investment banker.

*** Maybe. But I will give you an alternative explanation. Since the beginning of this year, the dot.coms have crashed. Many are down 80%, 90%…even 95%. The Nasdaq and the Dow are both down about 7%. And, Investors Business Daily puts the return from mutual funds for the first half of the year at only 1.5%.

*** Despite record amounts of new money flowing into equity mutual funds, the Dow, S&P and Nasdaq have been able to mount only limp, bear market rallies. This is because the smart money is leaving faster than the dumb money goes in. Institutional and professional money managers are moving to utilities, bonds and financial stocks.

*** But Alan Greenspan still has faith in the New Era, an analysis of his last ten speeches, reported by Jim Grant, shows him using the words “money,” “credit” or “leverage” 40 times, while the words “productivity,” “technology,” or “innovation” were used 281 times. Is it possible that the Fed chairman has deserted his post?

*** The dollar was quiet on Friday, failing to extend its gains against the euro. It is still below its May highs – thus, still in a bear market. Among all the noise in the market, this is the critical event. The financial press all over the world is reporting on the strong dollar. The dollar has become the store of value that people really want. Everything depends on it – the current account deficit, bonds, stocks, oil, gold…inflation. Can the dollar hold? More below.

*** The Dow rose 61 on Friday. The Nasdaq rose 27. The week saw the Dow rise 2.4%. The Nasdaq did a little better 3.4%. Advancing stocks beat declining ones almost 2 to 1.

*** Meanwhile, Steve Sjuggerud was looking over the list of the 197 top-performing industries, as rated by Investor’s Business Daily. “What…has been the worst performing industry out of 197,” he asked? “Internet e- commerce. This group, which has taken a shellacking so far this year, just edged out sector number 196, Internet … neither Internet content providers nor Internet retailers even made it onto our recommended list. The Wall Street Journal recently reported that from the market’s top to recent levels $1.4 trillion has been lost in the Internet sector.”

*** Amazon and Barnes & Noble.com seem to be in competition to see who can go bankrupt first. Amazon’s losses, of course, are legendary. But B&N is giving the river of no returns a race – losing more than 50 cents for every dollar of revenue. Amazon, meanwhile, is losing only about 18 cents per dollar of revenue on its operations. The trouble is, the company has $1.9 billion in debt. And a report from Lehman Brothers found that “from a bond perspective…the credit [is] extremely weak and deteriorating.”

*** “June 2000 witnessed the most audacious effort ever by the world’s wealthiest countries to shut down bank secrecy globally,” writes Mark Nestmann of the Sovereign Society, But there are alternatives, including “the creation of a cyber haven on tiny Sealand, located on an abandoned gun platform off the English coast.”

*** More darn cheap stocks? “If you’re looking to buy on the cheap,” says Dan Ferris “you can hardly look in a better place than energy and mining stocks right now.” Earnings reports from last week reveal incredible health – and wealth – in these often overlooked markets: EOG Resources (EOG) second quarter earnings rose 384% over the same quarter a year ago. El Paso Energy (EPG) earnings were up 73% over last year’s second quarter. CONSOL Energy (CNX) earnings rose 155%. Cabot Corp. (CBT) earnings rose 82%. Vulcan Materials (VMC) up 23%. Enron (ENE) up 26%. American Water Works up 36%. Many of these stocks are selling at single digit P/E multiples…