The Eternal Sunshine of the Spotless Mind

Why Hollywood likes unhappy endings, why divorced couples remarry and why investors buy Treasury Bonds…from a speech given yesterday in Las Vegas…

How clever, we thought: Jim Carrey’s new movie.

According to the reviews, a couple decides to divorce…and to scrub their minds of all the unpleasant memories of their union. We can imagine what happens next…the way is now clear for the couple to fall in love again.

A similar theme was used in the original British version of the movie from the ’30s – with Ronald Coleman and Greer Garson. In the older film, the poor man’s memory was erased by accident rather than by design…he was shell-shocked in WWI. Coming back from the war, he had no memory of his former life. So he created a happy new one with Greer Garson. Then, struck by a bus, his former life came back to him…while his new one disappeared. His wife, not wanting to impose herself, took a job as his secretary, saying nothing of their matrimony.

As might be expected, it ends as movies did in the ’30s – happily. The couple falls in love all over again.

The Depression years were hard on jobseekers but easy on film-lovers. Real life was full of unhappy endings. Stock market investors had been ruined. Ten thousand banks had gone under. A quarter of the workforce was unemployed. And all over the world, various forms of madness seemed to have taken hold of people. They were putting on uniforms and marching. Hardly 10 years later, the entire world would be at war…with millions dead…and whole economies pulverized. Still, what might have ended badly in real life always seemed to turn out better in celluloid.

Happy Endings: Real Life Happy Endings

It is now, of course, a new movie era. Flicks cannot be counted on to end well; we expect our happy endings in real life!

All memory of the unpleasant way things often turned out in the ’30s, ’40s, ’50s, ’60s, ’70s…and much of the ’80s and ’90s, too, has been laundered out. Our minds are spotless.

It is too bad. We need history. Few imaginations are wild enough to compete with the actual facts.

A German magazine, we saw at the newsstand in London, has as its cover story this week: The 20th Century’s Most Catastrophic Mistakes. Complete with gruesome photos, the feature article tells the old stories of hyperinflation; ruinous, pointless wars; barbaric, inhuman tortures and medical experiments; and absurd ideas. Germany is an expert at catastrophe – the country lived with Nazi madness for a decade…and East Germany put up with Communist claptrap for another 40 years.

While Americans have no history, Germany has more than it knows what to do with.

Long-time Daily Reckoning sufferers know that we wrote a book last year; they surely have a copy on their shelves.

The book was a best seller for a few weeks…and was translated into French, where it also sold reasonably well. We creatively translated the title to give it a boost: "The Inevitable Bankruptcy of the American Economy," had a certain irresistible ring to it in France.

What surprised us was the reaction of interviewers. They wanted to know when the collapse would come, how low the Dow would go, and what the price of gold would be by mid- summer.

"How should we know," was our answer. "And if we did know, why would we tell you?"

Our guesses are as good as anyone’s. What is shocking is that the financial press took them seriously.

Happy Endings: Brilliant Aphorisms

But finally, just this week, a French financial journal realized what the book was all about. "The aphorisms," said the review, "are brilliant."

We pass this comment along to you, dear reader, not in conceit, but in humility. As you know, modesty is our only virtue, and even that is insincere. The aphorisms in our book are nothing more than little, condensed, distilled and nuggetized bits of other peoples’ experience…history, in other words.

We say, for example, that ‘investors don’t get what they expect from the markets, but what they deserve.’ All the old timers said as much; our observation is hardly original.

Market history proves it true. But who believes it? What investor really thinks he deserves what markets generally deliver – that is, about 3% per year over the last 200 years?

Or take this common advice: Buy low, sell high.

Every investor claims to follow it. But who does? From our minds, all memory of what happens to markets has been erased; we think prices only go up. Stocks are now nearly as high as they’ve ever been, yet investors still buy them. Bond prices, too, are very high. But investors still buy them, too. And houses? Who imagines that house prices can go down as well as up? Our spotless minds hold no dirty examples. As far as we can remember, everything always turns out for the better. Every real-life story has a happy ending.

And yet, within the lifetimes of everyone reading this letter, things did not always turn out well. As recently as 25 years ago…it was as if we lived on a different planet.

Who remembers that two decades ago, dividend yields and P/E ratios were about the same number – 6?

Who recalls that at that time the price of gold and the price of the Dow were also about the same – near 800?

Now, stocks yield less than 2% in dividends and P/E ratios are about 4 times as high.

Happy Endings: Are There Always Happy Endings?

Do things always have a happy ending? How many long-term gold buyers are there in this room? Does anyone remember what happened to the price of gold in the last two decades of the 20th century? It collapsed, of course.

Who remembers buying bonds in the early ’80s? You could get a 15% yield from Treasuries. And here we pause and catch our breath. What happened, we wonder? How did the world improve so dramatically that lenders are now willing to let out their money for 1/3rd the yield? Is the world that much safer? Is the dollar that much more secure? Are the finances of the federal government that much healthier? Is the Fed that much better at protecting the value of the currency?

Investors are doing something that is breathtaking.

In 1980, the U.S. had a positive trade balance and Americans were net lenders to the rest of the world. The country was at peace. Republicans claimed they believed in balanced budgets. People still held parties when they paid off their mortgages. Paul Volcker said he would bring down inflation rates…and meant it. Ronald Reagan was president. You could buy a stock for 6 times earnings…and lend your money to the U.S. government for a 15% yield. Lenders demanded that much, because they remembered the inflation of the ’70s. They knew that not every investment story had a happy ending.

A quarter of a century later, everything has changed. Our minds have been cleansed of all nasty recollections. People judge it only a third as risky to lend money…as if we will live in eternal sunshine. Once again, investors have fallen in love.

To be continued…


Bill Bonner
for The Daily Reckoning
May 14, 2004

The Dow is teetering on the edge of 10,000. It may fall to the left or to the right…who can say? But we wouldn’t want to watch while holding a portfolio of equity mutual funds.

"The thing is," said an investor at the Las Vegas Money Show, "everyone is wondering when stocks will break…and when gold will finally head back up. It doesn’t really make any difference. Sooner or later, it will happen. And the longer it waits to happen, the worse the final destruction will be, because, the only thing keeping this economy going is credit. People have to borrow in order to be able to continue to buy things. The more they borrow, the more they owe. So, the longer it goes on, the worse the situation will be. And the more they’ll have to cut back."

We see the bubble; debt has expanded to outrageous proportions.

What we are looking for is the pin.

Oil, for example, sparkled pointedly yesterday. It rose to another record high – over $41 a barrel. Every time Americans pull into a gas station, a little air is let out oftheir balloons. Spending more on energy, they have less to spend elsewhere.

The rising costs of oil and food were blamed for a big jump in the Producer Price Index, which shot up 0.7% in April.

Interest rates look sharp, too. If they are rising, as everyone seems to think, they could slice into the debt bubble at any time. The entire economy is not only heavily leveraged with debt; it is leveraged at the lowest interest rates since Eisenhower was president.

"Never before have bond yields been so low when the dollar was unbacked by gold," Porter Stansberry pointed out on a panel discussion yesterday.

Never before have lenders been willing to lend money without knowing the value of the money they would get back. The last time rates were so low, the dollar was backed by faith in gold. Now, it is backed by faith alone.

Bond buyers’ faith must be weakening; yields are rising.

Of course, you can take the news of rising yields either way, good or bad. The dollar rose yesterday; investors seem to think rising yields are the mark of a stronger recovery. They expect higher rates from the Fed, too.

We’re not so sure. As near as we can tell, the American economy is tracking Japan’s long, slow-motion slump of the ’90s. Rising rates will undermine stocks, bonds and real estate – the collateral of the debt bubble itself. Credit will be destroyed. Interest rates will not go up…but down. Prices will fall.

Gold fell again yesterday, perhaps in anticipation.

Over to Addison for more news:


Addison Wiggin, also on the Strip…

– The city that never sleeps is like a share that never falls, we mused on our descent into McCarran International Airport last night – they’ve both been rigged.

– Your editors are in Las Vegas for the weekend. The reason for our trip won’t come as any surprise – we are here to talk about money and how best to amass it. What venue could be less appropriate, we wondered, than Las Vegas, where people are traditionally taught to throw money away? We will be attending both the Money Show and FreedomFest 2004. The weekend promises to be – in monetary terms – an all- you-can-eat buffet.

– In fact, Las Vegas Boulevard has an awful lot in common with Wall Street. Both streets are founded on the principles of risk, reward, probability and randomness…and both streets make their living from fleecing suckers.

– The terminology maybe different, but the mechanics are the same – fees and commissions are called tips on the Strip, while on Wall Street, dealers and croupiers are called brokers and market makers. Investment banks are called resorts, and trading floors are called casinos. Las Vegas even has its own version of fiscal and monetary stimulus – it’s called free alcohol and oxygen-enriched air. Investment bankers and analysts are to Wall Street what strippers, hookers and escorts are to Silver City – they’ll do anything to get your money.

– In Vegas, business is booming. In 2003, the town won $7.67 billion in gaming revenues alone. The visitors’ guide sitting on the coffee table proudly notes: "Thanks to an enviously robust tourist economy, Las Vegas continues to grow." In fact, Vegas is the fastest-growing city in the U.S. and has been for several years. – But over on Wall Street, the situation is reversed…the recovery might be finished, now that interest rates are having to chase inflation. It looks like the market is lost, and no one, including your editor, knows how this madness is going to end. Yesterday, the frustrated Nasdaq must have crossed the day’s break-even mark over a dozen times, finishing the session less than half a point higher at 1,926. The S&P lost 1 point to 1,096, and the Dow lost 34 to close at 10,010. The Nasdaq was equally as indecisive on Wednesday, but in a different way – it dropped 3% by lunchtime, but then won it all back by teatime, closing higher on the day.

– The bond market reacted nonchalantly to the day’s big news that the Producer Price Index was up 0.7% – 22.23% annualized – in the month of April. 30-year rates closed at 5.59% last night, up from 5.55%. Much of the blame was laid on energy bills. Oil settled above $41 for the first time in 21 years of trading.

– The 30-year "risk-free" Treasury’s real return – adjusting for inflation – may very well be negative, despite the recent correction in bond prices. Stock market investors, on the other hand, still expect a 7% real return from the market. They continue to operate under the illusion that the Street is there to help – like a friendly neighbor with a hot stock tip – and they buy more.

– Mainstream literature will tell you that as long as you are prepared to part with your money for the long term, measured in decades, and that you don’t use one iota of brainpower to choose your stocks – by using some kind of buy and hold strategy – you will optimize your capital’s potential, before fees of course.

– Where we are today, in Vegas, punters suffer from no such illusion. The average casino dweller equates losing money with having a good time. He’ll set aside a nominal amount, maybe $500 or $1000, with the sole intention of burning it at the tables, which he knows are loaded against him. Many people are actually trying to lose money, and won’t be satisfied until they do so. The casino operators may be crooked and they may be greedy…but at least they’re straight about the nature of the game: they offer no false promises and no hollow guarantees.

– The bottom line is: if you want to improve your probability of amassing wealth, you’d be well advised to avoid leaving your cash at either zip code.


Bill Bonner, still in Las Vegas…

"The guy across the road from me in Florida has a condo he paid $200,000 for a few years ago," said another attendee. "Now, it’s worth $800,000. So he took out some equity. Now he owes a lot more than he used to. And now he thinks the condo will go over a million next year…so he’ll go to the well again…and take out some more equity. He’s already taken out more than the thing is really worth and now he’s living it up.

"So I asked him – ‘Aren’t you worried about having to pay it back?’ ‘Nah,’ he says, ‘I’m going to sell it.’

"But who is he going to sell it too? I don’t know, but it looks crazier and crazier to me. And when it turns bad, it’s not going to be pretty…"

Fortunately, in America, 2004, things never turn bad. We all enjoy the eternal sunshine of the spotless mind.