The Ghost of Christmas Past

The Daily Reckoning PRESENTS: Part I of the Daily Reckoning Christmas Trilogy, first penned in 1999, and updated throughout the years…God bless us, everyone!


Old Greenspan was not dead. Not dead as a doornail, nor dead as a doorknocker. Not even as dead as a laptop computer after the power goes out – not even John Maynard Keynes is that dead.

Nothing is as dead as a computer without power. For even a nail continues to provide good service after the spark of life has gone out of it.

But Greenspan? The Fed chief was still alive. Not only that, he still had the power to flood the economy with cash…and lift stock prices. Or so everyone thought.

At least, Ebenezer still thought so. He had seen Greenspan on television not long ago. The old Rand-worshipping jazzman had said as much. Ebenezer could remember his exact words: “The Committee continues to believe that an accommodative stance of monetary policy, coupled with robust underlying growth in productivity, is providing important ongoing support to economic activity.” It sounded like mumbo-jumbo. But Ebenezer knew what it meant.

Of course, there were some – such as his old associate Bob – who said that Greenspan couldn’t do it…that merely reducing interest rates wouldn’t work. But what did they know?

“Bah,” said Ebenezer to himself, “humbug.”

“What reason is there to worry?” he asked, to no one in particular. “If I could work my will, I would have every idiot who goes about with ‘deflation’ or `recession’ on his breath forced to watch Wall Street Week and read the editorial pages of the International Herald Tribune.”

His musing to himself was interrupted by the entrance of two gentlemen who introduced themselves quickly and proceeded to divulge the purpose of their visit.

“We thought that, perhaps, given the spirit of the Christmas season,” said the leader of the two, “perhaps you could spare a farthing for the poor, the destitute and the needy.”

“There are many people who need our help,” added the second, “…the poor unfortunates who invested their money in dot-com stocks…or the big techs.”

“Need our help?” questioned Ebenezer. “Are there no mutual funds?”

“Well, of course…” the first began to reply.

“And do they not accept small amounts?” demanded Ebenezer.

“Yes…but…” replied the second before being interrupted.

“And has not the bull market been a fact of life for nearly two decades? And hasn’t every dip turned into a buying opportunity?”

“Well, yes…”

“And has it not been shouted from every newspaper headline…every news report…every Internet chat room…and every conversation between even the most casual passers-by at even the most ill-informed and down-market drinking establishment in the most remote and out-of-touch region of the country?”

“Doesn’t everyone who is capable of long division now realize,” continued Ebenezer, raising his voice, “that the recession is over…and that nothing beats investing in stocks over the long run?”

“Yes, we are aware…”

“Oh! Good. I was afraid that something might have happened…”

Then, misinterpreting the ensuing silence for approval, the second gentleman ventured, “Well, in this great time of trial, how much would you like us to put you down for?”

“My only wish is to be left alone so that I may continue to enjoy the fruits of the greatest episode of wealth creation in history,” replied Ebenezer. “Good day, gentlemen.”

And Ebenezer turned and walked away, muttering, “A poor excuse for picking a man’s pocket…”

That evening, Ebenezer slept poorly, under the fullest moon in more than a century. He had been startled earlier. Returning home from the office he had seen Alan Greenspan’s face in his doorknocker! An odd sensation, for Greenspan’s face was hardly one that he expected or hoped for. But there it was…for a fleeting moment, at least.

And now, after finally achieving the sleep he longed for, his rest was suddenly interrupted by the sound of ringing bells.

Yes, bells. The kind of bells they fail to ring at the top of a bull market. But why now…clanging like chains in the middle of the night?

The door to his bedroom blew open…and the clanging sounds seemed to mount the stairs.

“Humbug,” he thought, “I won’t believe it. The bears have been hearing ringing in their ears for years. The poor fools. ‘Recession…bear markets…crashes…deflation…’ and now they’re at it again…more convinced than ever. Ha!”

His color changed though, when, without a pause, something came on through the heavy door and passed into the room before his eyes.

The face: it was the same face he had seen on the doorknocker earlier in the evening. And on the television a few weeks ago. It was the face of Alan Greenspan, the Fed chief. His body was transparent, ghostly, but there was the source of the clanging. For the spectral figure was wrapped up in chains, to which were attached various metals – gold, copper, silver…both coins and nuggets, all clattering and banging against one another.

Ebenezer had heard it said that Greenspan lacked guts. But there they were. In this ghostly form Ebenezer could see all of him, inside and out. It was as strange as it was unappealing.

“Who are you?” asked Ebenezer, his voice cold and caustic.

“Ask me who I could be,” replied the phantom.

“Okay…who might you be?”

“That is a different question,” said the specter, “but I will answer it anyway. I have no time for word games. I am the spirit of Alan Greenspan…”

“I thought so…” whispered Ebenezer.

“…and it is required of every man that he walk among men…”

“But you are not even dead yet,” protested the old man. “I would know if you were dead…I would have read about it in the paper…

“And what are these chains you wear?”

“They are the chains you forge for yourself. But instead of gold and silver, yours are laden with computer terminals, stock certificates, portfolio statements, the New Era…mortgage refinancings. You will be fettered not just for your life, but for eternity. And they grow heavier with each passing month. Unless, that is, you heed the ringing of these chains…”

“I am here tonight to warn you,” the ghost went on, “that you may have a chance of escaping your fate. Rise and walk with me.”

“I am mortal…”

“Come,” said the ghost, taking Ebenezer’s hand.. The two of them rose as if weightless and slipped through the mist of time… “Here, look…” said the apparition, “Christmas Past: 1980.”

Ebenezer could see for himself.

There before him was the face of another Fed chief. It was Paul Volcker himself. And there, what was that? A crowd of people were burning him in effigy.

But why? Then Ebenezer began to recall what that Christmas was really like:

Inflation, measured by the CPI, rose at 13% that year.

Volcker’s job was to reduce that figure. He did so. But it was not fun for anyone – except short-sellers.

The Dow fell 24% after Volcker held his famous Saturday press conference and announced a change of direction. Volcker threw out the WIN buttons and targeted reserve requirements. Interest rates soared. Twenty-year Treasury bonds yielded 15%. The prime rate hit 21.5% percent. Homebuilders and farmers – and perhaps some Wall Street brokerage houses – threatened his life.

The Dow fell to 776. Adjusted for inflation, a generation of capital growth was wiped out.

But not everyone was hurt. Investors who bet heavily on gold stocks, oil and collectibles did well – at least, until Volcker’s purposes began to be realized.

Ebenezer recalled the predictions of 20 years ag

** Oil would go to $100 a barrel ** Inflation would be at least 6% – forever ** Gold would rise through the end of the century ** Bonds were “certificates of guaranteed confiscation” ** Stocks were dead (a death that was confirmed by `Business Week’ on Aug. 13, 1980 – the very bottom) ** The whole key to investing was to avoid risk

“Let us look a little further,” said the ghost. And with that, Ebenezer saw a new scene. In this one, he saw himself. But it was not himself as he was…but as he had been.

There was the young Ebenezer. Full of enthusiasm and eagerness to make his fortune. He had plenty of hair, too. And, look, you could see the muscles bulging beneath his polyester shirt.

“These are but shadows of the things that have been,” said the Ghost.

And there he was, the young Ebenezer. Standing alone and neglected at a Christmas party several years after Paul Volcker had taken charge of the Fed.

He looked quite sad…but Ebenezer knew why at once.

“I won’t make that mistake again,” said the young investor to himself.

“What mistake had he made?” asked the ghost of his guest.

“Why does he reproach himself? For the right thing or the wrong one?”

Ebenezer made no reply.

To be continued…

Bill Bonner
The Daily Reckoning

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin’s follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is – an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount – just click on the link below:

Empire of Debt

No matter what era you live in, you are always only two words away from great wealth.

In the late ’90s there were ‘tech stocks.’

Then there was ‘residential housing’…then ‘hedge funds.’ All of them washed up…or in the case of housing and hedges, are in the first stages of washing up.

But ‘private equity’ is still a winner.

It is a curious beast. For one thing, it runs completely contrary to an idea that has so enthused investors for so long – the notion that any dimwit can make money by simply ‘investing in a balanced portfolio of stocks over the long run.’

Some things are simply too amazing for words. Shakespeare. Mozart. Sex. Air transportation. No matter how many times we fly, we are still amazed that those huge planes stay aloft.

Investing, too, always leaves us in shock and awe. The investing creed – based on which sane people were willing to give total strangers billions of dollars’ worth of their hard-earned money – was that the stock market was reasonably fair…and fairly reasonable. Academics had elucidated the idea in the Efficient Market Hypothesis, according to which a plumber had about as much chance at winning at stock speculation as a corporate insider. The market was supposedly a level playing field, with all the players having about an equal chance to kick the ball.

Everybody had the same ‘information’ to work with, they said. And every investment dollar gets a vote. The market merely counts up the votes…and produces an answer more perfect than any individual could produce on his own.

But ‘private equity’ operates on an entirely contrary assumption – that a few rich, smart, well-connected people can outsmart the many ignorant middle class investors.

Now, markets have always been good at separating fools from their money. That is why we have hedge funds, mutual funds, ARMs with NEG AM, and pay option features…and Picassos selling for tens of millions of dollars.

But all of these things, no matter how extreme or absurd, were innovations and elaborations of the market. Private equity on the other hand is openly, brazenly, breathtakingly contemptuous of the market.

Traditionally, most people were smart enough to know that the stock market was no place for an honest working man. The proles put their money in banks, earned a fixed, reliable rate of return, and left the speculation in equities to the pros. But rising prices and loose chatter about ‘reforms’ made them think stocks were no more dangerous than, say, air travel. Where there were ‘flaws’ in the market, Wall Street and the politicians would be along to correct them. That was why we had the Trust Busters in the late 19th century…and later the SEC…and then Eliot Spitzer…and then Sarbanes-Oxley. They were all meant to keep the rubes hoping…believing…dreaming that the playing field was level!

Even today, in much of the rest of the world people know better. In most countries there is no popular market for stocks. Ordinary people are not fool enough to think they can beat the pros…the insiders…the rich and the well-connected.

“Here in Argentina,” an economist explained to us, “most people do not invest in stocks. They think stock market investing requires too much sophistication. Either they put their money in the bank…or they buy something with it. Often they buy property, because it is something they understand.”

The economy grows at 2 or 3% per year. In order for a Wall Street sharpie – or a private investor, for that matter – to earn more than that, on average, he has to take money away from someone else. Who is he going to take it from: the smartest, best informed, and most powerful investors? Or the poor mugs who think they can be Warren Buffett with $10,000 worth of savings?

Now cometh the coolest thing on Wall Street…Private Equity. With the argument that Sarbox and other reforms have made, the public markets are so difficult and expensive for companies that more money can be made by taking companies private. This sounds good to us. We are as suspicious of public markets as we are of public toilets, and of everything else with the word public in front of it. But what the Private Equity hustlers do is to take advantage of the naïve gullibility of public market investors. Michael Lewis provides the following example:

“The recent deal to buy, and then sell, the car-rental company Hertz Global Holdings Corp. nicely illustrates the current state of play in that relationship. In December 2005, a pair of private-equity firms, Clayton Dubilier & Rice Inc. and the Carlyle Group, bought Hertz from the Ford Motor Co. – which is to say they bought it from the sorry souls who own shares of Ford. Eleven months later, in November 2006, they turned around and sold Hertz back to the [public] in an initial public offering.

“In buying the company they put up $2.3 billion in equity capital. By the time they sold it they had gotten $1.3 billion of their money back, and held shares – which they no doubt plan to get rid of as soon as they can – valued at another $3.5 billion or so. In less than a year they had netted a fairly clean $2.5 billion profit.”

Is the world a richer place now that Hertz is on its own? Are more people suddenly renting more cars…enjoying more vacations…getting richer as a result of the Hertz deal?

No, dear reader, we don’t think so. Instead, the insiders and Wall Street pros who bought the business from Ford, then made a deal with the other insiders and pros at the big brokerage houses…who flogged it to their customers…so that now it sits in millions of small mutual fund portfolios, valued at a nice multiple of what the public used to think it was worth.

What hath all this money-shuffling wrought? Delusion…. and debt…

And here’s more news:


Chris Gaffney, reporting from the EverBank world currency trading desk in St. Louis…

“The economy has moderated, but can we keep it at these ‘slow growth/no inflation’ levels or will we slip into the more dangerous ‘no growth/rising inflation’?”

For the rest of this story, and for more market insights, see today’s issue of The Daily Pfennig


And more views:

*** We have been traveling for more than two weeks, rarely stopping in one place for more than a couple of days. We don’t really enjoy traveling. But we need to have a look around the world from time to time, just to have a clearer idea of what is going on.

Going around the world is a lot easier than it was a few years ago. In 16 days, we did a complete tour…stopping for many business meetings, dinners and parties along the way.

We have already reported to you our major finding: that no matter where you go you will find people who think the same thing. All over the world, people now believe in money the way they once believed in nationalism, socialism, or communism. Now, the only ‘ism’ they believe in is capitalism…but it is a strange variety of capitalism.

The definition of wealth has changed – from net worth to cash flow. People consider themselves rich based on how much money and credit they can run through, not how much they end up with. Debt is just another way to keep the money flowing. Nor does anyone fear a crash or even a severe setback. Money shuffling is revered for its own sake…and every momma wants her babies to grow up to be money shufflers. Why? Because that’s where the money is.

The old ‘isms’ ended in a terrible blow-up; our guess is that this one will too.

And now we offer a couple more thoughts…

First, if you are traveling long distance, try to get into British Airways’ Club Class and ask for a window seat. It’s a business class service, but they’ve outfitted the cabins in a way that is not too different from typical first class cabins. You have a little space of your own. You can work, read, or sleep, fairly comfortably.

Second, relax and enjoy the trip. Traveling can be exhausting and frustrating. Flights don’t leave when they’re supposed to. Sometimes they are cancelled. Often, plans need to be altered on the fly. And there are real mishaps. You may get sick. You may lose a passport or have your money stolen.

Fortunately, the only bad incident we suffered was when we were ripped off by a Buenos Aires cab driver. We had forgotten the exchange rate, momentarily, and overpaid by a factor of four. Even at that rate, it was only about as expensive as a cab in London. Besides, there is no particular reason why the trip should have cost only a quarter of a London fare. Cabbies, after all, are entitled to their informal pricing system for stupid foreigners. We paid it.

Traveling in India requires a special kind of Zen-like calm. Our companion on that part of the trip recalled seeing a grown man cry when his flight back to London was cancelled and he realized he would have to spend an additional day in India. He might just as well have regarded it as an opportunity.

Australia is a marvelous place…relaxed, friendly, and efficient. Americans feel at home, once they learn the language.

Argentina, meanwhile, is more of a challenge. The drive from Salta to our ranch takes five hours – over a road that must be one of the most dangerous in the world. It goes over a mountain pass, weaving its way around cliffs without guardrails, where occasionally, the roadway has been washed away.

“Look down there,” said Nick. “There are two cars…and a couple of trucks.”

The vehicles were so far away; they looked like toys – at the bottom of a cliff that must have been about 500 feet. What had happened to them was obvious when we went around the turn ourselves. One small miscue and we’d be down there with them. Someone had thoughtfully placed a small cross along the road…perhaps to remind travelers where they were headed if they didn’t stay alert.

We had no problem staying alert. Our eyes were wide open. The problem was, we couldn’t see anything. Such a thick fog hung over the mountains that we could barely see our hands in front of us.

“Is it often like this?” asked Nick.

“I don’t know…I’ve only been a couple times. Let’s ask Dario.”

Nick and Dario are architects and builders doing some work on an old farmhouse of ours. Nick is from Buenos Aires; Dario comes from Salta and makes the trip to the ranch about once a week.

“Sometimes it is worse,” conceded Dario.

The five-hour drive takes you from lush bottomland – where tobacco is the major crop – up through mountain pastures…and finally to a high desert. You drive across the desert for an hour or so…and then you come to the badlands. Well, ‘badlands’ is flattery to this country. Every speck of dirt or vegetation was stripped away by the hot winds millions of years ago. What is left is barren rock. But for someone coming from London or Paris, it is almost a paradise. The light plays tricks…and put on a show. The desert colors are vivid…striking…as are the naked rocks and mountains.

Finally, we work our way down to a valley with green grass and adobe houses – some of them rather gracious, with Greek-style columns around them and red tile roofs. Herds of goats, mules, and horses graze in the fields…children play in the dusty roads. And, most surprisingly, grapes grow on old vines. This remote valley has some very old vineyards…a couple of which now sell world-class wines.

But we still had a couple of hours to go to get to the ranch. It is at the end of the road, literally. You just drive up the valley until you can’t go any further. Then, if you are your editor, you are home.

On Thursday morning, we sat at a rude wooden table in the courtyard with Jorge, Francisco and the architects. The house was a ruin, not too different from the abandoned houses we saw along the road. But it wasn’t abandoned. In fact, a whole team of workers were laying stone walls…fixing the roof…and knocking out holes for new doors and windows.

Jorge, the ranch boss, gave his report. But Jorge lives in a world without many words. He gets no daily newspaper and he sees few strangers. The most recent visitors were a team of archeologists who came last month. He has no telephone, no TV, no Internet. All around him is silence…or the occasional talk of the gauchos. Jorge can say all he needs to say in very few, very short sentences.

We prompted him:

“We heard you had an accident.”

“Horse spooked. Threw me on the rocks. I went to the hospital.”

The hospital is in Salta; the trip there is the same trip we just took in the other direction. If we were severely injured, we thought to ourselves, the last thing we’d want to do is to have to make that drive. If the injury didn’t kill us, the drive surely would.

“Are you okay now?”

“Si, senor…”

Jorge’s wife, Maria, had prepared the meal. Everything came from the ranch – the goat, the lettuce, the potatoes. When you live that far away from the rest of the world, you have to learn to take care of yourself. For dessert, we had plums. We even had wine from the vineyard next door.

It is early summer down there…and very pretty. But it is high…nearly 9,000 feet. We were not used to the altitude. In Bombay, at sea level, we could barely breathe because the air was so thick with smoke and humidity. Here we could barely breathe because there was so little of it.

“Is everything okay at the ranch?” we prompted Jorge again.

“Si senor…but we need rain.”

The place did look dry. The last time we came we had to drive through two rivers. This time, we crossed two dry gulches.

“If it doesn’t rain pretty soon,” Francisco added, “the cattle are going to get mighty thin.”

But we couldn’t stay to figure this out. Instead, we ate our lunch…did our business… got back into the truck and headed back to Salta.

“Adios, senor,” said Jorge.

The Daily Reckoning