The Real Boom's Evil Twin

The Daily Reckoning PRESENTS: The world has never been want for some kind of crisis that tests its inhabitants. War, depression, economic hardship – all still occur. What has changed in the last quarter century is the way we approach these crises. Bill Bonner explores how the current global mindset is allowing trouble to take a holiday. Read on…


The following is based on a speech given at this week’s investment conference in Vancouver.

Gloom and doom ain’t what it used to be.

Our old friend Dr. Gary North was – and still is – a master of the Armageddon genre. The turning of the millennium seemed to cry out for some kind of catastrophe. Gary came up with what seemed like a suitably disastrous scenario – Y2K. Remember that? It sounds like a joke now, but it was no joke then.

Computers are set up to do things at certain times. Gary guessed that when the world’s computers got to the year 2000 they would freeze up. They hadn’t been programmed to go beyond December 31, 1999. Even if most computers made the transition gingerly, there were so many computers, handling so much data, some of them were bound to go haywire. It wouldn’t take many errors, he figured, for the whole data system to collapse. People wouldn’t be able to use their credit cards. The government wouldn’t be able to send out retirement checks. The railroad yards and truckers would lose control over their freight. Stores wouldn’t be able to restock their shelves. Municipal water systems would shut down. Deprived of food and water, city dwellers would go on a rampage and many thousands would die.

But then the big day came and nothing happened. As far as we know, not a single computer-controlled system in the entire world failed because of a date-related malfunction.

Poor Gary. He had moved his family to the backwoods of Arkansas in order to avoid the urban riots, starvation and lawlessness that he saw coming. He had staked his reputation on Y2K trouble; his fortune too. But the trouble never came. Those of us who knew him felt sorry for him. We were afraid he was depressed. So we called him up with sympathy and consolation.

“Too bad about that Y2K,” we would say. “No collapse…no panic in the streets…no mass starvation. Really, too bad.

“But don’t worry. There will be plenty of other crises. Maybe this global warming thing will catch on. Maybe the whole planet will fry. Or bird flu could turn out to be a mass killer.

“And we’ve heard that there is a meteor that might strike the earth and wipe out all human life.

“So, cheer up.”

You know, the life of a financial advisor is not easy. We’ve been in the business of publishing financial analysts and advisors for nearly 30 years. We’ve seen plenty of them come and go. And many have gone under very unpleasant circumstances. One whom we knew was shot dead on the beach. One went to jail. Another one went crazy.

From time to time, a young man will come to see us. He’ll say he wants to get in the business. So, we warn him. You don’t know what trouble is, we say, until you become a financial analyst. When your recommendations don’t work out, your readers will despise you. And when you do well, they’ll be disappointed you didn’t do better. Worse, you might begin to think you really know what you’re talking about. And then you’re completely useless – and a danger to everyone, especially yourself.

So take our advice, we tell them. Go into law or dentistry. But if you decide to go ahead…remember, you can always come to us for advice and help. And if things really go badly for you, we always keep a loaded pistol in our desk drawer; we hate to see a financial analyst suffer.

But the trouble with this modern world of ours is that there isn’t enough trouble in it. There used to be more. Which is what made the good old days so good. Back then, people had real trouble and they really appreciated it. Now, they just toss it off. They’re not worried about it because they don’t know what it really is.

When we were young, we fully expected that we would never be old. Nuclear war or runaway population growth would see to that. As to the former, the threat was very real. “We will bury you,” said the leader of the Soviet Union, in the august chamber of the United Nations one day. We thought he meant it. And during the Cuban Missile Crisis, the world was probably only an upset stomach away from annihilation. If either Kennedy or Khrushchev had been in a bad mood, we might never have lived long enough to enjoy this great economic boom.

There was also the danger of too many people; India could never feed herself, the experts said. Food production worldwide couldn’t keep up with population growth. Hundreds of millions would starve; it was only a matter of time.

As to financial matters, the average family was only a paycheck or two from total disaster. Losing a job could be catastrophic. No one had credit cards. There was no EZ mortgage finance available. Besides, adults back in the ’50s and ’60s were deeply suspicious of debt. It was the lesson they had learned during the Great Depression. That generation knew trouble…real trouble.

I often compare my own situation to that of my father. He was born in 1921. His father died in 1923. And there he was. The family was so poor that to eat, they had to dig up potatoes out of a field where the farmer had missed them. And to keep warm, he walked along the railroad and picked up coal that had fallen out of the rolling stock. Then, when he was 10 years old – along came the Great Depression.

In the 1930s, one out of every four American workers lost his job – with no unemployment insurance…and no welfare system…to fall back on. My father had a knack for being in the wrong place at the wrong time. He tried to escape the poverty of his family by joining the army – in 1939. Then, he thought he had gotten extremely lucky when he drew the best assignment in the army; they sent him to Hawaii. He said he was recovering from a hangover on the base when Japanese airplanes appeared overhead. They tried to kill him for the next three years.

But Americans had it easy during the war, compared to others. Britain was bombed for months. France was occupied…Italy and France were both battlefields.

There were severe financial shocks, too. Britain went broke. France had to form two new governments…and replace its currency – again, twice. But, imagine the time of it your parents and grandparents would have had, had they lived in Russia, China, India, Germany, Argentina or Japan: War. Hyperinflation. Starvation. Police repression. Mass arrests. Occupation. Bolshevism. You name it; they lived it.

As long as the generation that had lived through the Depression and WWII were in charge of things, America was in pretty good shape. But in the 1980’s, a new generation – our generation – took over. And there were three key events during that period that caused trouble – as we had known it – to take a holiday.

First, there was the Crash of ’87. Stocks fell hard. But then, they got right back up again, as though nothing ever happened. Then, people began to think that crashes were no trouble. Even if stocks fell, they’d soon be on an upswing again. Books began to appear such as “Stocks for the Long Run.” People began to believe you couldn’t go wrong in stocks, no matter how much you paid for them.

Second, in 1989, the Berlin Wall was dismantled. Suddenly, we no longer had any enemy worthy of the name. We weren’t going to be exterminated in a nuclear war after all. From here on, it would be clear sailing.

Third, Ronald Reagan and the neo-cons transformed the Republican Party. “Deficits don’t matter,” said Dick Cheney. They don’t matter to the Democrats. And now they no longer matter to Republicans either. After the ’80s there was no longer any organized political party in favor of fiscal and monetary conservativism.

With these changes in place, trouble could take a holiday. Since then, every warning has turned out to be a false alarm. The Tech Bubble burst and it didn’t really matter. The recession of 2001-2002 was so mild few people even noticed. Even terrorists disappeared from North America after the stunning attack in 2001.

But the trouble with trouble is that when you don’t have enough, you have to go looking for it. That is probably what drew Britain and America into Iraq. And it is the lack of financial trouble that is drawing people all over the world to do strange and troubling things. What homebuyer would sign a contract where his payments automatically went up to more than he could afford, except someone who wanted problems? And what is a subprime ARM but an invitation to rumble? And who would buy a package of these Collateralized Debt Obligations but a moron…or a man looking for trouble?

As mentioned above, despite the crack-up of two Bear Stearns funds, the Financial Times reports that investors continue to put record amounts into hedge funds. And from Miami comes word that 20,000 new condos are under construction – even as the American property market sinks. Savings are at a record low. Debt is at a record high.

People looking for trouble are bound to find it.

Bill Bonner
The Daily Reckoning
July 27, 2007

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

The Real Boom’s Evil Twin

Is our Crash Alert flag still flying?

Yes? Good…good…

The Dow went down 312 points yesterday…setting hearts aflutter. More than $900 billion in stock market wealth has vanished since July 19th.

“New home sales tumble,” is the headline next to the Dow update on the Money page of USA today. Builders are reporting worse-than-expected results. Economist Mark Zandi says he expects 2.5 million homeowners to default. And the tab for the foreclosure crisis is now predicted to rise to $113 billion.

“How to Enjoy the Crack Up Boom” was the subject of our first little speech in Vancouver. (Our second speech is recalled below.)

In order to fully enjoy a Crack Up Boom you have to understand that a Crack Up Boom is not all it’s cracked up to be, we explained. It is fundamentally a feature of monetary inflation, not of real economic growth. Easy come; easy go.

But the trouble is, just as you can’t tell the difference between a real dollar and an inflationary dollar that was just created out of thin air yesterday, neither can you tell the difference between a real boom and an inflationary one. To the observer, they look almost exactly alike.

And to make matters worse, the present boom has generated both real wealth…and crack up wealth…often mixed together in the same place. There are people who are building healthy, profitable businesses in the midst of an incredible bout of speculative fever.

But the secret to success in many things – business, war, investments and marriage – is often just to avoid tempting targets of opportunity and stick to a winning strategy.

In your financial lives, the most important thing is to make sure that your own business…your own careers and income sources are solid. And that takes constant and faithful attention. You let yourself get distracted and you are heading for trouble.

That has been the prevailing theme this week – pay attention! Every speaker has given a version of this advice: it’s your money, ultimately YOU are the one who is going to have to figure out where the safest – and most profitable – place for it is.

And if you couldn’t make the trek out to British Columbia for our conference this year, you can still feel like you were there (minus the hangover from last night’s “Whiskey Bar”), with the 2007 Agora Symposium Highlights. All week, we’ve been audio recording the speeches, and we’ve had our roving reporters at each and every ‘break out session’, so not only will you get the speeches, but the recommendations as well.

If you purchase the Agora Symposium Highlights before Tuesday, you will only pay $99…after that, the price goes up to $149 – so act fast.

Investors are always at risk of being led into temptation. Who wants to hold onto a stodgy old stock at home- even if it is yielding 5% – when a sleek new model down the street promises to double in a single year? And with modern communications, there’s now the thrill of cozying up with a little exotic number from Asia.

There are good stocks…and there are fast ones. Right now, they’re all on the move. In the words of a famous sportscaster – look at those Zimbabwe stocks run! Yes, this year, no stocks have run faster than those from that forlorn African nation.

Of course, you wouldn’t let yourself be distracted by Zimbabwe stocks…but how about a little enhanced leverage? Hedge funds are still taking in money at a record pace.

Or how about a condo in Miami? As reported in this space, 20,000 new units are under construction in Miami.

“I’ve got a unit down there,” said a man from Ohio. “I don’t know what to do with it. I bought it a few years ago for $1.2 million. Now, some guy slipped an offer under my door for $1.7 million. I don’t know whether to sell. Or hold. I’m afraid all those new condos will cause a collapse. Then, I’ll wish I had sold when I had the chance.”

“Well,” we dared to offer advice, “you have to stick to a winning strategy. Is it a place to live, an investment…or a speculation? If it’s an investment and it gives you a decent yield…as a place to live…why sell? But if it’s a speculation, you have to refer to the speculation rule.”

“What’s that?”

“Be brave when others are fearful…be fearful when others are brave.”

That was the best counsel we could come up with. We wondered for a moment whether property buyers in the greater Miami area were fearful or brave. We don’t know, but the guy who slipped the offer under the door must have been a George Armstrong Custer.

More news:


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

“Yesterday we saw volatility move back into the world’s markets in a huge way. Another bad housing number simply added fuel to the fire and everything got sold. And I do mean everything!!”

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


And more thoughts…

*** “Gold is acting as money,” said our old friend Paul van Eeden. “It is almost perfectly keeping up with consumer price inflation since the 1920s. It is doing what it is supposed to do. It provides people with a store of wealth that really maintains it value.”

When asked about the future of metals, generally, Paul guessed that they were already overpriced. You make money by buying low and selling high. Most metals are not low; they’re high. “You don’t make money that way,” said Paul.

But gold is different, says Paul. Gold is money. It is not just a metal. It will vary inversely with the dollar. True, gold is at a 27-year high. But if the dollar goes down, gold – in order to maintain its purchasing power – has to go up. So maybe you can’t count on making a lot of money by holding gold, but it’s not a bad thing to hold if you want to preserve your wealth.

“The very thing that makes gold a bad place for you money most of the time makes it an excellent place occasionally. It has no sales or profits; but its sales do not decline. It benefits from no technological enhancements; but it needs none. It produces no earnings…but it announces no earnings disappointments either. It holds no press conferences; but it tells no lies. It uses no leverage; but it doesn’t go bankrupt. You can’t buy it with No-Money-Down…but it doesn’t get foreclosed. It doesn’t go anywhere; but it doesn’t go away.”

That’s exactly why we like gold – it is been around the block a few times…and it’s not going anywhere any time soon. Which, interestingly, is why certain investors won’t touch it with a ten-foot pole: there is no ‘instant gratification.’ But that’s OK with us – we would rather hold gold as insurance, than invest in a flash-in-the pan stock…but of course, that’s your call.