The Way of All Cash, Part I

The Daily Reckoning PRESENTS:There are a couple things Argentines know well: polo and financial crises. A couple weeks ago, we introduced you to Eva Perón…and today; Bill Bonner presents Evita’s husband – the man behind the demise of the Argentine economy. Read on…


“All progress is based upon a universal innate desire on the part of every organism to live beyond its income.”

– Samuel Butler, Notebooks, 1912

January 22, 1944, in Luna Park, Buenos Aires, is a memorable time in the history of humbug. It marks the occasion on which Juan Perón met Evita.

We have, of course, already introduced you to Madame Eva. Therefore, today our burden will be to discover the man who was her husband, the man widely credited with having wrecked the Argentine economy for 40 years. We do this partly out of curiosity, and partly out of a keen instinct for self-preservation. There are two things the Argentines know more about than anyone else. One is polo; American polo teams routinely hire Argentine ringers to boost their scores. The other thing Argentines know is financial crises. What the Argentines don’t know about financial crises is probably not worth knowing. Is there any crisis involving man, paper, or a central bank that the Argentines have not survived? American economists routinely give advice to central bankers on the Pampas. Today, with the United States facing what could be the greatest financial crisis the world has ever seen, we look beyond the Rio Plata to see what we can learn.

When Eva met General Perón, he was already 50 years old, which is to say, he was old enough to know better, but young enough to disregard what he knew. While he cooed with Evita on the Calle Posadas, his soldiers goose-stepped down the Avenida de Mayo chanting “Death to Jews.” Juan was not only sympathetic to the Nazis and Mussolini’s fascists, he was envious of them. Argentina stayed out of Word War II and even looked the other way when German submarines occasionally holed up in remote harbors in Patagonia.

“They have chosen to dally with evil,” declared Churchill of the Argentinians, “but not only with evil but with the losing side.” Two months before the action was over, the Argentines corrected their mistake, declaring war on the nearly defeated Axis powers. But that didn’t stop the dallying. When the war was over, Perón provided blank passports to war criminals, in exchange for cash.

Any hack can tell the truth, but it takes a politician of genius to tell a good lie. He can be elected by the people or impose himself on them. His provenance hardly matters. In a trade that deals in lies, what really matters is the quality of them.

At the turn of the century, the three most promising regions of the world were the United States, Argentina, and Russia. All three were large countries, each with large and growing populations. Each country had an enormous agricultural capacity. And all three of these countries were industrializing at a rapid pace. Each was a “new world” in its own way, and each seemed to be racing the others to lead the rest of the world into the new century.

We know what went wrong in Russia. The place was taken over by Bolsheviks with lies as absurd as they were murderous. But what happened on the pampas? We have read many accounts; no one seems to know for sure. We don’t know either, but we offer a theory anyway: Perón refused to die.

At the opening of the 20th century, Argentine farmers enjoyed a land of milk and honey – with rising farm prices! Argentines were getting rich, shipping agricultural products to Europe. They built palaces out on their farms, complete with opera houses and polo fields. And in the capital, they laid out broad avenues, with beautiful parks and monuments. They put up some of the handsomest buildings in the world. They came to Europe as tourists and stayed in the best hotels. Argentines were wealthy and everyone knew it. Their wealth was growing fast. Between the turn of the century and the beginning of the Great War, capital accumulated at the rate of 9% per year, while population grew at only half that rate.

At least, at first, it also seemed that Argentina was spared the cultural decline of Europe. European civilization, having peaked before the First World War, had thereafter come to be dominated by vulgar bunkum. A cheap rot-encrusted everything – art, manners, architecture, politics. Interventionists, meddlers, world improvers – that is to say, accomplished liars – had taken over at all the world’s major popular assemblies and hijacked its leading central banks. But Argentina almost escaped unscathed. Its armies never got into either world war. It never suffered a great depression in the ’30s. Life in Buenos Aires was safe and civilized even while European cities were being blown up and its peoples being exterminated. But then, suddenly, the people of the pampas too caught the populist bug. And unlike Europeans or North Americans, they were never able to shake it off.

Juan Perón ruled Argentina tentatively before 1946 and then conclusively between 1946 and 1955. We like to look at a photo of him, decked out in a white cap like a ship’s captain, garlanded with a blue and white sash, trimmed with enough gold filigree to support a central bank. In his prime, he would have made a splendid corpse. Had he been strung up like his hero, Benito Mussolini, he might have done less damage, too. Argentina might have been occupied and reconstructed and might have taken off with a burst of post-war dynamism, like Japan or Germany. Instead, after Evita died of cancer, Perón took a 13-year-old mistress and dodged a military coup by running abroad, first to Paraguay, then on to Nicaragua, Venezuela, the Dominican Republic, and finally, Spain.

In short, wherever his money and strongman credentials would take him. And then, when the policies he began worked their way through to their inevitable conclusion – that is to say, when Argentina was all but broke – they called him back to Buenos Aires in 1973…to do more damage. A pitched battle was even fought at Ezeiza Airport on his behalf. The populace couldn’t seem to get enough of the man…or his women. When he died in 1974, his last wife, Isabel, continued making things worse in his name and with his style, until at last in 1976, the military decided it had had enough.

Finally, the Peróns were finished. The handsome general and his pushy wives were gone. But Perónism continued…and continues to this day.

Bill Bonner
The Daily Reckoning
London, England
May 26, 2006

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:

The Most Feared Book in Washington!

Are the corrections over? Or just beginning? Who can know?

Both the Dow and gold bounced yesterday. Not persuasively. Not conclusively. But just enough to keep us guessing.

Everywhere we look we see more signs that it is late season for the great imperial economy. There may be fruit still on the tree, but it is going bad. In a healthy, young economy, money is spent to increase productive capacity. Savings are put to use to build factories…offices…and businesses. These robust new ventures flower and fill the air, like St. James Park in the month of May, with the rich aroma of fecundity. But as the season turns, the fruit ripens and then begins to rot and attract bugs. Productive investment turns to speculation. People no longer make money by making things, but by spinning money around. The rich are no longer the captains of industry – the railroad builders and steel-mongers, for example. No, the new filthy rich are the fast-talking Sergeant Bilkos of the credit boom…not steel mongers, but money mongers…who promise huge rewards to investors and, occasionally, deliver.

Twenty-six top hedge-fund managers earned an average of $363 million last year, according to yesterday’s press reports. That was up 45% from the year before. Two of them – James Simons of Renaissance Technologies and T. Boone Pickens, Jr., of BP Capital Management – earned more than $1 billion a piece. Each one of the 26 money shufflers earned about as much as all of the United States’ national and regional airlines put together. Forget the major airlines; they lost more than $2 billion. It would take Simons and Pickens together to bail them out.

We stop in our tracks. Our mouth drops. Are we jealous? Are we envious? Are we impressed? No, we are merely dumbfounded. Who would be so thickheaded as to pay a man more than $1 billion to guess about which way the wind will blow? Why doesn’t he make his own guesses?

Oh, but the money is actually “earned” by the manager, you say? That is, a large portion of what the fund manager gets comes from his share of the profits he has brought in. Mr. Simons, for example, takes an incredible fee of 5% of capital plus 44% of the profits. The normal larceny is two and 20 or 2% of capital plus 20% of profits. Mr. Simons is said to use “mathematically driven models” to produce such profits for himself and his customers. As near as we can tell, he is doing to the financial markets what card counters do to Las Vegas.

But where are the goons? There must be people on the other side of the trade. Have they no calculators, no yellow pads, no number-two pencils? Do they not realize they are losing billions? Do they not care?

We have nothing but questions. It is all too amazing. Too absurd.

If Mr. Simons really could earn a billion dollars in one year using his models, you wonder why he’d want to go to the trouble of running a hedge fund. Think of all the regulatory hassles, the customers, the office work. Rather than earn 50% on the client’s money, why not earn 100% on his own?

We know the answer. Because 100% on your own money is an honest speculation; 50% on clients’ money is a swindle. Speculation is inherently a risky business. Sometimes you will guess right. Sometimes you will guess wrong. One day’s speculation begets profits, while another begets losses that take away the profits that yesterday’s speculation begat. But what if you could only win? What if, when a speculation went well, you got, say, 50% of the profit? And when it went bad, you took no part of the loss? Well, welcome to the hedge-fund business.

Mr. Pickens made his money in the commodity/energy boom. No boom, no profits. But commodities and energy are famously cyclical. When they go up and down, they go way up and way down. Hedge funds operating in the commodity area are money-making machines in the up cycle. In the down cycle, they are money-losing machines…at least for the clients.

And thus, the rotten fruit finally falls from the tree.

Mundus vult decipi, ergo decipiatur. Which is all right with us.

More news from The Rude Awakening…


Eric Fry, reporting from Manhattan:

“A home is a wonderful thing to own; but it is also a wonderful thing to sell…especially when prices are slumping and buyers are disappearing…and time is of the essence.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.


And more views from Bill Bonner…

*** Some of the worst weather we have ever seen has been some of Britain’s best.

Last night, we walked home. May is supposed to be the most beautiful month in Britain; for a few hours yesterday, it was. The grass shoots up in St. James’ park, the flowers bloom, the trees leaf out. After a long winter, there is a warm, wet freshness in the park, like the fur of a newborn kitten. The smells are intoxicating. The views are enchanting. Yesterday evening, people were picnicking out on the grass. Lovers lay arm in arm on blankets next to the lake…or strolled along the avenues, lined with handsome plain trees. Everything was so green…light green…dark green…green, green. The sun sits on top of distant buildings and seems to stay there. There is an hour of twilight, where the last sunlight, coming in at ground level, runs through the green leaves like light through colored glass. Everything is green, even things that are normally brown or yellow or red. For a moment, it is a paradise.

But this morning, we awoke to the sound of rain hitting the windowpanes. It is another stormy, dark day in London.

“Why do people want to live here?” asked Jules again, after spending a week in the city.

Whatever the attraction might be, it’s not the weather. But the Brits are a curious race; those who couldn’t support the cold, gloomy climate must have died out. Those who are left, wear T-shirts, even when the temperature drops and the raindrops fall. It is summer to them; maybe all they will get.

*** Ryland Homes, one of the nation’s top builders, says it will have to adjust its 2006 earnings forecast downward for a second time. Houses just aren’t selling like they used to. In San Diego County, foreclosures are running at almost double the rate of a year ago. The Twin Cities area of Minnesota reports a record inventory of unsold houses. Other reports say the record is nationwide, with more houses for sale than at any time in history.

*** “As far as I am concerned you have never bought any gold,” says a dear reader. “You are always waiting for the price correction. This time 550, last time 450. You are waiting and watching; it never hits your support level. Never buying – always waiting and watching. Let us know when you pull the trigger!”

Yes, as we confessed yesterday, when the price went over $500, our cautious approach to buying gold seemed inadequate. We haven’t been able to buy for a long time because gold refused to hit our buying targets.

Fortunately, we have been under no great pressure to buy. A couple of real estate investments – one in France, the other in Argentina – have done for our personal liquidity what the Royal Air Force did to Dresden. But our advice to readers remains the same: buy gold at the best price you can get. There, how’s that for advice!

What’s the best price you’re likely to get? While the bull market still has far to go, we think it is likely that the price of gold will fall below $600 in this correction. But if we really knew, we’d be managing a hedge fund!

*** Remember when George W. Bush told the world that if America had any enemies in Iraq, well, “bring ’em on”? It was the kind of remark that the gods punish. Now, even the president regrets saying such a blusteringly insipid thing. Reuters states:

“At a joint news conference with Blair, after three years of war that has killed more than 2,400 Americans and thousands of Iraqis, Bush was asked what mistake he most regretted.

“The Texan said that he regretted saying “bring ’em on” when responding in July 2003 to a question about the Iraqi insurgency.

“Bush said that remark was ‘kind of tough talk, you know, that sent the wrong message to people.’

“‘I learned some lessons about expressing myself maybe in a little more sophisticated manner, you know. “Wanted, dead or alive “; that kind of talk. I think in certain parts of the world it was misinterpreted,’ he said.”

But Bush was not misinterpreted at all. That was the problem; his enemies knew exactly what he meant.

*** “Listen Up, D.C. Commuters,” starts an entry in the WSJ blog.

“Authors of a new book on the U.S. deficit, Empire of Debt: The Rise of an Epic Financial Crisis, are warning Washington, D.C., commuters not to get too complacent about the current economic climate and a federal budget deficit coming in below projections. With ads placed at rail stations and on buses in the District of Columbia, the pair is warning: ‘Dear Congress, Your Debt to Society: $132,967 per U.S. family.’

“Bill Bonner and Addison Wiggin, financial writers with Agora Financial, a Baltimore, Md.-based research firm, argue that the media, Congress and the public are immune to a historic ‘horrifying national debt.’

“‘Our national debt is like the elephant in the living room,’ Wiggin said. ‘We all know it’s there, shattering the breakables, messing up the carpet, generally wreaking havoc, but no one wants to address it.'”

We know you’ve seen our pictures from our trip to the belly of the beast this past Monday – but are there any readers out there that have seen any of the ads on the metro platforms or on the back of buses in Washington in person?

One reader has – and seems to have found some sort of spiritual guidance through these ads…

“Wanted to let you guys know that I saw your Empire of Debt billboard down in the bowels of the metro at the Chinatown metro stop in Washington, D.C. Even though it was down below the crust of the earth and fairly dark, I felt secure knowing that you guys were watching over me.

“It kinda reminded me of the Scripture verse from Psalm 139:12- ‘even the darkness will not be dark to you; the night will shine like the day, for darkness is as light to you.’

“Good job fellas, looks as if the Good Lord is watching out for us during these final days.”

The Daily Reckoning