Vandals of the Internet

"News has taken over," wrote Bill in yesterday’s Reckoning. But how far does a barrage of headlines get us? We’ve seen what became of the New Era. Whither, then, the Information Age? This DR Classique was first published almost exactly 4 years ago today.

"Art" is what Jack Lang called it. He was referring to graffiti – of the sort you now see all over Paris and other major cities.

As minister of culture, Lang actually used taxpayers’ money to promote graffiti. The idea was planted. Grants were given. Money was spread around. Sure enough, a crop of graffiti "artists" was raised.

Lang held expositions where the graffiti artists were given a chance to show off their work. A subway car was hauled up out of the ground for the artists to work on…and then put on display.

Since then, the "artists" have attacked almost every building in Paris. Even the most ancient buildings have been defaced. Even the most beautiful facades have been vandalized.

And now Jack Lang has moved to the ministry of education, and the taxpayers’ money is used to get rid of graffiti. Squads of public workers, armed with various solvents and grinders, battle the new art form. Graffiti, though, is easier to apply than remove.

Digital Graffiti: The Essence of the Information Age

"Graffiti" may have a digital cousin.

I have been trying to understand the essence of the Information Age. What’s it all really about? What is information really worth? How can it make us rich? And how come, given that the Information Age has been upon us for many years, companies have been unable to convert this abundance of information into profits?

Is it possible that information has no value? And that it is only given value by the circumstances in which it is used?

In the middle of WWII, a dead man was dressed in a British officer’s uniform and given a set of plans for the invasion of Europe. The plans were, of course, intended to mislead Hitler about Allied intentions. The body was then dumped into the sea, so it would wash ashore where the Germans could find it.

Hitler also believed that he had a network of spies in England who would be able to fill him in on the coming landings. But these spies had almost all been discovered and "turned," so they were feeding false information to the German high command.

Thus the information that Hitler was receiving was worse than no information at all. It not only lacked quality…it lacked integrity. Of course, there are many examples from military history in which the integrity of information was decisive. Solzhenitsyn tells us how the Russian army in WWI was commanded by German-speaking officers from Prussia. They would transmit their orders and battle plans in German.

Curiously, they were often intercepted and read by the enemy – whereas their own troops found them incomprehensible. In our own War Between the States, Lee’s plans at Gettysburg had been betrayed to the Yankees when a Southern officer used them to wrap a cigar – and left them by mistake to be discovered by Union troops.

Digital Graffiti: Free Information Worth Less Than It Costs

Most recently, the nature and value of information has been called into question by the Internet. Information is free on the Internet – as is, I hesitate to remind you, this letter. But free information sometimes turns out to be worth a lot less than you pay for it.

In the last few weeks, quite a few people have been charged with manipulating stocks via the Internet. The typical scheme, such as the one perpetrated by a student at Georgetown Law School, involves buying the shares of some marginal company and then going on the Internet to ramp up the price. This is easier to do than misleading the Wehrmacht. You only have to announce some new breakthrough…some new contract…a rumored buyout…new technology…whatever. The whole idea is to create the kind of buzz that gets people talking about it.

The very same "investors" who are thought to be too sophisticated to allow a bear market to occur seem to jump at the chance to buy a stock they know nothing about, on the basis of a recommendation from someone they do not know…founded on information whose accuracy cannot be affirmed and whose source cannot be traced.

A lawyer defending one of the alleged manipulators has responded, though, that you can’t mislead people on the Internet. He says that Internet postings are nothing more than "graffiti," with no more informational content than graffiti has artistic content.

The lawyer’s argument is that his client just used the Internet as a graffiti artist uses the wall of a public building…or perhaps a dog uses a tree. He pollutes it, perhaps vandalizes it…but no serious person would mistake it for useful information.

But junk life imitates junk art. Pumping and dumping stocks on the Internet works. In just a few hours, the graffiti artists of the Internet have been able to sell their shares at a profit.

In the military, the units charged with gathering information and separating fact from fiction are called "Intelligence" units. Mr. Cassady, with whom I stayed in Normandy, has spent time in U.S. Army Intelligence. He had even been stationed at Fort Holabird, Maryland.

Separating fact from fiction is tough work. And it gets tougher – the more facts and fictions you have to work with. The Internet is ultimately just a means of communication – delivering an almost infinite number of facts and fictions. The tough part is still sorting them out.

Which, of course, is what I try to do every day….

Bill Bonner
The Daily Reckoning
April 2, 2004

Editor’s note: Don’t miss Bill Bonner’s special address, "Doom, Gloom, and Other Delights" at the Money Show in Las Vegas on May 13! You’ll also hear remarks from DR contributors Dr. Steve Sjuggerud and Karim Rahemtulla…as well as a keynote address from Sir John Templeton.

Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the international bestseller: Financial Reckoning Day: Surviving The Soft Depression of The 21st Century (John Wiley & Sons).

Platinum and silver are exploding to the upside.

Gold rose 50 cents, following a big day yesterday. At $427.80, it now well above our last target buying level – $400.

Copper’s hot, too…it gained a cent yesterday, to $1.37 per pound.

People still read the news daily and react to it. Jobless claims fell. The Producer Price Index rose. The European Central Bank decided to sit tight, with its key lending rate twice as high as the Fed’s. "Coal is hot," says the Wall Street Journal. Stocks rose.

How people will react, we don’t know. But we see nothing especially new or interesting in these headlines. So we stand back and admire this old tattered ball we live on. What’s up, we wonder?

Events seem to follow patterns. But the patterns are hard to see when you’re in the middle of them. We believe, for example, that the U.S. is on the Road to Ruin. But how do we know? There are no road signs, no maps, no GPS. And even if we are right, what route will we take…and when will we get there?

We don’t know. So, we just follow the rules. We buy stocks when they are cheap. We buy businesses we like. We buy real estate we want to own; whether it goes up in price or not. And we approach debt like we approach the polling station and the news – skeptically, and as rarely as possible.

And, oh yes, we buy gold. The yellow metal owes nothing to nobody. If the dollar-based international monetary system collapses, gold will still be there. If the credit-fueled American stock market plummets…or the world’s fantasy economy blows up…gold will sit as still and quiet as a cigar butt. Inflation? Deflation? Gold will neither laugh, nor cry…neither panic nor despair.

Looking at the Big Picture, we note that America’s economy has shifted from producing things to consuming them…and from lending money to borrowing it. Its leaders have gone from encouraging thrift and moderation…to urging squandering and recklessness.

Meanwhile, on the other side of the world…the earth’s largest democracy and its largest non-democracy are posing the first serious threat to Western economic dominance since the beginning of the Industrial Revolution. Japan showed the way: Make things cheap and export them to America. Now, China is making so many things, so cheaply, it is depressing prices all over the globe. And India – with its millions of educated, English-speaking people – is showing that it can compete in services and technology, too. So, now service workers…and Silicon Valley…are feeling the squeeze. Deflation in the global price of labor is probably inevitable.

But $50 billion was added to the dollar money supply over the last two weeks. At the Fed, Ben Bernanke has vowed to avoid stable prices at all costs. And all over the world, growing dollar deposits…and U.S. Treasuries in central bank vaults…inspire inflation. We see it in the price of commodities. China is bidding for them. It needs energy…copper…steel to keep providing Americans with gee-gaws. Inflation in primary commodities is also probably inevitable…at least for now.

All over the world, asset prices are propped up by debt. Take away the credit…and at the margin…prices fall. A single desperate homeowner can bring down the price of an entire neighborhood. Once we get to Ruin, there will be plenty of them. So, what can you expect for your houses and stocks? Deflation, is our guess.

But who knows. We’re thinking about it…but there is so much thinking to do…and only so much time.

Meanwhile, here’s more news:

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Dan Denning, also in London…

– "You put your money in and get nothing out, ever." Your London correspondent thought his colleague Dave was referring to the stock market. But no…he was referring to an even more entertaining form of gambling, the Grand National, which takes place tomorrow here in England.

– It’s the world’s oldest steeplechase. The English have been betting on the race, all four miles and four furlongs, nearly every year since 1837. If there were such a thing as an office pool, your editor might have theoretically drawn a horse by the name of "Montreal" (although the original name on the theoretical slip could have been "Silver Streak," which, as a precious metals bull, he would have preferred, theoretically.) The horse he really wanted was "Bear on Board."

– We suspect the bear is now on board in the stock market. But the bear hasn’t yet made his presence felt on the Dow Jones Industrial index. Said index was up a modest 15 points yesterday. But the Dow’s biggest move of the day was…three. The Index is dropping three Eisenhower-era components – AT&T, Eastman Kodak, and International Paper – and adding three new components: AIG, Verizon, and Pfizer.

– Out with phones, film, and trees. In with insurance, phones, and drugs. Not exactly a trade which makes the Index more "financial." But if the Index is designed to represent the U.S. economy, what does the change tell us? Dow Theory guru Richard Russell says, "IP and EK are manufacturers, and AT&T does some manufacturing. Verizon and AIG are service companies and Pfizer is health service, research and some manufacturing. So the Dow will look more like a service stock average and less like a manufacturing stock average – and thus more like what the U.S. is becoming."

– "Can a nation become wealthy by providing services? Maybe it can, but I can’t see it," Russell adds. We agree. And in that vein, it’s probably good news that the ISM factory index rose to 62.5 in March. It was the fifth month in a row the index has risen.

– The number the market covets, though, will appear in today’s employment report. Can a nation become wealthy without adding jobs? We think not, no more than a nation becomes wealthier as asset values float higher on a sea of credit. People may FEEL wealthy when their stocks and houses go up in price. But they’ll BE poor if they hold on to those assets…and learn the hard truth that prices can go down, too.

– Investors in Fannie Mae (both in Fannie stock and Fannie-backed bonds) might be poorer, too, if reports that Fannie may have to revise previously reported financial statements are accurate. Fannie’s housing cousin, Freddie, has already admitted it cooked the books to "smooth out" earnings growth over time.

– Yesterday, the Office of Housing Enterprise Oversight (OFHEO) announced that it’s looking into Fannie’s accounting practices. "Our review of this particular matter," said the Office, "while not concluded, has led to concerns that Fannie Mae may not have applied the proper accounting guidance in this area. This could affect not only the company’s manufactured housing portfolio but other assets as well."

– Hmm. "Other assets." Would those be Fannie’s bonds? Its derivatives contracts? The bonds of primary mortgage lenders that Fannie has bought? We don’t know, dear reader. This is the trouble with the "financial economy." When a thing’s value derives from the value of two or three other things (interest rates, the reliability of mortgage owners making their payments on time, bond investors), it gets awfully hard to know what the thing is actually worth…if it’s worth anything at all.

– For our part, we prefer gold. The yellow metal soared to a fifteen-year high at yesterday’s close; spot gold is trading at $427.80 per ounce. And right now, gold is rising against almost all the world’s currencies. Think about it. The yen is appreciating against the dollar, but the yen price of gold has held firm. In euro terms, gold has risen nearly 10% in recent weeks.

– What’s notable about this? Currencies rise and fall in value relative to each other. They’re supposed to reflect the "fundamentals" of the economy they belong to. But right now, they look more like "monkeys strapped to greyhounds, forced to race," as my friend Dave suggested.

– All currencies are weakening now…relative to gold. Does that mean the market is starting to treat gold more like money and less like a commodity? We would humbly suggest…definitely yes. In fact, it wouldn’t surprise us a bit if the rumored hoarding of commodities in China includes an awful lot of shiny yellow stuff.

[Ed note: Dan is gearing up to explore the China Story first hand, from May 20-30. Care to join him? You could get up close and personal with at least four companies planning to go public on the U.S. stock exchanges in coming months…and explore the delights of one of the most dynamic economies on the planet.

Bill Bonner, back in London…

*** The folks in Fallujah just "don’t get it," said a military spokesman. They don’t seem to realize that it’s a new era in Iraq…with democracy, peace, and prosperity.

The last time the phrase "they just don’t get it" was prominent in the news was back at the end of the 1990s. Then, proponents of the New Era used it to describe people – like us – who didn’t understand how you could make any money buying companies with no apparent means of support. Henry Blodget and the dot.com mongers had no good response. "They just don’t get it," was the best they could do.

Well, as we recall, the whole New Era hallucination blew up…and those who ‘got it’ got it good and hard.

The U.S. announced victory in Iraq more than a year ago. But the military historian Clausewitz explained that one of the greatest dangers in war lay in beating an enemy on the field but failing to win the "willing submission of a populace." Without that, he observed, your gains become liabilities…because the enemy makes it impossible for you to enjoy your successes or advance further. Every step you take deeper into enemy territory – without secure lines of supply and support – merely increases the risk of complete disaster.

Watching the scene on TV, it did not look to us as though the Iraqis fully appreciate our efforts at nation building. It was almost as if they liked their nation just fine without us.

*** Elsewhere in the news, we see that next week marks the 10th anniversary of another disappointment in New Era annals. After the colonialists were kicked out in the ’50s and ’60s, Africa was said to be entering a new era of democracy, peace and prosperity. But on April 6, 1994, an airplane carrying the presidents of Rwandi and Burundi was shot down. Within hours, the Hutus began swinging their machetes in the direction of anyone who even looked like he might be Tutsi…and in a few days, hundreds of thousands of men, women and children had been slaughtered.