Victims of Success, Part I

The Daily Reckoning PRESENTS: Throughout history, it is clear that becoming successful is hardly ever easy. Often times it takes a great deal of fortitude, and it can even be very dangerous. But as Bill Bonner explains, without these inherent dangers, our lives as we know them might be completely different. Read on…


This week we gave a little speech at the Chateau d’Ermenonville, where Jean Jacques Rousseau is buried. Rome was our subject. The ‘perils of success’ was our theme. And a group of Americans embarking on the Grand Tour was our audience. Here, more or less, is what we said:

Our labors here at the Daily Reckoning can scarcely be called labor at all. Our role is nothing more than to point a finger and laugh. And our biggest challenge each week is merely to decide what to laugh at first. Clowns to the left of us…jokers to the right…and here we are.

This week, as always, we are spoiled for choice. Nothing is droller than watching people in a desperate race to get rich. They are like pioneers in a land rush, riding hell for leather across the Great Plains. They jettison anything that will slow them down…tossing off dignity, common sense and caution as if they were pianos being thrown off top-heavy wagons along the Oregon Trail.

Of course, when they finally get their stakes into the ground the whole romance of it fades fast. They actually have to sweat to turn the earth and make something out of the land they’ve claimed. No wonder they prefer the rich, flying hopes of the mad dash itself. It’s not the lure of the hard work and gritty production at the end that attracts them, but the heady illusion that they will somehow get rich without working at all…as if the land will fructify on its own, like the fabled Land of Milk and Honey that kept Moses wandering around the desert for 40 years.

Almost all of modern finance is based on similar propositions, propositions that couldn’t possibly be true. Of course, that is precisely what makes them endlessly appealing to so many people. The truth, on the other hand, is disappointing, like a bathing suit on an aging man. It is not at all what people want to look at. They’d much prefer to leave some things in the dark and imagine them as they wish they were – that they can get rich without saving…or that their economy can flourish without anyone actually making anything.

Everyone hopes to get something for nothing; and the worst thing that can happen to them is actually getting it.

But there were other sorts of travel – indulged in not by those racing to get rich, but by those who were already rich. The Grand Tour was a feature principally of the 18th and 19th centuries. It was a kind of finishing school for the wealthy and the intellectually ambitious. Typically – as if it were possible to find a typical pattern – a young man or woman with a certain social standing would leave England or America in order to explore the continent.

At the beginning, this traveling was not only hard, it was dangerous. There were thieves and kidnappers all along the route…as well as rude inns, where travelers would likely get bitten by fleas…or come down with a serious illness. Many were the travelers who set off on the Grand Tour and never came back.

Why did they bother? Because they thought the past – particularly the classical period – had something to it that was worth learning. History may not repeat itself line for line, they realized, but the themes of the past tend to recur. Besides, if you are looking for a way to understand the present and guess about the future, what else do you have to go on other than the experience and lessons of the past?

Gradually, over the two centuries, conditions of travel had improved so much that towards the end of it – even into the early 20th century – young ladies from good American families made the trip with their maiden aunts or tutors and wrote romantic essays and novels about the travels.

One of the most important stops along the tour, for example, was the Coliseum, which for most of that time was a neglected ruin.

It is in the shadows of the Coliseum that a story by Edith Wharton, called “Roman Fever,” takes place – in which two American matrons, Mrs. Slade and Mrs. Ansley, experience a little contretemps. The latter of the two conceives her lovely daughter, Barbara, in some moonlit corner of the ruin – with Mrs. Slade’s husband!

But the Grand Tour was more than an opportunity for hanky-panky. It was an opportunity to discover the roots of our western civilization. The theory is that by discovering the roots, we better understand the tree…and its fruits.

If Julius Caesar had not won the battle of Alesia against Vercingetorix, whom he brought back to Rome in chains, he probably never would have crossed the Rubicon or made himself emperor. Nor would he have subdued Gaul. And if he had not subdued Gaul, he could not have conquered England. And if England and France had not been conquered, Europe might never have been Romanized…and there would not have been a Dark Age…or a Renaissance. Which means that the culture that flourished in Western Europe…and was carried on the Mayflower to the New World…would never have developed. We don’t know what the world would be like without that, but it wouldn’t be the same world we have today.

Thank God the frogs lost, says Jacques Bainville, author of a history of France. But what Bainville forgets is that the patterns of history are only seen clearly in retrospect, and even then, people don’t learn much from them. Napoleon had the disastrous history of Sweden’s invasion of Russia by Gustavus Adolphus to teach him. But that didn’t stop him from making the same mistake.

This basic plot line was described best by Marcus Aurelius:

“Consider the time of Vespasian. You will see the same thing: men marrying, begetting children, being ill, dying, fighting wars, celebrating, trading, farming, death of others, grumbling at their present lot,…coveting a consulate, coveting a kingdom. Then, turn to the times of Trajan: again everything is the same, and that life too is dead…”

So even if, as people say, we Americans have no history…what of it? And then, while the typical American may not know much history, that doesn’t mean he has none. His country did not spring forth out of nothing; in fact, it has thousands of years of history, and its first and most celebrated citizens knew it.

Bill Bonner
The Daily Reckoning
May 4, 2007

Editor’s Note: Don’t forget – you can hear Bill (along with all of your favorite DR editors) speak at this year’s Agora Financial Investment Symposium in Vancouver, British Columbia. This year’s theme is “Rim of Fire: Crisis & Opportunity in the New Asian Era” – and it’s your first look at investment opportunities, global market concerns, and the best investment bets across the globe.

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

Up is down. Left is right. Good is evil. Risky is safe.

That’s what we take from the financial world this week.

One commentator says the United States is entering a glorious new period of growth and stability, thanks to the entry of Asia into the world economy.

The Dow must see it coming; it’s hitting one new record after another. Not since just before the Great Crash of ’29 has the Dow behaved in such a manner. One increase follows the next with no correction. What could be safer than buying an index that almost always goes up?

Investors may think they are getting rich, but as we noticed yesterday…even if Abby Joseph Cohen is right and the Dow goes to 13,500 this year, it will leave investors with a real gain of only about 2%.

An investor has to weigh his anticipated reward against his estimation of the risk involved. Anyone who stops to think about it would have to conclude that a gain of 2% ain’t worth the risk. But apparently few people do think at all. They feel they are being conservative by buying U.S. stocks; after all, if they really wanted to take some risks and make some money they’d be in Chinese stocks (up 75% so far this year).

The New York Fed warned this week that hedge funds pose the biggest threat to investors since the LTCM crisis of ’98. Back then the Fed organized a $3.6 billion bailout. But that kind of money is peanuts today. Another $60 billion was raised by the funds last year alone. Today, they are a $1.6 trillion industry; and they are much more leveraged than they were 10 years ago. Practically every one of them is walking around with dynamite taped to its belt.

What makes the situation especially dangerous is that they all tend to show up in the same places at the same time. “Returns are increasingly correlated,” says the Fed, which is the Fed’s way of saying they are all doing the same thing. So, when one blows up…they might all blow up. And when they all blow up…it’s likely to send a cloud of smoke and debris over the entire world’s financial markets.

But right is left, now. Up is down. In the minds of most investors, hedge funds are what help to make the economy so buoyant…so robust…so safe. They’re throwing money this way and that. And money is what makes the world go ’round, no?

It’s a market for idiots, we conclude. If you are foolish enough, you can make a lot. But if you have any sense at all, you’ll be content with comfy poverty.

Only a moron could invest in China’s go-go market today. Only a dumbbell would put money in most of today’s hedge funds. Only a mental defective would lend to most of these high-profile private equity deals.

Which is why the morons, dumbbells and mental defectives are making so much money!

And we know what you’re thinking, dear reader – that we’re just jealous. Not at all. We’re just flabbergasted and amazed…and amused. There is something thrilling about the whole spectacle…(more below).

Meanwhile, imagine all those investors who bought shares in General Motors (NYSE:GM) and held onto them for years. What could be safer? What could be surer? GM made cars and trucks. It was the world’s largest and most successful automaker. And for most of the 20th century, it had a long lead over its competitors. Grandparents gave their grandchildren GM stock, with this advice: “Hold on to this. Don’t ever sell it. Stock in GM is stock in America. It can only go up.”

But poor ol’ GM couldn’t seem to do anything right. It couldn’t compete with the Asians – or the Germans – when it came to making cars. Too many ‘legacy’ costs for retired employees; too many legal, environmental, and labor regulations; too many tired factories and worn-out machines. So, GM became a big moneylender, first advancing money to finance cars, later houses.

In the first quarter of ’06, it made a profit of $602 million – thanks to its GMAC finance unit. But that business too has fallen on hard times. GMAC lost $305 million in the first quarter of ’07…and the poor automaker’s profits fell 90% – to $62 million.

And now poor ol’ GM is yesterday’s news. It was go-go in the ’20s, ’30s, ’40s, ’50s, ’60s, and ’70s. And now it’s almost gone.

Now the go-go moneymakers are hedge funds, private equity, Chinese stocks…even the Dow!

In an upside down world, the riskiest deals are said to be the safest.

We’ll see…

More news:


Addison Wiggin, reporting from Baltimore…

“What do the Feds know about oil? Or… better yet, what is it they think they know? The U.S. Department of Energy announced yesterday that the Strategic Petroleum Reserve is down 13% from a year ago. But they are suspending plans to buy approximately 4 million barrels of crude oil because prices are “too high.”

“The DOE’s announcement left The 5 wondering if the spot price is coming down anytime soon. After all, there are the known knowns, and the known unknowns… and the unknown unknowns…”

For more on this story, and for briefing of what else is happening in the markets today, check out the latest issue of The 5 Min. Forecast


And more thoughts for a Friday…

*** We’re big fans of a couple of phrases here at The Daily Reckoning: “I told you so” – which doesn’t happen nearly often enough, and “if only.”

The latter we find ourselves lamenting all the time…”if only” Nixon hadn’t cut the lifeline binding U.S. dollars directly to gold, maybe greenbacks wouldn’t look so anemic today. Or “if only” America hadn’t burned up all her oil, maybe we wouldn’t face the prospect of $5 gasoline this summer.

The days of the dollar being backed by more than a wink and a smile, of course, are long gone.

Meanwhile, world currencies with an ipso facto energy “backing” are doing very nicely…even as the purchasing power of the U.S. dollar collapses. Take the British Pound.

Lots of factors sent it soaring. But with energy in short supply, England’s vast share of the North Sea oil riches look almost as good as the gold-backed greenbacks of yesteryear. The same goes for Norway’s Krone… Canadian dollars, backed by Alberta fields and oil sands… even Australian dollars, backed by vast stockpiles of coal, gas, and – of course -uranium.

It came as no surprise to us that the world’s biggest investors have hedged their money by shifting cash into these foreign “energy-backed” currencies. It’s hardly the newest trick in the book. Or the craziest. Though, until recently, it’s been relatively tough to do.

But that’s changed, now that our pals over at Everbank have helped us pull together a special kind of new FDIC-insured deposit account where you can automatically hedge any U.S. dollars you put in, simply by spreading them evenly – and automatically – between all four of those politically stable, energy-centric currencies I just mentioned.

They call it the “World EnergySM Index CD.” And given the way all four of these currencies have soared lately against the greenback, it might just be the best and easiest way available to both hedge against a falling dollar and profit from a rise in oil, all at the same time.

This World EnergySM Index CD is completely new. It’s not even posted yet on Everbank’s customer website. In fact, they’ve opted to give Daily Reckoning readers first crack at this, before they open it up to the rest of the market. If you’re interested in finding out more, the only way to get info is to either email them at or call 800-926-4922. Just be sure to mention you read about it here in the Daily Reckoning when you write or call.

*** Bonner’s Law: The quality of information declines by the square of the distance from the source.

Corollary one: The farther away you get, the clearer the picture becomes.

This week’s news told us that U.S. lawmakers were getting annoyed by their confreres in Iraq. It seems the Iraqi pols are planning to take the summer off. They’re just going fishing, we suppose.

But the news set off huffs and puffs of indignation all around Washington. “How can they think about taking a break while our boys are risking their lives to straighten that godforsaken place out?” was the gist of the complaints.

From the banks of the Potomac, the show in Iraq has a clear theme; there is even a moral to it. The Iraqis need to get their act together; it’s as simple as that. Hilary Clinton said so. In her mind, and probably in the minds of most Americans, the United States made a good-faith effort to clean up the place. We handed the Iraqis a freshly-minted democracy on a platter…a platter of U.S. dollars and military contracts, at that. But the desert tribes blew it.

And now…rather than stay at their posts and pass the necessary ‘reforms’…the weasely desert tribes’ representatives are planning to go to the beach.

Of course, if the Iraqis saw it the way the Americans do, they would have already passed the ‘reforms.’ But the picture is less clear to them; they are in the middle of it.

And here, from our Daily Reckoning headquarters, we have no idea what is going on in Iraq. But why not just let the Iraqi lawmakers take their vacation? They’ve probably already done enough damage.

*** Poor Paul Wolfowitz. The man lied to get the United States into a disastrous war, with hundreds of thousands of casualties and hundreds of billions in taxpayers’ money lost…and then he got tagged for helping his girlfriend get a measly $193,500 job at the World Bank. Doesn’t seem fair. It is as if he had gotten away from robbing a bank with nothing more than a parking ticket on the getaway car.

His friends protest; they say the car was parked legally.

But Wolfowitz is a very lucky man. Hanging would have been getting off easy. And he won’t even get any points on his driver’s license.

**** ‘Tis the season for scandal in Washington. We hear that Randall Tobias, Deputy Secretary of State and former CEO of Eli Lilly (NYSE:LLY), has resigned for having patronized the escort services of one Miz Julia, now known as the ‘D.C. Madame.’

But he did nothing illegal, he swears. He ordered up the girls to his condo ‘like pizza.’ He just wanted a massage. What’s the harm in that?

Miz Julia’s clientele also extended to lowly pols and pontificators, like Dick Morris of Clinton fame, and Harlan ‘Shock and Awe’ Ullman, the Clausewitz of the Iraq debacle.

Domino’s must have changed a great deal since we last patronized it. The most exciting thing we ever got from the firm was pepperoni and cheese.

*** And here is Hugo Chavez back in the news, threatening to nationalize Venezuela’s banks. “Private banks have to give priority to financing the industrial sectors of Venezuela at low cost,” said the democratically elected head of state. And if they don’t, “it’s better that they go [away]…that they turn over the banks to me, that we nationalize them and get all the banks to work for the development of the country and not to speculate and produce huge profits.”

The nation’s big steel company better watch out too. Chavez doesn’t like the way Sidor (a company whose owners are based in Luxembourg) does business. It “has created a monopoly,” Chavez says. But what annoys the man is that they try to make a profit by selling their output on the world market at market prices, rather than selling it into the local market at reduced prices. “If the company does not immediately agree to change this process they will oblige me to nationalize it,” he says.

Can anyone remember a case when nationalizing a major industry led to greater efficiency, higher profits, more output, lower prices, or happier customers? We can’t. But up is down…in is out…and dumb is smart.

Eventually, dumb will be dumb again. But who knows how long that will take and how much dumber smart will get by then.

*** Finally, Argentina is in the news too. The old bugaboo – inflation – is coming back. The government controls the figures. So, neither investors, nor economists, nor consumers have much faith in them. Shoppers say they see prices rising steeply. Experts say the inflation rate could be as high as 15% already.

The economy is booming – at about 8% annual GDP growth. Capacity is stretched. It would a miracle if there weren’t inflation.

“Argentina goes through a crisis about once every 10 years,” says our contact in Buenos Aires. “Our last real crisis was in 2002. We’ve got a few more years to go.”


The Daily Reckoning