Why Fools Fall in Love

“Investing is one of the subjects about which humanity learns much but retains little- a little like love. The wisdom of the ages about romance is available to anybody with a library card. Yet, I’ll wager that the incidence of heartbreak and unrequited devotion is just as high today as it was in the first week of creation.”

James Grant

The Fed can loosen up the credit mechanism…and increase the liquidity in the financial system. But what happens to the cash? Where does it go? Why is it that sometimes stock market prices soar…and other times, it is the CPI that takes off?

No one knows for sure. Just as no one knows why fools fall in love…or what, exactly, is meant by ‘the holy trinity’.

Yesterday was “Trinity Sunday.” The old Pere Marchand would have known better. But his young, bearded colleague couldn’t resist. He tried to rise to the challenge, with a sermon intended to conquer the mystery of the ‘holy trinity’.

Explaining the absence of inflation or the course of true love would have been easier. Still, he struggled on… against an elusive enemy.

“God is love,” he said. “In our patriarchal society, we describe this love as the love of a father for his son.”

“He’s put himself in very bad position,” I thought to myself. His rhetorical cannon were firing off in all directions, not even coming close to the Holy Trinity. It was hopeless. I guessed that he would try a suicide charge.

“But we know that there is more than just Father and Son…there is the Spirit, too, the Holy Spirit that completes the Trinity…God, the Father, Man, the son (for we are all God’s children)… all bound together by a Holy Spirit.”

It made no sense, of course. But it did no harm either. Parishioners knew no more of the Holy Trinity when they left as when they entered. Which was probably a good thing. What would happen if people took these ecclesiastical theories too seriously? God only knows.

In some churches in America, they have already modified the Holy Trinity to fit the fashion of the times. ‘In the name of the Holy Parent…’ said one duly ordained, kicking off a wedding ceremony in North Carolina.

What is wonderful about life is that even without understanding the Holy Trinity, the Designated Hitter Rule, or the Quantity of Money Theory, people still fall in love.

A man who has ‘fallen in love,’ is a wonder. The experience is undeniable, though there is no theory to explain it. He loses control of himself and often becomes an embarrassment to his friends or an amusement to his enemies. Then, so certain is he – against all available evidence – that he will want to be legally bound to his wife for his entire life that he publicly commits to have and hold her ’til death us do part.’

Alas, death does not come soon enough for about half of all married couples. Instead, they take matters into their own hands, providing the coup de grace to the marriage vows, or in extreme cases, their spouse.

Neither reason nor logic explain love and marriage. Yet it is the way of most of the world. People fall in love, get married – and if they are lucky – for no act of will nor thinking leads them to it – they enjoy one of life’s great blessings.

That is the problem with thinking your way to truth, dear reader, is that so much of life resists simple logic and defies theory.

Mr. Goupil worked all day on Saturday. He has been a tile man all his life – a true artisan and perfectionist. We took up the old, uneven terra cotta tile, dug out the floor, and poured concrete. Now, Mr. Goupil is resetting the old tile.

He is a short, stout man…so stout in fact that his stomach practically drags on the ground when he is on hands and knees. What’s worse, he wears his pants low; laboring out in front of the house, alongside the road, Mr. Goupil must have mooned half of Lathus as they drove by on Saturday morning.

“Don’t go out there,” I had to warn my mother. “It’s not a pretty sight.”

But what is most remarkable about Mr. Goupil is how he manages to do so little during the course of a day.

Yes, courtesy requires that everyone passing by must stop and have a conversation. And, yes, merely rising to shake hands takes Mr. Goupil longer than it would take me to drive to the next town.

And, yes, paid by the hour, it is obvious why he does so little…but not how.

After an entire day, he had only completed a couple of rows of tile. How could anyone move so slowly and still be breathing? Should I check his pulse from time to time? Or hold a mirror under his nose?

If I were doing the job myself, I could not have prevented myself from doing more than that. I would have kicked more tiles than that in place by accident.

“Mr. Goupil is a luxury,” Elizabeth explained. “And he comes with the house – like property taxes. Or like Mr. Deshais. We could get along without them, but it wouldn’t be the same.”

“I am yours until the end of June,” Mr. Goupil explained when he arrived two weeks ago. But at the rate he is working, it will take him that long to set the tile in the entryway…he will never make it to the main room.

So there you have it. It makes no sense. But it wouldn’t be the same otherwise.

Your editor, enjoying life’s mysteries….

Bill Bonner
Paris, France
June 11, 2001

*** For 85 minutes Friday morning, a technological glitch on the New York Stock Exchange prevented investors from buying their favorite technology stocks. The exchange shut down for a little over an hour, forcing traders do something useful. Hundreds swarmed out onto Broad Street to smoke a cigarette or two while taking in the beautiful June day.

*** Once the “systems” were restored, the traders returned. But investors never did.

*** By day’s end, the Dow had fallen 113 points, dipping back below the 11,000 mark. The Nasdaq fell 2%, to 2215. Energy stocks were up. Exxon Mobil and Texaco both gained on the day.

*** The Big Board’s shutdown occurred just days after the NYSE reported that its first-quarter profits fell nearly 5 percent because it spent money to upgrade its trading- related systems. So much for technology-driven productivity gains.

*** Even though Nasdaq stocks have fallen far from their record levels, tech stocks retain very rich price-to earnings ratios. “[They] continue to price in hyper growth in the future,” Bridgewater Associates observes. “The Nasdaq has a P/E of 150, and the Nasdaq 100 has a P/E of 75. The bullish argument is that higher earnings are just around the corner. Perhaps, but there is no indication of a rebound, yet.”

*** In fact, semi-conductor chip sales are down 74% in the last 6 mo. Equipment orders are down 50%. And Juniper announced last week that its business stinks. Traders took the stock down 18%. Cisco fell 6%.

*** The price of gold shot up $7.20 yesterday and gold stocks rose an average of 8%. “The XAU gold index outperformed the Nasdaq over last 2yrs,” writes Harry Schultz. “both are down; but, Au stks lost less $ than hi- tech stks! Nobody believed a gold bull mkt was beginning when we signaled it in 1969, ‘at the beginning.’ Gold will climb a wall of worry/doubt, as before. It is written.”

*** “We saw our gold picks rise between 3% and 16% last week… and BEGIX, the gold fund index is one of the best- performing YTD – up over 20%,” says our resident gold bug John Myers. “What’s behind these increases? The Fed. With rumors of even further cuts, the latest monetary policy is beginning to resemble the mid 1970s when the central bank cut rates seven times. Those cuts helped create a flood of money, which spurred the price of gold from $103 to $520 an ounce.”

*** “Investment bankers are earning less for every transaction,” Bloomberg reports. “The average fee reaped by firms such as Goldman Sachs and Merrill Lynch fell to an average 0.69 cents per dollar from 1.29 cents last year. As J.P. Morgan Chase disclosed last week, “The current weak environment continues to adversely affect revenue opportunities for J.P. Morgan’s investment banking.”

*** Because the number of stock IPOs this year totals less than half last year’s number, investment bankers are “crying poor.” A friend of mine who builds houses in Westchester County for the monied Wall Street crowd tells me, “The market for houses over $2 million is dead.”

*** A grantsinvestor.com story notes, “for the fifth week in a row, the four-week moving average of new jobless claims topped 400,000. Worse yet was the news that continuing claims by those who’ve already been looking for work for a while [reached] 2.85 million, the highest since November 1993. Meanwhile, the Conference Board’s help- wanted index slipped to an 8 1/2-year low.”

*** The early chapters of the unemployment story are downright Gothic: “In April, the net change in consumer installment debt (i.e. credit cards) accelerated to a rapid 11.2% annual rate of increase,” ISI observes. “This net figure represents the difference between extensions and repayments. It’s likely that the reason the net figure accelerated is that repayments slowed.”

*** In other words, consumer debt is rising, not because consumers are breaking out the plastic more often, but rather, because they are paying down debt more slowly. That’s not a trend that will do anyone any good.

*** “Contrary to popular belief the strength and resilience of the U.S. consumer is not a redeeming feature of the current cycle. The longer it takes for the consumer to capitulate fully, the more prolonged the downturn will be,” predicts Credit Lyonnais Securities Asia’s Dr. Jim Walker. Capitulation is just beginning, he says.

*** Equity markets have displayed a remarkable willingness to believe that the Fed’s actions will truncate this particular business cycle. Instead, by prolonging the late cycle consumer boom, its policies are likely to do just the opposite and elongate it,” says the ever-provocative Dr. Walker. “At this stage in the economic cycle, the resilient consumer is not the hero that rides to the rescue but the villain that pushes up costs, undermines profitability and exacerbates the investment down cycle.”

*** It’s my birthday. I can’t believe I’m actually 30. I feel so old!…Okay, so I’m 42.

Eric Fry

And more notes!

*** MZM (money of zero maturity, commonly known as ‘cash’) has been rising at a 21.6% rate. $1 trillion has been added to the money supply over the last year.

*** Yet, despite all the new credit and cash, inflation appears not to be a significant threat. The Conference Board estimates inflation at 3.7% this year and 3.8% the next. (By comparison, the Conference Board sees salaries increasing an average of 4% this year – leaving consumers with net gains of almost nothing.)

*** “How come inflation is not keeping up with growth in the money supply?” I asked Dr. Richebacher on Friday. “Ah…, there is no simple answer,” he replied. “But, I can tell you what I think. I think we have arrived at a crucial point. There is no turning back. This recession is going to be the worst one since WWII.”

*** “Consumer spending and consumer stocks are likely to hold up surprisingly well,” writes Robert Miller of our London Fleet Street Letter, “but the downturn is likely to be both unavoidable and severe – as the economy will need time to recover from the excesses of the boom.”

*** Richard Daughty, the Mogambo Guru, adds: “Greenspan and his posse of bankers at the Fed can lower interest rates until Doomsday and it won’t do any good. And for two reasons. 1. When you are drowning in debt, the last thing you need is more debt, and 2) if you have already defaulted on some debt, you know that any new money you get your hands on is going to be pursued by a ravenous pack of lawyers and their angry clients. But the only way to keep the whole thing from collapsing is to keep plowing more money into what is essentially bankrupt already. Lose a million of Other People’s Money or lose a billion, what’s the difference to you? Besides, what can it hurt? And there is the chance that it might even work out! It never has before, but it might this time!”

*** Why do I live in France, asks a familiar message on the Daily Reckoning website? The taxes are high and the country is run by Socialists, my interrogator continues. But money isn’t everything, dear reader. And theory is no substitute for experience. More below…

*** “Dad, did you put my money in stocks,” asked Henry, 10, inquiring about a small inheritance. “If you put it in stocks, make sure you get me the good ones. You can give Maria the bad ones.”

The Daily Reckoning