MASTERING
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ORIGINAL, INTERACTIVE
SEMINAR ON TRADING USING
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BALTIMORE MARYLAND
WEDNESDAY JULY 12, 2000
*** Debt rising - and virtue?
*** The Fools' gold
*** Was the John Birch Society a commie front?
*** The fault lies in ourselves...not in our stars...in May
consumer debt rose at nearly 10% annualized, or more than $11
billion. But who needs savings? Maybe the instinct to save is
outdated. Maybe it betrays those who yield to it.
*** "Virtue," said economist Mancur Olson, "is what used to
pay." For thousands of years, it used to pay to save enough
grain for winter...or the 7 lean years of Biblical history.
Otherwise, you might starve.
*** But that was then, this is now. With modern
communications, modern government, modern this and that,
what's the point? Savings are an inventory of cash. And
inventories are expensive. 'Just in time,' the stream-lined,
inventory-less production system of modern business, has
reached American household finance.
*** Here's an interesting item, from the Motley Fools:
A dollar invested in gold in 1802 and left there
for 195 years would have grown to $11.17.
A dollar invested in stocks in 1802 and left there
for 195 years would have grown to $7.5 million.
Tell me again how gold is the best long-term store
of value?
*** Ah, but the smarty-pants Fools miss the point. Gold is
the ultimate store of value - not an investment. The figures
above show that the price of gold will have to double in
order to stay even with inflation in the dollar. That is
quite likely to happen.
*** But a dollar invested in stocks? What stocks from 1802
are still in business? People do not invest in "stocks," they
invest in companies that sell stock. And companies do not go
up over the very long run, they go out of business. An
investment in 1802 stocks would now be worth - zero.
*** The price of gold fell $1.60 yesterday. Platinum - which
I am watching because of Harry Schultz's prediction that it
will go to $800 this year - fell 70 cents.
*** Amazon, meanwhile, the kind of company you might buy if
you are investing for the long run, dropped to $33 and
change. Which do you think will be worth more 200 years from
now - AMZN or AU (that's gold to those of you unfamiliar with
the basic elements).
*** 'Harry Potter' Greenspan, able to conjure up whatever
miracle the economy requires at precisely the right moment,
is not a DR reader. I have concluded that after careful study
of the chairman's remarks yesterday to the Fed governors. He
believes the productivity numbers, which have been, as you
know, thoroughly discredited, both by James Grant's team and
by our own Dr. Kurt Richebacher.
(http://www.dailyreckoning.com/corprofits2/)
*** Nevertheless, his comments were cited as the source of a
bit of summer ebullience in the market yesterday. The Dow
rose 80 points on the hopes that interest rates will receive
no further upward goosing by the Fed.
*** The Nasdaq, however, fell 29 points. Lower interests mean
little to these companies. What hurts them is the growing
feeling that their hour has come and gone.
*** The dollar was up a bit - even though Japan continues to
talk about ending its policy of giving away money. (see: The
Austrian Case Against American Monetarism
http://www.dailyreckoning.com/body_headline.cfm?id=167)
*** Dividends, as I pointed out yesterday, are providing the
lowest yields in history. It is worth mentioning that half
the long-term returns of the stock market have come from
dividends. (see: If it Sizzles It's Probably Fat
http://www.dailyreckoning.com/body_headline.cfm?id=228)
*** "Until mid-March." Writes Dave Dreman in Forbes, "this
year's new issues shot up an average of 120% on their first
day of trading. Now 65% of the [year] 2000 crop are trading
below their offering prices." He notes that the Nasdaq
recently declined more than in 1987 and in the 1973-74 bear
market. Dreman believes that overvaluation is a big risk,
with the Nasdaq 100 carrying "a staggering average weighted
P/E of 144" and the DJIA and S&P 500 at about twice their
historical earnings multiples.
*** From a DR reader, on the subject of the John Birch
Society: "...from a highly-placed Soviet defector, Colonel
Stanislav Lunev: The John Birch Society was run by the KGB,
with the purpose being to paint patriots as rightwing kooks,
and thus discredit anti-Communists." Who knows? Could be
true.
*** My apologies for not answering correspondence promptly. I
try to keep up...but time runs out. I almost never have time
to follow the chats on the website, by the way, so if you
want a response from me...please send an email. And be
patient. Thanks.
*** "August 24, 1944, the day they liberated Paris, I met my
Waterloo," said DR reader and Army Air Force veteran John
Ketzner. We were having lunch at the Maryland Club where
Ketzner told me his incredible story. He was flying in
formation over Germany when a German fighter appeared from
behind. The tail gunner couldn't stop him and soon the plane
was out of control. "The next thing I knew& I was floating in
mid-air. The plane has exploded. I tried to find my parachute
- but it was missing. I figured I was finished. But then I
remembered that I must have it on. Sure enough, there it was
a little over my head. I pulled the cord... The civilians on
the ground practically killed me...I was rescued by the
German Army. I got to prison camp and began to tell my story.
But nobody wanted to hear it. There were 9,000 other guys
there and everyone of them had a story to tell."
*** I got an interesting letter from an English reader,
commenting on the American Revolution. It's too long for this
space...but it is excerpted on the website:
(http://www.dailyreckoning.com/body_headline.cfm?id=231)
What does the election in Mexico mean to you? Profits. With a
market reformer now in charge, foreign investors can expect a
major windfall. In our latest Investors Library report, find
out the company most likely to prosper in this brave new
Mexico. Click http://www.dailyreckoning.com/specialreports
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
" .. Clinton's face turned red with anger and disbelief. 'You
mean to tell me that the success of the program and my re-
election hinges on the Federal Reserve and a bunch of f******
bond traders?'"
Bob Woodward's inside-the-Clinton
Administration book,
The Agenda
1994
The discussion of the last few days has been remotely
focussed on the relationship between politics and
markets...as well as between custom and hyper-rationalism.
These four threads are now so tangled that I thought I would
have to cut the knot and move on to other subjects.
But then, the following item appeared in yesterday's WSJ:
The democratization of financial services could take
some strange new turns. It may well be in financial
services that the self-organizing enterprise flowers
in full.
The front page article was about a new mutual fund called
MutualMinds.com. The idea is simple. It is a form of 'open
source' fund management, in which the investors themselves
can make suggestions...and the fund is managed according to
their recommendations (the organizing company performs the
paperwork and actually makes the trades.) The investment
decisions are made by a computer program that tracks the
suggestions and allocates investments towards the
recommendations of the most successful people in the group.
This is not likely to be a very fruitful way to invest. Mark
Hulbert has shown that following the 'hot hand' on a short
term basis doesn't work. But it is sure to be fun for the
participants, since they will be competing for glory as well
as profits.
But what caught my eye was the idea of 'self-organizing'
systems. It brought me back to the subject you were probably
hoping I would abandon. That is, the New Dialectic.
Knowledge, as you know, costs something. And there are two
main ways of getting it: either by experience or by logic.
Either you think it through and figure it out...or you rely
upon your own experiences and the experience embedded in
custom and instinct. A young man may have no direct
experience with marriage. Nor is it logical, strictly
speaking, for a young man to willingly restrict his freedom
by connubial contract. But there seems to be an instinct for
it. Young men search for the perfect woman to come along.
Then, they get married, stop searching...and often discover,
years later, that they have married the woman they were
searching for.
At least, people have been doing it for a very long time, so
who am I to argue with it? Statistically, married men live
longer, earn more money and are happier than unmarried men.
My nephew was probably unaware of these figures - but he
married anyway and is on his way to becoming a happy
statistic. Congratulations to them both and the instincts
that drove them forward to the altar.
The WSJ article explains:
"Today, self-organization is rapidly becoming a very hot
idea, the essence of which is that top-down master plans
aren't the only way to build something big and lasting.
Unorganized assemblies of people can create everything from
marketplaces to computer systems almost spontaneously, on the
fly, from the bottom up.
"The Linux operating system is a good example of what self-
organization is all about. Unlike Windows, where an army of
Microsoft Corp. programmers churn out proprietary code, Linux
software is an evolving collaboration of thousands of
software writers around the world. While there are companies
that provide Linux-oriented services, such as customer
support, the brains behind Linux programming exist not within
the walls of any company but inside the heads of people who
amount to volunteers."
Markets are examples of self-organizing systems. It is not
logic, nor even sanity, that sets prices and practices. They
simply evolve over time. Everyone would like to be able to
set prices - and occasionally some large players have the
power to influence them in one direction or another. But,
ultimately, the market - a natural thing - does what it
wants. Every investor is merely a volunteer.
Nature itself is self-organizing - at least from our human
point of view. God may have it figured out. But no man or
group of men organizes nature. Or understands it. Nature has
its own mind and its own agenda.
But politics is different. It uses slave labor, not
volunteers. Each of us is a slave to the system - forced to
do something we would rather not. This is the difference
also, between being a slave to ideas and instincts - which
even Ghandi was - and being thrown in jail, fined, taxed or
regulated. The force may come directly out of the barrel of a
gun, as Mao suggested, or it may hide behind the curtain of a
voting booth. Either way - its Will Must Be Done...or else.
Politics must rely on force - indeed, that is what makes it
politics - because its aims and projects are almost always
preposterously futile, stupid and counterproductive. No one
volunteers to waste their time, energy and lives, so they
must be drafted.
George Sabine's textbook A History of Political Theory, shows
that Artistotle puzzled over this distinction too. He writes:
"It is possible to argue, Aristotle says, that in the making
of law the collective wisdom of a people is superior to that
of even the wisest lawgiver.. He illustrates this by the
assertion (perhaps not quite obvious) that popular taste in
the arts is reliable in the long run, while experts make
notorious blunders at the moment. To somewhat the same effect
is his marked preference for customary as compared with
written law...he holds it clearly impossible that the
knowledge of the wisest ruler can be better than the
customary law."
Frederic Bastiat, too, makes the same distinction - between
"real law" - that is, the rules of a self-organizing system,
the laws of nature, the laws of thermodynamics, and customary
taboos and practices - and the "pretended law" that kings,
despots, Al Gore and the IRS produce. Real law, he says, give
us just results. Pretended laws are counterfeit. They are the
cause of injustice, not the cure for it.
The conceit of democracy is that people think they can vote
their way to justice. They think they can replace the real
law of the market with their own wishful thinking about who
should get what. But ultimately, the bond traders have their
way.
Your correspondent,
Bill Bonner
P.S. About this time, 56 years ago, while John Ketzner was
bombing Germany, Field Marshal Erwin Rommel had a problem. He
was torn in several different directions - between logic and
experience.
It was obvious to him and most of the officer corps of the
German Army that Germany was in big trouble. The Americans
and allies were unloading troops and supplies in Normandy
that the Germans couldn't match. While the materiel piled up
behind the Allies' lines, the Germans were running out of
fuel, ammunition and men. For every 10 soldiers Rommel lost,
only one was replaced.
He had been ordered to hold the Allies back at all cost. Yet,
he knew that the bigger danger was that the Allies wouldn't
break through. Then, the Russians, who were unstoppable in
the East would occupy Germany. It would be far better to have
the Anglo-Americans as overlords.
He and his fellow officers plotted. They talked. They tried
to figure out how to get rid of Hitler so the way would be
cleared for peace talks.
But Rommel was trapped by his instincts, training and the
customary reluctance of the German military to interfere in
politics. He dithered. And then, on the 18th of July, he was
injured in an attack by a British fighter plane. Rommel
returned to Germany to recover. Two months later he committed
'assisted suicide.'
P.P.S. John Ketzner visited Germany many years after the war.
He was employed by the CSX railroad system and went to
Germany to buy new equipment.
"Have you ever visited Germany before," he was asked by his
hosts.
"Yes," he replied, "I was a guest of the Third Reich for 8
months in 1944."
Conversation halted.
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