*** The Dow rose by 109 points yesterday. Bush seems
headed for the White House. Productivity has returned to
levels not seen since Austin Powers first met Dr. Evil -
the swinging 60s. (That is, if you believe the Bureau of
Labor Statistics.) And unit labor costs are going
down...again, according to the BLS. So, unless something
else happens - Greenspan is unlikely to boost rates again
on the 22nd of this month.
*** What's not to like? 1588 stocks advanced. Only 1256
fell back. 123 hit new highs - a very big number - while
only 33 hit new lows.
*** "Those numbers were really positive for the market,"
Reuters quotes a fund manager. He was speaking of the
productivity numbers in particular. The BLS has non-farm
productivity rising at the fastest rate in nearly 17
years - 5.3%.
*** A larger economy, and better communications, produce
an expansion of the division of labor. A Bombay
architect, who used to content himself with whatever work
came his way - designing a house for a neighbor, a
sunroom for a man down the street, a gas station for a
commercial client - can now specialize. Working on the
Internet, he may choose to design only elaborate lawn
follies, decorated with the lewd and nightmarish figures
of Hindu gods.
*** Applying himself singularly to the task, he is likely
to be able to do more and better work than he would if he
were to jump from one project to another. He may even
design special tools - such as a software program - to
make his work easier. Thus, productivity increases.
*** The Internet and globalization are bound to increase
productivity. But it is unlikely that the BLS has been
able to measure it. Nevertheless, the number the BLS came
up with was much loved by Wall Street, seeming to confirm
the delusions of New Era aficionados. Greenspan, so fond
of words such as "innovation," "productivity' and
"technology," can keep mumbling. Meanwhile, the BLS
admitted that it was a touch too optimistic about the
figures for the first quarter - and revised its figure of
2.6% growth down to 1.9%.
*** Another figure the street liked was the price of
labor, per unit of production. All the news is good news
in the 'summer of love,' and this was no exception. It
fell. Of course, once the productivity numbers had been
teased out, the labor cost figure was a cinch. If output
increased by more than 5% - wages could go up by the same
amount before triggering an increase in unit labor costs.
But if productivity did not really increase as much as
advertised - the unit labor cost would look much less
fetching.
*** With all this positive feeling about the U.S. market,
the dollar rose. The euro fell below 91 cents. It's still
above its low point of 88 cents, reached in May, but not
much.
*** This may be an historic time to leave the dollar. The
euro seems too cheap. The dollar seems overbought. I feel
like buying something in Europe. I noticed that another
chateau - a fixer upper - is for sale in the Poitiers
area. Someone, please, stop me.
*** Gold goes down as the dollar goes up. Yesterday, gold
responded on cue - falling 40 cents.
*** Amazon is still struggling to stay above $30.
*** Which brings up an interesting question... if AMZN is
still losing money by the end of the year can they still
keep the ".com" in their domain name? After all, the
designation is meant for commercial, for-profit
companies. (http://www.dailyreckoning.com/jokes.cfm)
*** Cisco reported higher-than-expected earnings. It made
a profit of 16 cents a share during the latest quarter -
up 32%. Hmmm... if it can keep that up it will make 64
cents for the year. Apply the rule that the P/E should be
equal to the growth rate. That makes Cisco worth 64 cents
x 32 = $20.48. Hmmm... that's a bit more than the current
$68 price.
*** The Financial Times reports that there is a new "hot
topic" in the investment world. It's called behavioral
finance, "a theory that sweeps away the conventional
thinking that investors make rational decisions." But you
already knew that.
*** Dun & Bradstreet reports that "June Insider Trades
Slowed Substantially from May." Insider additions and
disposals for June slowed noticeably from the prior
month. On the purchasing side, executives bought a total
of over $271.6 million-worth of shares in May, compared
to just $193.1 million in June.
*** "That's a 28% drop... not a minor change," comments
Lynn Carpenter of our team. "Insider sales tend to be
right, but early. The lead between insider purchases or
sales and a stock movement in the same direction is
around 3-6 months." (see: Working Without a Net)
*** IBM made 19% less money in the second quarter this
year than they did in last year's second quarter. Sales
declined by 1%.
"Can you believe it," asks our pirate investor, Porter
Stansberry, (http://www.pirateinvestor.com) "IBM is dying
on the vine while all of its competitors - Sun, EMC,
Network Appliances, Dell, etc. are having breakthrough
quarters."
*** The trouble at IBM, as Porter points out, is that the
company has been so keen to boost 'shareholder value'
that they have destroyed the business. Instead of
investing in new plant and equipment, Big Blue bought
back its own shares - at record prices - cut costs, and
massaged the numbers. These practices make the shares
look good in the short run. But in the long run they are
a disaster.
*** I got up early this morning and caught the train at
little Lathus station. As usual, I was the only one on
the platform. Three hours later, I arrived in Paris.
Well, it ain't Baltimore, but then... what is?
In the month of July 2000, the Dow swung between a high
of 10,843 and a low of 10,481 - a breadth of 362 points.
The Nasdaq had a range of 580 points. But both indexes
ended down. In this roller coaster market, capital gains
are no sure thing. Smart investors are taking refuge in
value stocks.
In today's edition of the Daily Reckoning Investor
Library, we'll tell you about one of the best value
sectors right now: Real Estate Investment Trusts. Click
here to view your free copy: http://www.dailyreckoning.com/specialreports
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
The man who touched off World War I, by sending the
Archduke Ferdinand to his eternal rest, was described as
an "anarchist."
Anarchists are back in the news - rising up to protest
the World Bank, the IMF, the Republicans and Democrats,
the pasteurization of milk and the division of labor.
They are gathering now in Los Angeles, the Post warns, to
make their voices heard at the Democrats quadrennial
bombast - the national convention.
I admit to being soft on anarchism. The creed has much
appeal. You don't get jury duty. Nor are you called upon
to make campaign contributions. Your sentences don't have
to make sense. And I like black.
But the 'anarchists' in the Post article give followers a
bad name. As Ray DeVoe says, they are 'rebels without a
clue.' The poor saps don't understand anarchism, but even
less the many things they are protesting. Instead of
eliminating government, they want more of it...more
controls over this or that...more people with the power
to tell you what you can do and what you can't. Compared
to one of these people, even a Democrat seems harmless.
Without government, it is widely believed, the strong
would exploit the weak...the rich would exploit the
poor...the capitalists would exploit the workers...and
people would drive on the wrong side of the road, if
there were roads.
The assumption underlying modern politics is the same one
that supports economics - that man acts in his own self-
interest, rationally, and usually, ruthlessly.
Rational self-interest is said to guide decision-making.
People figure out how they can get the most for
themselves. They think about their families too, the
theory goes, but only because they share so much genetic
material.
Rational self-interest is at the heart of the 'prisoner's
dilemma' I mentioned yesterday. There, too, is the
central banker's and politician's dilemma - which dooms
paper money, including the dollar.
A man, looking out for #1, will do things that benefit
him - even if they are harmful to the rest of society:
Grand Theft Auto, inflation of the currency, murder,
rape, betray his partners and his wife - you name it.
Against these abuses, this supposed anarchy, stands the
government - ready to protect, defend, and sort out the
conflicting self-interests of its citizens.
The only problem is that it isn't true.
John von Neumann invented game theory, went mad, and
eventually recovered. But his games allowed scientists to
test people to see how rational self-interest really
worked.
These games were the equivalent of putting people in a
'prisoners dilemma' situation to see at what point they
would 'defect' and choose their own interests over those
of the group.
Scientists played the game themselves - putting small
sums of money at risk. But instead of choosing the
tactics predicted by the theory of rational self-
interest, they cooperated to produce the greatest good
for the group of players.
These results were so at odds with the theory that the
researchers refused to believe them. They argued that the
players were too stupid to understand where their own
interests lay.
Finally, in the 1970s, computers were brought in and
taught to play the games. As Matt Ridley puts it:
"Computers started using their cold, hard, rational
brains to play the prisoner's dilemma, and they began to
do exactly the same thing as those foolish, na‹ve human
beings."
This led to a contest. Setting up 'prisoner dilemma'
situations, contestants were asked to devise computer
programs that would play other programs to see what
strategy emerged victorious. The underlying question -
when does it pay to cooperate...and when does it pay to
'defect'?
The winner was an elegantly simple program called 'Tit
for Tat,' a computer simplification of the kind of
personality that might succeed in real life. Tit for Tat
won by imitating what people really do - not what the
rational self-interest theorists thought they should do.
Tit for Tat is nice. It offers to cooperate. It never
defects first. But it is no doormat. When another program
is unkind to it - it retaliates...and then offers to
resume its cooperative behavior. What's more, Tit for Tat
is clear. Other players know what it will do.
What the competition suggests is that modern economics
and the rationale for government is based on a myth.
Humans do not really compete selfishly. They cooperate
collectively.
So strong is the desire to collaborate rather than battle
it out that it proved a problem as WWI developed. Bogged
down in the trenches, the soldiers on both sides began to
cooperate with each other - and ignore the orders of
their superiors. Informal truces were declared and
respected. Rules of behavior - about when you could shell
an opponent, fair warnings, and the treatment of
casualties - developed. The rules were backed up, just as
they were in the Tit for Tat program - by retaliation.
Usually, retaliation was followed by reconciliation. But
sometimes, unscheduled battles broke out.
Eventually, generals discovered they had to put a stop to
the anarchy developing in the trenches by moving troops
around frequently, so they did not develop friendly ties
with the enemy. This allowed the slaughter to continue as
planned.
It is this drive to cooperate...and the development of
trust, and rules of the road...that enables the expanding
division of labor. Francis Fukuyama noticed that 'high
trust' societies were also the richest. No wonder - they
allow the division of labor to expand.
But even in high trust societies, it's risky to leave
your keys in the car...and your money in paper currency.
And even the division of labor has its limits - as we
will discover in tomorrow's letter when, I promise, I
will finally reveal the inner workings of marriage...and
explain how Tit for Tat has a romantic side too.
Your ever-puzzled pen pal,
Bill Bonner
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Last modified: April 01, 2001
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