In Today's Daily Reckoning:
*** Confidence and self-esteem at record levels...
*** Have bonds topped out?
*** Dollar index at new high. Am I wrong about the euro?
Wrong about the dollar? Wrong about the future? Or just
plain wrong?
*** Consumer confidence fell slightly in August...but it
is still near record levels.
*** A measure of the public's optimism may be found in
savings rates - which hit a new record low in July of
0.2%. Contrary to the signals I reported a few weeks ago,
the average American is not saving. He is spending - and
taking advantage of Internet search engines that offer to
find him even more money to spend, by mortgaging his
home. (see: Pride, The Bubble and National Self-Interest
http://www.dailyreckoning.com/body_headline.cfm?id=399)
*** Yet another sign of confidence - the cost of put
options has fallen still further, to the point where they
are practically free. Put options pay off when stocks
fall. They are insurance against a bear market. But who
needs insurance? Things just get better, right? See
below.
*** So far this millennium, bonds have been the smart
place to be. They're safe...they've risen about 10%...and
they pay interest. But bonds get killed when consumer
price inflation rises. Could that be happening now?
*** Bonds fell yesterday...the 30-year T bond lost $3.75
on each $1,000 of face value. The yield rose to 5.75%. It
is surely too early to call a top in the bond market. But
it's got to happen some day.
*** JP Morgan's Commodity Index hit a new high of 550
yesterday. It was only 420 as recently as April. Shipping
futures rose sharply. "Virtually every commodity
inflation index has soared in August," writes Bill King
in today's commentary. Could consumer price inflation be
far behind?
*** One commodity that bucked the trend is lumber. Lumber
was down big yesterday, though housing sales rose 14.7%
in July. In fact, "home sales [are] rising to [the]
highest level in 7 years" reported Reuters. Maybe they
don't use lumber in houses anymore. Maybe they build them
with silicon chips and recycled laptop computers.
*** The Dow fell 37 points. The Nasdaq rose 11. It was
another slow day in August.
*** Leading the Nasdaq were, again, the Big Techs -
companies such as Oracle and Cisco that have harnessed
the economies of scale of the Information Age.
*** There were 1325 issues advancing on the NYSE
yesterday; 1470 declined. 81 stocks registered new highs.
41 hit new lows.
*** Ahem...the euro is either near or at a new record low
against the dollar. The dollar index has hit a new high.
And the euro at 89.2 cents. I got mixed reports this
morning...but if it has sunk to a new low, I will be
forced to revise (or deny) my view.
*** I thought the beginning of this trend was in place
when the dollar topped out on May 17th. Since then, we've
been enjoying a 'summer of love' - with the momentum of
an 18-year bull market carrying us forward and the warm
sun of July and August to boost confidence. But now, the
sun is sinking a little lower in the skies of North
America. The dollar should be beginning its decline too.
*** The dollar will eventually crack against the
euro...and the whole thing will fall apart - the Big
Techs, bonds, stocks generally, the dollar itself, and
the U.S. economy. Savings rates will rise, imports will
collapse, gold will go up and Americans' self-esteem will
fall. Maybe not yet, dear reader. But maybe soon.
*** "American companies operating outside the United States
are the world's largest exporters," writes Lynn Carpenter
of the Fleet Street Letter, "[They're] bigger than Japan.
Bigger than Germany. Yet the Fed pretends these giants
don't exist. Just as it pretends our cost of living has
nothing to do with eating, staying warm or driving a car."
(see: It All Makes Sense in Bora Bora
http://www.dailyreckoning.com/body_headline.cfm?id=398)
**** And speaking of the New Economy yesterday, Dan Ferris:
"It isn't virtual at all. It's made of metal and wire and it
burns gargantuan amounts of fossil fuels, just like the Old
Economy, the horse and buggy economy." Ferris reports coal
demand could surpass our current billion-ton burn rate by as
much as 200 million tons. But coal is only one way to play
the demand for electricity generated by computer users and
the like... (see: The Joke's on the New Economy
http://www.dailyreckoning.com/body_headline.cfm?id=401)
*** The ice is melting at the North Pole. Is it too early
to buy beachfront property in Nebraska? Writing in the
Wall Street Journal, Dr. Fred Singer, a veteran of two
Arctic expeditions with the U.S. Navy: According to
satellite photos, the polar ice cap is shrinking, but
that is because the world is "recovering from a previous
cold period that climate experts refer to as the Little
Ice Age. As a result of these changes, which have nothing
to do with human influences, it is warmer now than it was
100 years ago."
*** I talked with Elizabeth yesterday. The boys made it
through their first day back at school. Edward was
relieved that his teacher seemed nice. French teachers,
by the way, are not the least bit concerned about a
child's self-esteem. They are not allowed to hit
students, but they have a rich and vivid vocabulary for
telling them what they think of them - rather like a
plumber's remarks to the pipe upon which he has just
skinned his knuckles.
*** Robert Heinlein on the division of labor and
knowledge:
"A human being should be able to change a diaper, plan an
invasion, butcher a hog, conn a ship, design a building,
write a sonnet, balance accounts, build a wall, set a
bone, comfort the dying, take orders, give orders,
cooperate, act alone, solve equations, analyze a new
problem, pitch manure, program a computer, cook a tasty
meal, fight efficiently, die gallantly. Specialization is
for insects."
*** Today marks the anniversary of the bombardment of
Paris in WWI. A few years later, American troops arrived
in France. "Lafayette, we are here," declared Pershing -
before wasting the lives of thousands of American
soldiers. Lafayette had more sense. More below.
You can get rich with value stocks... and you don't have
to wait years for it to happen. To learn how to make
quick profits in quick stocks, read this new edition of
the Investor Library.
http://www.dailyreckoning.com/specialreports
* * * * * * * * * * * * * * * * * * * * * * * * * * * * *
It has been a long time since Americans were so
optimistic, so full of confidence... so sure of
themselves and the future that lies ahead of them.
Progress! We anticipate steady, accumulating improvements
in the quality of our lives...in our net worth...even in
our life expectancies.
The division of labor and knowledge makes us less self-
reliant. We don't know how the bread is made....or by
whom...or even where. The cereal I just ate for breakfast
must have ingredients from dozens of different countries.
I could not reproduce them - I couldn't even identify
them.
Not only have we lost control of the things that are
essential to our quality of life... we don't understand
the money that buys them. It too has become more
abstract. Most of the money we spend is no longer even in
paper form - it is now only data...whose integrity we
have no way of monitoring or controlling.
Yet, confidence in this abstract money is at a record
high - as judged by yesterday's dollar index. Confidence
in the custodian of the currency, Alan Greenspan, must be
at an episodic high too - never before have Americans or
the citizens of any civilized nation had such faith in a
bureaucrat.
The list of things in which confidence runs high could
stretch on for several pages - the Internet, technology,
the Big Tech stocks, brokerage houses, the economy,
employment, creditors, promises of a balanced budget, and
so on. About the only thing that really seems to worry
Americans is the increase in temperatures at the poles -
a concern so remote and extravagant that it must reflect
an almost complete absence of anything real to worry
about.
The last time confidence ran so high was probably at the
beginning of the 20th century. Then, as now, the nation
was enjoying a burst of technological innovation that
promised a whole new quality of life. Electrification,
trains, automobiles, telephones, appliances - it must
have seemed as if nothing would ever stop the march of
progress. Surveys of public attitudes at the turn of the
century revealed an almost unbounded faith in the future.
Respondents universally expected vast increases in
material well-being. But not only that, they also looked
for lower crime rates, higher levels of education,
courtesy and manners, and a diminishing burden of
government.
But progress does not come in digitally-perfect units. It
does not build steadily, like a pile of beer cans at a
summer picnic. Instead, progress happens in fits and
starts - by trial and error, accidents, and disasters.
For every step forward, there are several to one side or
the other, many dead ends... and some long, dark nights
when things actually get worse, not better.
"In life," said the philosopher Kierkegaard, to repeat
the quote I gave you a couple of days ago, "only sudden
decisions, leaps, or jerks can lead to progress.
Something decisive occurs always only by a jerk, by a
sudden turn which neither can be predicted from its
antecedents nor is determined by them."
A jerk happened in the late spring of 1914. The Archduke
Ferdinand was assassinated. Did anyone really care? What
did it matter to France, Britain, Russia...let alone to
America? But by this time in August, war had already
begun...and the German army had already advanced so
deeply into France that it could bombard Paris. The
French government fled to Bordeaux. Hundreds of thousands
of people left the city.
I told the story of this part of the war in an earlier
letter. But the point I want to make today is not about
the progress of the war, but the meaning of it.
At the beginning of the war, the people of this area of
France - a rural area far from Paris - were asked what
they thought of it. "Stupefaction" was the reply. They
didn't know what it was about. Nor did they particularly
care.
But wars and credit bubbles have a way of generating
their own momentum. France was allied with Russia. And
Russia was allied with Serbia, like two hapless prisoners
handcuffed together. Once the war was set in motion -
citizens rallied around the flag. Many people thought the
whole thing was crazy...but defection from the majority,
in time of war, is a cause of shame, if not treason.
Directed at the mothers, sweethearts and wives of the
soon-to-be dead men, a British recruiting poster asked
"When the war is over and someone asks your husband or
your son what he did in the Great War, is he to hang his
head because you did not let him go?" Another asked
mothers directly, "Is your best boy wearing khaki? If
your young man neglects his duty to King and Country, the
time may come when he will neglect you."
Peer pressure also drove men into uniform. Believe it or
not, one of the earliest of the "'Pals' Battalions,"
which were organized by groups of friends, was made up of
London stockbrokers.
Crowds gathered. The excitement was infectious. Everyone
wanted to get in on the action - as they now want to buy
Big Tech stocks. A young man recalled arriving in London
on August 3, 1914 - "the city was in a state of hysteria.
A vast procession jammed the road from side to side,
everyone waving flags and singing patriotic songs. We
were swept along...bitten by the same mood of hysteria."
And, of course, the press saw an opportunity to sell
newspapers. Jean Cocteau bought a copy of Le Figaro
(which is the paper I read today) in Paris shortly after
the war. He discovered that he had been overcharged - and
the paper was two years old! But when he complained, the
vendor replied, "But, cher monsieur, that is precisely
why it is more expensive - there is still a war in it!"
Reports of German atrocities in Belgium were magnified
beyond recognition. Not only did this sell papers - with
lurid descriptions of how the Huns raped and murdered
their way through Louvain (which was not untrue...but
greatly exaggerated) - it also hardened attitudes in
Britain and France towards the war, and helped tilt
America towards the Allied cause.
Governments tried to suppress news and opinion that was
considered contrary to the war effort - but in Britain
and France, the press was left relatively free. By
contrast, in America, freedom of the press was sharply
curtailed. The Sedition Act of 1918 made even criticizing
the war in a lodging house illegal. And the director of a
patriotic film - "The Spirit of '76" - was sentenced to
15 years in jail because it was 'anti-British."
Defection was not permitted. Not in the tabloids. Not in
the theatres and lodging houses. And certainly not on the
battlefield.
Once an objective was set - no matter how unimportant or
strategically blockheaded - soldiers hammered away. The
Germans decided to attack the French fortress at Verdun.
The resulting campaigns cost them 337,000 casualties -
for no apparent reason. German casualties were so high
that a young man reaching age 18 in 1915 had only a 50/50
chance of surviving the war. (The most notable result of
the Verdun campaign was that it made the defending French
General, Philippe Petain, known throughout France - so he
could play a decisive role in the next Franco-German war
2 decades later.)
Britain's General Haig decided that it was a war of
"attrition" - so he directed the Somme campaign...gaining
a few yards here and there...at a cost of hundreds of
thousands of lives on both sides. The French mutinied.
But the British, French and Germans gradually learned
better tactics. Enter the Americans, whose commander,
Pershing, ignored his Old World colleagues and promptly
launched frontal assaults on well-defended German
positions. American troops suffered disproportionate
casualties and were so ineptly led that a British
military historian concluded that "the most important
service of the AEF (American Expeditionary Force) was
simply to appear in France." The Germans were discouraged
by the apparently inexhaustible manpower and supplies of
the Allies.
But what was the point of it all? Niall Ferguson examines
the war in detail in his book, The Pity of War. He asks a
series of questions, including: Why did Britain (let
alone America) intervene? Why did not the war end more
quickly? Why did men keep fighting...and why did they
stop? Who won the peace?
Even now, we do not have good answers to these questions.
We don't really understand why the war began. It was just
one of those 'jerks' of history. But if it had been
avoided - or even if the British, and then Americans, had
stayed out of it...the history of the 20th century might
have been very different.
Russia may have come to terms with Germany much earlier -
and thus almost certainly avoided the Bolshevik
revolution which caused so much misery to so many people
for the next 7 decades.
Germany and France probably could have fought it out -
and come to some peace on their own...as they had in
1871. This would avoided the Versailles Peace
agreement...the reparations...the great inflation in
Germany...the rise of Adolph Hitler...and probably WWII
(which was merely a continuation of the first World War).
As things turned out, WWI marked the end of the evolving
culture of the 19th century.
"When the German Foreign Secretary Jagow received the
news of the English declaration of war on August 4,"
records Mr. Ferguson, "one witness recalled, 'his
features showed...an expression of anguish.' The previous
evening, [his British counterpart, Sir Edward] Grey had
famously likened the war to 'the lamps going out all over
Europe' and telling a friend: 'We shall not see them lit
again in our lifetime.'"
Grey was right. For the next 70 years, Western
civilization would go sideways, and backwards - taking
one misstep and then another. The great confidence - in
the institutions and progress of bourgeois European
civilization - was shattered. It never recovered. Only
now, at the dawn of a new millennium is the debris being
swept away - all the humbug of socialism, nazism,
communism...the Stalinist architecture...the empty and
appalling "modern" buildings...and the accumulated scum
of big government. Maybe, after the rubbish is hauled
away...we can begin building again, on the exposed
foundations of real civilization.
Confidence - like credit - comes and goes.
Your ever-optimistic reporter,
Bill Bonner
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