*** Will Wall Street rally...now that we, almost, have a new
president-elect?
*** Holiday shopping slow...but there's that last weekend...
*** Bankruptcies, junk bonds, recession, inventories,
Darwinism, Lava lamps...and, can you believe it, more!
*** Well, it was nice as long as it lasted, but it looks as
though America finally has a president-elect. Bush should
demand a recount.
*** The news boosted futures in after-hours trading, but not
spectacularly. After all this time, it is hard to believe
that yesterday's Supreme Court decision would have much
affect on the markets this morning.
*** Yet that is what commentators are predicting. And
overnight, the dollar rose along with Asian stock prices.
*** And Mr. Bear is probably ready for a little holiday
anyway. The Dow rose 42 points yesterday.
*** But the news was generally bad. Retailers are
worried...and reporting weak results. The latest was Best
Buy yesterday, after Wal-Mart, Home Depot and Lowes last
week. Consumers just aren't spending like they used to.
*** Holiday shopping has gotten off to a slow start. Still,
there is that one big weekend before Christmas -- maybe the
customers are planning to show up then.
*** Meanwhile, in the tech sector, Compaq became the latest
company to admit it was having trouble selling PCs. The
Nasdaq fell 83 points.
*** The Anderson School at UCLA has been making economic
forecasts since the Eisenhower administration. Its latest
forecast sees an end to the 38 quarters of economic growth
in the United States. By the middle of next year, say the
forecasters, the United States will be in recession.
*** As if to get a head start, the Financial Times reports
that "private hedge funds and investment banks are setting
up funds to buy distressed debt, and law firms specialising
in bankruptcy and creditors' rights are staffing up."
*** "The number of business bankruptcy filings has hovered
between 9,000 and 10,000 a quarter since the beginning of
1999," continues the FT article, "But bankruptcy and
creditors' rights lawyers point out that some recent filings
have been large -- ICG Communications, the once high-flying
telecoms group -- and that their own internal evidence
suggests a wave of business failures to come...and worldwide
defaults on speculative-grade, or junk, bonds will rise from
6 per cent to 9 per cent 12 months from now, with the
majority concentrated in North America.
"'The last time there was such an increase in defaults, in
the late 1980s, the result was recession,' says David
Hamilton, an analyst in Moody's risk management department.
'When you have a boom that has been going on for as long as
it has in the United States, the longer the boom continues,
the weaker the credit quality for the marginal borrower
becomes. When you get into the late phase, you get a lot of
what turns out to be questionable lending.'"
*** Remember how the Information Age was supposed to
eliminate wasted time and resources? Well...again, the FT:
"Slowing growth is also putting to the test the theory that
improved technology would allow companies to manage their
inventory better, almost eliminating the build-up of stocks
when demand levels off.
"'That's turning out not to be the case: inventories are
turning up in a number of industries,' says Jeanne Terrile,
director of strategic research at Merrill Lynch...
'[Inventory] is still behaving in a sort of old-fashioned
way,' she says."
*** "For companies that only a year ago were running
production lines at full capacity, boasting about Internet-
enabled inventory management and struggling to meet demand,"
adds the FT reporter, "the challenges of overcapacity,
overgearing and overstocking have arrived with frightening
suddenness."
*** And more on the Greenspan Put: "History shows," writes Charles
Peabody, "that, when the authorities try to arrest the deflation of an
asset class (such as that which has been occurring in the TMT sector)
through the infusion of liquidity, that liquidity usually does not flow
into the deflating asset (although it does help, temporarily, to arrest
the de-leveraging process). Instead, that liquidity tends to seek out an
asset class that has already been inflating and where confidence remains
high."
*** Peabody thinks he sees another bubble in the making -- guessing that
the next shot of juice from the Fed will find its way into real estate,
and real estate lenders, rather than TMT stocks: "And as reflected in
[yesterday's] Wall Street Journal article (see page C1) entitled 'Small
Banking Stocks Vault Over Their Bigger Brethren,' analysts can't shout
loud enough about the attractiveness of the thrifts and community banks
-- which are essentially residential mortgage lenders. When the Fed
tries to arrest a de-leveraging process by injecting liquidity into the
system, that liquidity tends to seek out the asset class that is already
inflating and creates an even bigger asset bubble. As can be seen in the
chart in this WSJ article, stocks in the Keefe Thrift Index have
experienced triple digit percentage increases this year, far
outperforming (by almost 60 percentage points) most other financial
stocks. And yet, some analysts are predicting another '40% climb in
thrift shares' from here."
*** Power failures cost the U.S. economy $50 billion last
year. And new technology is particularly vulnerable. Peter
Huber estimates that Internet-related equipment uses 13% of
the nation's electrical energy. And some high-tech equipment
is so sensitive that it can only tolerate 31 seconds of
outages a year.
*** The L.A. Times blames information technology for
California's electrical shortages: "Consider the college
dormitory," suggests an article in yesterday's paper.
"Thirty years ago, a typical student room might contain a
couple of desk lamps, an overhead light, a stereo system and
maybe a hot plate. Now check out Claire Steggall's room at
the University of Rhode Island. The freshman engineering
student and her roommate have two computers with printers
and monitors, two mini-refrigerators, a microwave oven, a
television-VCR with cable service, desk lamps, a stereo with
a big subwoofer for boosting bass tones, a telephone, hair
dryers, a Lava Lamp--you get the idea."
Asked if she ever switches her computer off, Steggall
thought for a moment and said, "I do if I leave for the
weekend."
*** I flew into Washington's Dulles airport yesterday
afternoon. The corridor leading from the airport to
Washington is home to many tech and dot-com companies. As we
passed PSInet and Careerbuilder.com I half expected to see
flags at half-mast...and lights off. Instead, they were lit
up for the holidays. And the whole area seemed to be
booming. All went well until my taxi arrived at the
Washington Beltway. What a mess! It took more than two hours
to get around to the other side of the city.
*** It's very cold this morning. Skies are clear...but snow
is predicted in Baltimore for this afternoon.
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Looking out my office window at Mount Vernon Square in
Baltimore, I again pose the question -- why do I choose to
live in France rather than the United States?
And since there is no one else in the office at 5 o'clock in
the morning, I will have to answer the question myself, as
well as pose it.
The answer, as I hinted yesterday, has to do -- in a very
roundabout way, of course -- with Darwinism.
But first, let me introduce a distinction to which I refer
often in these letters. There are two forms of knowledge,
said Nietzsche before he went mad. There is the knowledge
you get from personal experience...which he called
"erfahrung"...and there is "wissen" -- which is the
knowledge you get from the newspapers and from the abstract
ideas you learn in school.
Darwinism is an example of "wissen," confirmed, or at least
not contradicted, by much of what we can observe personally.
People who understand Darwin's theory believe they know
something.
Darwin noticed that there were similarities between living
things. He wondered if all might not have developed, or
evolved, from the same source. This led to a theory about
the way nature works.
The popular expression of the theory has two main elements:
that random mutations are the source of change...and that
these mutations either confer an advantage or a disadvantage
in the competitive environment, and are thus selected in or
out as the case may be.
In answer to the question, why does a giraffe have a long
neck, the reply -- "in order to eat the leaves of trees" --
is incorrect. That response would suggest a hidden order or
even design to the natural world. Darwinists don't believe
in design...they believe life is, in the poet and insurance
agent Wallace Stevens' words, "an old chaos of the sun." The
giraffe, according to Darwinists, has a long neck because
the short-necked giraffes did not survive.
My argument with Elizabeth concerned the meaning of
"random."
"Either things are random or they are not," I told her,
following up with the logical flourish worthy of William
Jennings Bryan:
"And if man evolved from monkey by random mutation, favored
by natural selection, then God had no role in man's
creation. And if God had no role in man's creation, then
Nietzsche is right...he may as well not exist."
"But how could Darwin or anyone possibly know whether the
mutation is random or not?" asked Elizabeth. "Maybe it just
looks random."
There is something about the concept of randomness that
always seems to provoke an argument in our household.
Longtime Daily Reckoning sufferers may recall another
argument that we had -- concerning the Random Walk Theory of
stock price movement.
There, too, Elizabeth resisted the idea that stock price
movements could be entirely random.
As it turned out, she was right.
By way of further introduction, we practice a division of
labor in our household. Elizabeth decides where we live,
what we eat, where our (six!) children go to school, how we
spend our money and so forth.
I take on the big, important issues -- such as the family's
position on the Efficient Market Hypothesis (EMH)...or what
we think of the Strategic Air Power (SAP)...or whether we
favor the Designated Hitter Rule (DHR). If it cannot be
reduced to three capital letters, in other words, it is out
of my sphere of influence.
But the randomness of stock price movements, the Random Walk
Theory, or RWT, is clearly something I should know something
about.
Still, Elizabeth's instincts were right. As Smithers and
Wright put it in their book, "Valuing Wall Street," "It is
now widely agreed among economists that the random walk
version of the Efficient Market Hypothesis is very nearly,
but crucially not quite, supported by the data."
People took the Random Walk Theory very seriously, just as
they took Darwin's Theory of Evolution (TOE) very seriously.
Both appear to describe the way things work. But neither
gives the reader any clue as to why they work the way they
do...how things got to be the way they are...or what they
will be like in the future.
Smithers and Wright do explain that the failure of the
Random Walk Theory does suggest a useful insight -- one that
could save you a lot of money...but I will get to that
later. Let me first return to Darwinism...and why I like
living in France.
France is a country with many things that I deeply dislike.
It has a strong, well-padded central bureaucracy. Everything
requires paperwork and approvals. Since I do not like anyone
telling me what to do...the bureaucracy is annoying.
It has high taxes -- with a maximum income tax rate nearly
50% higher than in the United States and a "wealth tax"
which eats away not merely at what you earn in the current
year, but what you earned, and managed to save, from
previous years.
It is also a culture that delights in "solidarite" -- where
group-thinking and mass action are cultivated. Strikes are
common...with the trains and highways often blocked. Still,
the French not only tolerate these disruptions -- they
invariably seem to sympathize with the disruptors.
France is more of a socialist country than the United
States. Perhaps it is a genetic flaw...or a weakness of my
character...but I find myself completely unable to get in
the spirit of "isms." Crowd behavior and group-thinking
always seem imbecilic...and even dangerous. I do not even
like watching sporting events.
Darwinism is an amusing, stimulating idea...but it is also
easily vulgarized into a mob-slogan. Thus, the Theory of
Evolution devolved into "the survival of the fitness" and
the "law of the jungle"...which further devolved into the
socialist apologia: "you can't make an omelet without
breaking some eggs." And by the mid-20th century, the
socialists were using this vulgarized abstraction to run not
merely their own lives, but those of millions of others.
All things being equal, I would prefer not to be one of the
ingredients in the socialists' omelet.
But just as no sensible man would take Darwinism seriously,
neither should he take socialism seriously...or any 'ism'
for that matter. In fact, big, abstract ideas are often
entertaining...but they are certainly no basis for
organizing your life. I distrust them all -- even, or
perhaps especially, my own.
But when I look out my office window in Paris, I do not see
socialism. I see a very romantic street scene - with the
Paradis Cafe on the corner...cobblestone streets...and
attractive people wandering around. Every quarter hour the
bells of St. Merry's toll...and in almost any direction I
choose to set out at lunchtime, I will find dozens of
appealing restaurants within a 10 minutes' walk.
Also, I like the way the French windows open...so you can
look out without the double-hung bars interrupting your
view. And I like the way French drivers stay in the right
hand lanes...and the way you can drive 100 mph down the
highway without getting thrown in jail.
Taxes are higher in France, but where else can you buy a
decent bottle of wine for $5? And where else can you see
practically pornographic pictures -- such as the current ad
campaign for Yves St. Laurent perfume -- without paying for
them?
What I really care about is not the "isms" -- but the
everyday experiences of my life. Are my children safe? Are
they being well-educated? Is the food good? Is what I have
to look at appealing to my eye?
What I actually care about is the erfahrung, not the wissen.
And the erfahrung isn't my concern, in any case. I only deal
with the big issues.
So, if you really want to know why I live in France, you'll
have to ask Elizabeth.
Your correspondent, back in Baltimore...
Bill Bonner
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