In Today's Daily Reckoning:
*** The Fed did nothing...neither did Wall Street
*** But gold shot up...
*** Amazon as a 'concept stock'...Better than Kaufman &
Broad...GM food...and more!
*** As predicted, the Fed did nothing...and Wall Street
followed its lead. The Dow rose a piddling 23 points. The
Nasdaq, where irrationality tends to be more exuberant,
rose 81 points.
*** The market looked healthy, though. There were 1785
stocks advancing on the NYSE, while only 1113 fell back. 77
stocks hit new highs; 58 hit new lows.
*** So, it was a nice 'summer of love' day. Even gold,
seemed to arise from its crypt and buff itself up a bit.
The metal rose a healthy $6.80.
*** Ultimately, the Nasdaq and gold are not likely to go in
the same direction for very long. Gold varies inversely
with the dollar. And the Big Event of the future will most
likely be a crashing dollar and rising gold.
*** Gold, by the way, is cheap. It is down 65% in nominal
terms from its high in 1980. Of course, the high occurred
in an atmosphere of lunacy little different from the recent
Nasdaq peak - though I may have forgotten to mention it at
*** In those heady days, it looked like the dollar was
doomed and gold would soon rise to $1,000 an ounce. One
prediction was that gold would hit $5,000 an ounce before
the end of the century.
*** But here we are at the end of the century. Gold is
hardly $5,000/oz. And the dollar is not-quite worthless.
You can buy an ounce of gold, in real 1980 terms, for about
$150. The number of dollars, meanwhile, as counted by the
Fed's Adjusted Monetary Base, has nearly tripled. Or as
Rick Lombardi of Citadel Research put it in Barron's, gold
"is as inexpensive relative to the Monetary Base in the
year 2000 as it was at $35 an ounce in 1970."
*** "In the United States," says economist Paul Krugman,
writing in the NY Times, comparing our 'summer of love' to
Japan's nuclear winter financial situation, "we have come
to rely on Alan Greenspan's knack for doing the right thing
in an emergency." The right thing, according to Krugman, is
flooding the world with money after the crash of '87 and
the panic of '98.
*** But the Japanese tried to do the right thing too.
Interest rates were reduced to zero and the government
provided enough fiscal stimulus to awaken a corpse. Japan
now has the world's largest government debt - and an
economy that is still comatose. (See: The Austrian Case
Against American Moneterism http://www.dailyreckoing.com/body_headline.cfm?id=167&tp=a)
*** What is it about Greenspan's little trick that it works
only in America? I don't know, but I think we are going to
*** Down, down, down, down...a Washington Post story quotes
Amazon critic Eric Von der Porten: "Amazon is looking more
and more like other concept stocks such as Boston Chicken,
Discovery Zone and Planet Hollywood - all of which took on
a lot of debt and ultimately had to file for bankruptcy."
*** But raising money seems to immunize companies from
criticism. "No analyst wanted to tell the truth [about
Amazon]," said the president of Gramercy Capital, "because
their firm would lose out on the prospect of vast
underwriting fees." AMZN carries $72 worth of debt for
every active customer - which must be some kind of a
*** Jeff Bezos, AMZN's founder, was Time Magazine's 'Person
of the Year' in December and applauded for "one of the
smartest strategies in business history." His stock was $87
at the time. Now, it is below $40...with much farther to
*** "Kaufman & Broad is a great co.," Lynn Carpenter
corrected me, "but it's not #1. Centex is the largest.
Plus, it's our FSL pick for a couple of reasons.
Valuations are almost the same on both these good
companies, except for debt levels. KBH's debt is very high,
1.8 X total equity. Centex's is much lower,
0.8 of total equity. This is an interest rate sensitive
business, and high debt isn't helpful. Plus, Centex
maintains a higher profit margin, which allows it to take a
hit somewhat better. And if you look back over the
numbers to 1996, a bad year for construction, you'll see
negative earnings for KBH, but only a slight drop for
Centex. Both are good companies, but I'd go with wise and
steady Centex for the long run." (See: http://www.dailyreckoning.com/body_headline.cfm?id=212
**** "The undeveloped Costa Maya region in Mexico" writes
International Living's Ken Layne "is following the same
route to development as Belize: eco-tourism and $50,000
dive-tours marketed to dot.com yuppies." Real estate on the
beach will skyrocket... but right now, you can still get
quality beachfront property there for $39,000... (see:
Paradiso Costa Maya: 80 Miles of Virgin Coast http://www.dailyreckoning.com/body_headline.cfm?id=213)
*** Today's headline in the Financial Times: "World Needs
GM (genetically modified) Crops, says UN Food Chief." But a
lot of people in rich countries take a "let them eat
granola' attitude. So, while Celera is worth billions,
companies that tinker with the genes of plants are scorned.
James Passin, former employee of mine and now manager of a
small cap fund in New York (http://www.fbird.com), provides a
little history...and a recommendation. I've had Addison add
it to the daily reckoning website:
*** Elizabeth and I had dinner last night with friends -
people who had recently moved from London to Boston. "I'm a
bit disappointed," said David. "The Americans we meet are
obsessed with working day and night in order to make as
much money as quickly as possible. People are the same in
London - but at least they're not proud of it."
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"What is done by what is called myself is, I feel, done by
something greater than myself in me."
James Clerk Maxwell
On his deathbed, 1879
I labored through a very interesting book last night: "The
User Illusion," by a Danish physicist named Tor
Norretranders. The book is not easy. Too much science.
Science books are often difficult to understand. Perhaps
the authors do not really know what they are writing about.
Or, maybe I am an imbecile. I lean to the former
explanation, but who knows?
It was Norretranders' book that started me puzzling about
the role of reason in stock market bubbles - and the rest
of life. The Dane provides a history of the science of the
Internet intertwined with the philosophy behind it. That,
or the saucisse montbeliard, troubled my sleep.
But this morning, I awoke with the illusion of profundity,
to which I am particularly susceptible. Like Newton, who
united Heaven and Earth, I felt that I was on the verge of
connecting some important dots.
Isn't it amazing how the best ideas arise, unbidden? Even
the greatest achievements of the greatest scientists seem
to come not from directly conscious effort - but from
intuition, chance and inspiration. Einstein, standing on
the train platform in Fribourg, had the odd sensation that
the plaform was moving while the train in front of him was
still. From this momentary insight, his notion of
relativity was elaborated.
The mathematician Henri Poincare maintained that his best
work was not done by his conscious mind, but his
unconscious one. He would work on a problem, go to sleep,
and often, have the answer when he woke up.
If this sounds a little too good to be true, remember that
Poincare and Einstein worked hard during their waking
moments too. Nothing comes from nothing, after all.
Nor does everything come from power of reason alone. The
rational mind is worshipped as though it were mankind's
salvation. But in many cases, reason is a trap...and those
people most gifted at it are often the most easily snared.
The conceit of the Internet Age is that everything of
cutting edge importance to mankind can be reduced to simple
binary signals, yes or no, plus or minus, black or white.
This data is then communicated, reassembled into
information and rationally processed. Even remote sex, so
realistic that it cannot be distinguished from the real
thing, will soon be available, according to a recent Time
Magazine, courtesy of the Internet revolution.
But let us go back a few steps...
Every fool has a reason for what he does. There is always
an explanation. The power to reason is supposed to be what
separates man from the lower beasts. This is pure nonsense,
of course. Many four legged animals seem smarter that the
average game show host. And dogs are infinitely more
dependable than Congressmen.
Nevertheless, people think that if they just had enough
information and enough time to reason it out, they could
have anything and everything they wanted. But there's the
rub - Norretranders explains scientifically what is
intuitively obvious. "Knowledge costs," he says. It costs
time and effort. Like the difference between real profits
and virtual ones, it requires the investment of time and
effort to transform data, or information, into knowledge.
Which brings me back to my friend Michel's observation: the
more information you have, the dumber you become. Michel,
too, arrived at his conclusion intuitively, or perhaps by
observation. Norretranders confirms it by reference to the
curious 2nd Law of Thermodynamics. As energy is used up, it
produces a condition of 'entropy' - in which the energy,
though still somewhere in the universe, is unavailable. It
takes energy to turn data into knowledge. Thus, "in reality
the 'information society' is an 'entropy society' - a
society of ignorance and disorder."
If it took no energy, that is to say, no investment, to
turn data into knowledge, the Internet would be not only a
first order innovation...it would be promethean. Gain could
be had without pain. A perpetual motion machine - which
requires no energy inputs - would be possible. Finally,
there really would be a new era, a new world.
But the actual world we live in, rather than the virtual
world of the New Era imagination, is a world in which
knowledge and wisdom come only at great cost. For every
tiny bit of it, as Mencken points out, some poor soul lies
on an ash heap in Hell.
You can get knowledge by reason, experience, insight, or
maybe even divine inspiration. Reason is only one route -
and probably not the most important one.
In the 1800s, August Comte, founded a nave school of
philosophy known as positivism. The idea is that you begin
with known facts and provable assertions and build,
rationally. Anything that cannot be proven from experience
or logic should be rejected - just as my son rejects going
to church. "What's the point," he says.
Positivism has been wildly popular, as people like to think
they can reason things out for themselves. It underlies the
whole Internet pretension - that reality can be broken down
into binary impulses, transmitted, stored and sorted out
If only life were so simple! If only everything could be
reduced to true or false, black or white! Man's faculties
of reason are so snaky that he can prove everything he
wants to prove - and nothing. Eminent scholars have
'proven' that Jews are inferior to Aryans, and that the
world would run out of oil by the year 2000. Experts have
'proven' that the price of gold would rise to $5,000 and
that the dollar would disappear.
Meanwhile, even simple statements, such as "I am a liar"
confound us all. If it is a true statement, it disproves
itself. If it is untrue, well...you'll have to figure it
Mathematics, the most rational of all pursuits, stumbles
too. Bertrand Russell's Principia Mathematica tried to
establish the logical foundations of all mathematics. Kurt
Godel, a brilliant mathematician, however, pointed out the
inescapable contradiction in Russell's work in 1931. Years
later, Russell, who had moved from one dubious proposition
to another over the years, recalled, "I realized, of
course, that Godel's work is of fundamental importance, but
I was puzzled by it. It made me glad that I was no longer
working at mathematical logic."
Kurt Godel, one of the world's most gifted mathematicians,
died in 1978. He starved himself to death, crouched in a
fetal position, refusing to allow nurses to enter his
room...fearful that they were trying to poison him.
All he had left were his powers of reason.
Your very positive correspondent,
P.S. Tomorrow...if not reason, what?
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Last modified: April 02, 2001
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