-->Vile Bodies

The Daily Reckoning

Paris, France

Friday, 15 August 2003

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*** Germany, Italy in recession...

*** Get your chips ready... big move up in gold...

*** Counting the corpses... Bye bye, Diana...
irritations... and more

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"Germany falls into recession," says yesterday's BBC
headline.

A week or so ago,"Italy falls into recession," was the
news.

Britain and America, on the other hand, are believed to be
in recovery mode. So,"get your chips into play," said one
of our favorite economists, Larry Kudlow.

We like Kudlow for the same reason we like Abby Cohen and
Ed Yardeni - and especially NY Times columnist Thomas
Friedman - we get a chuckle out of them all.

Occasionally we feel the desire to make a critical remark
about their oeuvres, but each time we stop short. They seem
to deserve not scorn, but pity... the kind of pity you would
feel for a jackass who wandered onto the freeway. The poor
beast has no idea where he is or what he is doing there; he
just waits for a delivery van to put him out of his misery.

"Power always thinks it has a great soul," said John Adams.
Friedman, riding into Iraq on the back of the U.S.
military, like a tickbird on the back of a rhino, imagines
that he is helping to bring enlightened democracy to
Mesopotamia. He thinks he is doing the whole world a favor;
for surely it would be a better place if the desert tribes
did what he told them to do.

Reading Friedman's dispatches in the Times, we have wanted
to challenge his ideas, but we've never figured out how to
do so. Calling them stupid would be flattery. One day he
scolds the Arabs for not turning themselves into liberal
democrats... the next day, he takes the U.S. Army to task
for not keeping the water and electricity flowing. And
practically every day, he hallucinates about the great
model society he is helping to create - if only everyone
would cooperate!

But occasionally, by accident, these fellows say something
that makes sense. Kudlow is right; if you want to play this
market, get your chips ready... because it is pure gambling,
not investing. Investing requires values. You need to be
able to put your money in something with a reasonable hope
of earning a decent return. At the stock market bottom in
1982, for example, an investor could get a 5% yield and pay
only 6 to 8 times earnings for a stock. It might have gone
down from there... but a reasonable investor would expect
that it wouldn't go down much.

Today, after a boom that has approximately doubled debt
levels - aggregate debt/income was at about 160% in 1982,
it is 296% today - stocks trade at average prices over 30
times earnings. Yes, they could go up. But no reasonable
investor would bet on it.

Readers will recall that Kudlow always urges investors to
get in on the game. He saw no reason to fold - even at the
height of the bubble in 2000. In fact, he expected it to
keep expanding - maybe forever. The Dow, he predicted,
would rise to 20,000... 30,000... 50,000!

So, reach for your chips, dear reader. Your stock market
chips will buy a lot of gold - 26 ounces for every complete
set of Dow stocks. Sell the stocks, buy the gold.

Then what do you do? Nothing. Take a vacation from
investing. Concentrate on your business, your job,
children, your wife and your mistress. You've already
enjoyed the Great Boom. Now get ready to enjoy the Great
Bust. Italy and Germany are leading the way. We won't be
long behind them.

And now for a breath of fresh air from our editor, sittin'
on the dock of the bay... Eric Fry in San Francisco:

--------------

Eric Fry in sunny California...

- The economy continued showing fresh signs of life
yesterday, while the bond market continued writhing in the
throes of death... and in keeping with recent financial
market trends, stock market investors celebrated the former
while ignoring the latter. The unnervingly volatile bond
market did not dissuade stock-buyers from bidding the Dow
to a 39-point advance at 9,310 and the Nasdaq to a 14-point
gain to 1,700.

- Meanwhile, the gold market dazzled its admirers again
yesterday, as the precious metal jumped $3.80 to $367.50 an
ounce. The yellow metal has climbed in eight of the
previous nine sessions.

- Just below your New York correspondent's hotel window
here at the Fairmont Hotel in San Francisco, the Powell
Street cable cars clang their distinctive bells all day
long... and all morning long and all evening long. One
ancient cable car after another inches its way up Powell
Street from Union Square. Each car seems to breathe a sigh
of relief as it finally reaches the top of the hill at
California Street, then clang-clang-clangs its bell before
beginning its steep descent toward Fisherman's Wharf.

-"How unlike the stock market," your New York editor
thought to himself."Cable cars DO ring a bell at the top."
Indeed, the brakeman also rings a bell as the car lumbers
to a stop, and rings the bell twice quickly just before it
lurches into motion again. The signals are clear and
predictable.

- Unfortunately, no financial market 'brakeman' rings a
bell when the stock market is about to screech to a halt,
or when it is about to start rolling again. But there are
signals nonetheless.

- For example, the cautious investor recognizes a P/E ratio
of 50 times earnings as a signal to run in the other
direction. The cautious investor also understands that a
'buy' recommendation from a Wall Street analyst is sure-
fire signal to sell. Conversely, when the cautious
investor's next-door neighbor swears never to buy another
tech stock again in his life, he recognizes this as a sure-
fire signal to buy. And when the cautious investor's same
neighbor boasts that he is buying a second home for
'investment purposes,' the cautious investor will recognize
this as a signal to sell his house immediately and rent an
apartment until home prices collapse.

- The bond market thrashed around again yesterday, before
closing with a slight gain. Early in the trading session,
the yield on 10-year Treasurys jumped above 4.62%, before
rallying briskly to end the day at a yield of 4.45%. But
yesterday's acute volatility in the bond market gives us
cause once again to worry aloud about Fannie Mae and
Freddie Mac, the nation's two largest mortgage lenders.

- We've been observing of late that soaring interest rates
are a bad thing for mortgage lenders, especially Fannie and
Freddie. The only thing that is as threatening to these
highly leveraged 'closet hedge funds' as rapidly rising
interest rates is extremely volatile interest rates -
yesterday's action being a case in point.

- Volatile interest rates make for tricky trading on
derivatives desks. And trying to hedge away hundreds of
billions worth of mortgage securities is not a simple
matter, even during the most tranquil of times. Throw some
volatility into the mix, and suddenly, the life of a
leveraged mortgage lender can become very complicated very
quickly.

-"Fannie and Freddie now carry and astronomical $1.6
trillion in assets on their balance sheets, up from $962
billion in 1999," Business Week notes. So massive have
these two mortgage lenders become, that their hedging
activities in the bond market have been contributing to -
if not directly causing - the heightened volatility in the
bond market... which, in turn, creates the need to conduct
additional hedging activity, which contributes to
heightened volatility, etc.

- Fannie and Freddie hate volatility for another reason as
well: volatile financial markets tend to create a volatile
earnings trend, which tends to create a volatile stock,
which tends to frighten away investors. And if the shares
of Freddie and Fannie should begin to frighten away
investors, how will their option-laden managements ever
hope to cash in?

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Bill Bonner, back in Paris...

*** It was a marvy week. We read two insipid editorials by
Thomas Friedman this week (we are on vacation)... and Diana
Mitford Mosley died. We read the obituaries before we read
the news... and found her story recounted in several papers.
But none seemed to do justice to the imbecility of the
woman. Below, we conduct an autopsy...

*** We have come back to the city after the heat wave
broke. The air is fresh this morning. The city is quiet. It
is the Feast of the Assumption today, a holiday in Catholic
countries, recalling the day when the virgin Mary was
welcomed into heaven. For the first time in weeks, people
enjoyed a good night's sleep. Even at 10 AM... they must
still be at it, for there is scarcely a soul in the street.

*** It was the worst heat ever recorded in France, say the
meteorologists. It lasted for weeks; the world has not seen
so much sweating since the pyramids were built. The heat
carried people off like fever. During the worst of it, we
read in the paper that some towns had had to set up
refrigerated tents to hold the bodies. Now that it is over,
the dead are being gathered up and counted. Three thousand
is the latest tally...

*** We were recently introduced in London as"perhaps the
most irritating writer in the English language." So
irritating are we to the West Virginians that a posse of
them showed up one day with a rope. In Ireland, a photo on
the wall is used as a target for dart-throwers; even after
3 years they have not forgiven comments made in this space.
And during the war against Iraq, at least one reader
suggested that U.S. bombers detour over Europe so they
could drop a bomb on our headquarters!

What is so irritating?"You don't seem to take anything
seriously," writes a DR reader."Even the End-of-the-
World... you treat it like a lark..."

But, thank God and thank you, dear reader, for the readers
keep reading...

And here cometh another reader to explain why:

"Perhaps one day E Lilly & Co. will manufacture a patch to
ease the transition to a DR-free life, but until that
happens I have no alternative but to keep posting the money
to AGORA and laughing at Bill's jokes.

"OK, you say that I am pathetic and that reading the DR
will break up my marriage and lose the roof over my head.
Maybe you're right. But what about you? I ask. You are no
better than I. You all keep reading the f*****g thing, even
though you might deny it to your friends and to the
police."

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The Daily Reckoning PRESENTS: An autopsy, a heart like any
other... and an elusive soul...


VILE BODIES
by Bill Bonner

Today, we return to the morgue. For among the thousands the
heat carried away was the woman who married Oswald Mosley -
a woman about whom we wrote last year. At her wedding, in
1936, were some of the most important people of the age,
notably Adolph Hitler and Josef Goebbels.

Of all the stupidities into which a man can fall, Oswald
Mosley launched himself into one that was especially vile.
With money supplied by Benito Mussolini, he organized
Britain's 'black shirts,' a national socialist organization
much like the Nazis in Germany.

National socialism was supposed to be the wave of the
future, but Mosley's group couldn't seem to think up
anything more original than going into London's East End
and beating up Jews.

Most Englishmen were appalled. The Duke and Duchess of
Windsor, on the other hand, thought they should do more of
it. When WWII broke out, the Mosleys were locked up as
security risks. They were set free after the war was over,
but told to get out of town. They joined their best
friends, the Duke and Duchess in France, and have lived
here ever since. Diana died on a hot day in Paris, at the
age of 93, last week.

And now we approach the corpse. We can't help but wonder
how it works, beneath this human shell. The obituaries have
revealed little... only the public facts. What we want to
know is why people do such things. So, we've come with a
scalpel; we want to see what is in there.

Don't worry, squeamish dear reader. The only organs we will
look at are the heart and the soul. The brain is not worth
looking at in our opinion; it is nothing more, as La
Rochfoucauld put it, than"the heart's dupe." People can
take a set of 'facts' and think what they want, we noted
yesterday. The heart drives them to it. The brain, on the
other hand, is no better than a congressman - it will go
along with anything.

It seems as though a person will do anything, too, no
matter how preposterous. For here before us is a woman who
was among the world's great beauties. She was said to be
the prettiest of the Mitford sisters, which was tough
competition. Even in her 90s, she posed for Vogue Magazine
and looked good.

She was a beautiful blonde,"the most divine adolescent I
have ever beheld: a goddess, more immaculate, more perfect,
more celestial than Botticelli's sea-borne Venus," wrote a
friend. It is almost too bad she wasn't dumb. She might
have glided through life and been a joy to all who saw her.

Instead, she married badly... which is to say, she fell in
love with Mosley, who was an idiot, and threw in her lot
with him. Later, British counter-espionage agents came to
see her as the greater threat:"The real public danger is
her," said a report,"she is much more intelligent and more
dangerous than her husband."

Of course, she was not the only one of the Mitford sisters
to go bad. They were almost all too smart for their own
good. Their synapses fired right, left and overtime... and
took them in strange directions. Sister Unity, like Diana,
took up with the Nazis. Sister Jessica took an equally
moronic course, but in a different direction; she became a
Marxist.

"I don't understand," said Lord Redesdale, father of the
Mitford girls."I am normal. My wife is normal. And all our
girls are crazy."

While Hitler was praising Diana and Unity as"perfect
specimens of Aryan womanhood," the other sister, Jessica,
called 'Decca' in the family, was plotting to buy a handgun
with which to kill the Fuhrer. But it was Unity who
actually used a pistol - on herself. She shot herself in
the head and died in 1948. What had become of the sweet
little girls raised in Swinbrook? How could normal people
produce such extraordinary characters... how could such
divine little angels turn mad?

We have no ready answer. But a friend tells us of a book by
Riccardo Orizio, an Italian journalist, who interviewed
former dictators. The dead ones do not talk, but there are
a surprising number still among the quick. His book,"Talk
of the Devil: Encounters with Seven Dictators" includes
conversations with Idi Amin, Jean-Bedel Bokassa, Wojciech
Jaruzelski, and Nexhmije Hoxha - who (with, until his
death, her husband, Enver) ruled Albania for nearly fifty
years; Jean-Claude (Baby Doc) Duvalier, and Mengitsu Haile
Mariam, the Marxist-Leninist dictator of Ethiopia.

They are all as mad as Diana and Mosley. But they all
insist that whatever evil they may have done - mass murder,
starvation, grand-scale larceny - they always had a good
reason for it. In fact, each thought he or she was making
the world a better place. And none of them regretted or
repented anything they did - except for tactical 'mistakes'
that got them booted out of the country.

At least Diana Mitford Mosley had no blood on her hands.
And, after 4 decades of peer pressure, she finally admitted
that her wedding guests were not the nicest folks you could
have to a party.

"We all know he was a monster, that he was very cruel and
did terrible things," she said of Hitler in 1994."But that
doesn't alter the fact that he was obviously an interesting
figure. No torture on Earth would get me to say anything
different."

We have not come to the morgue to torture. We just want to
know. How does it work?

And so we have plunged our scalpel into the cadaver. And
what have we? A heart like any other. Red. Round. It could
be yours, dear reader. What then accounts for this madness?

Perhaps the fault lies not in our hearts at all, but in our
souls. We cut around to see if we can find it... but it must
have got away.

Diana Mitford Mosley... may she RIP...


Bill Bonner