-->Lessons Of History, Part I

The Daily Reckoning

London, England

Tuesday 14 October, 2003

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*** Jim Rogers says 'get out of the dollar'... stocks keep rising
into Never-Never Land...

*** Property prices in Britain 'start to fall'... gold goes up...


*** Rush Limbaugh is a big fat drug addict... Harvest on the
Hudson... Financial Reckoning Day - a contrary indicator???...
and more confessions...

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We caught up with our old friend, investment biker Jim Rogers,
last night. Jim was making a presentation at the Royal Automobile
Club to a group of fund managers and private investors.

"You can read the papers all you want. You can even go to a
country and talk to the finance minister. I can tell you exactly
what he'll say: that things are improving.

"But if you really want to know what is going on, you have to go
out and talk to real people... cross the border at some remote
location... talk to people. What we found after going around the
world for 3 years was that if you really want to know what a
place is like, you should talk to the woman who runs the
whorehouse. The madams seem to know everything."

What Jim wants to find out when he travels is what we try to
figure out at home: Are stocks going up or down? Is the currency
solid? What is going on?

"I'll tell you what is going on right now," Jim continued,
echoing themes from his foreword to our book."Americans have
over-reached. That is what you find out when you get out and talk
to people. No matter where you go, people generally are friendly
to Americans, but they distrust and dislike the way the American
government throws its weight around. We have troops in 120
different countries. It costs a fortune to keep them overseas.
They're supposed to be making the world safer for us, but from
what I can tell, all they're doing is making enemies. When we
were traveling around, Paige [his wife] and I tried to defend our
government, but I don't know how many times people asked 'Well,
how would you like it if there were troops from Iran or Iraq or
India stationed in your country?'

"Or, 'What would you think if there were Moslem soldiers in the
Vatican... or in Jerusalem?'

"I didn't have a good answer. The truth is, I probably wouldn't
like it.

"But it's not just in foreign policy that Americans have
over-reached... it's economically, too. Americans are too far in
debt. They owe more money to more people than the entire rest of
the world put together.

"Now, almost all central banks - except maybe China - have gotten
very good at debasing their currencies. But none of them have
gotten as good at it as our own Fed. At the Fed, debasing the
currency is the stated policy. Fed governors have promised to
dump dollars from helicopters if that is what it takes. And
already, there are dollars all over the world. Everybody takes
dollars... and everybody has dollars. And, if they ever decide
they don't need so many dollars, the greenback is in big
trouble...

"If I have one piece of advice for you, it is to get out of the
dollar..."

What have we been telling you, dear reader? What have we been
telling you.

And now, the latest news from our man on Wall Street, Eric Fry:

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

Eric Fry in Lower Manhattan...

- In the spirit of Columbus Day, the Dow Jones Industrial Average
re-discovered territory it last explored in June 2002. The Dow
rose 90 points to 9,764. The Nasdaq Composite also ventured into
regions so unfamiliar that they seemed almost foreign. The Nasdaq
added 1% to 1,933, a level not seen in almost 21 months.

- But investors fully expect the stock market to secure the
territory around Dow 9,700 and Nasdaq 1,900 before advancing to
subdue distant, savage locales like Dow 10,000 and Nasdaq 2,000.

- Gold, looking every bit the frightened native, retreated $4
during the morning yesterday, but then regained its courage to
advance $1.60 for the session to $375.70 an ounce. Gold stocks
fared even better than the metal itself, as the Philadelphia Gold
and Silver Index rose 2.4%. Gold's resilience yesterday was quite
surprising, given the fact that the dollar strengthened nearly 1%
against the euro to $1.167.

- Typically, gold falls when the dollar rallies. But these days,
the gold market seems to be charting a steady, bullish course
toward $400 an ounce, no matter what direction the dollar winds
are blowing. Clearly, the gold market has gained a few admirers
during the past couple of years, both here in the States and
overseas. Asian demand, for example, is strong and growing.

-"More domestic investors are interested in tapping into the
gold market," the Shanghai Daily reports,"with more than 20
percent of stock investors willing to transfer part of their
funds to the gold market, according to a questionnaire of
investors in ten Chinese cities... 7.5 million stock investors
will invest in gold in the near future, said the questionnaire."

- Hmmm... 7.5 million Chinese investors couldn't be wrong, could
they?

- Continuing the explorers-of-the-world theme, your New York
editor attended a party on the banks of the Hudson River
yesterday. (The majestic river is, of course, named after Henry
Hudson, who discovered the river in 1609 while searching for a
northwest passage to the Orient.) On a spectacular autumn day,
your editor dined al fresco at the Harvest restaurant in
Hastings, New York. He spent about half the time gorging himself
on antipasti and roasted lamb, and the other half of the time
trying to shoo his 5-year old son away from the water's edge.

- Every October, the restaurant's owners invite family and
friends to the Harvest for a grape-pressing and Italian-style
feast. And what a feast it is! The Harvest is your New York
editor's favorite restaurant outside of Manhattan, both for its
outstanding menu and its spectacular location. The restaurant
sits a half-hour train ride north of the city along the Hudson
River.

- The cuisine at the Harvest derives from the very same meals
that its gastronomic Italian owners prepare for themselves. In
other words, the owners eat their own cooking... unlike their
counterparts on Wall Street.

- Down on Wall Street, no one eats their own cooking, especially
not corporate insiders. Stock purchases by company insiders last
quarter hit their lowest level in a decade, according to Thomson
Financial. But insiders are not hesitating to dump their stock.
Company executives unloaded a hefty $36 worth of their own stock
for each $1 in purchases.

-"Since March," Newsday observes,"investors have bid up share
prices almost consistently, apparently convinced that the economy
is improving, corporate earnings are growing again and the market
rally is real. Corporate insiders apparently don't agree.
Corporate executives combined to sell $8.7-billion worth of stock
during the third quarter, the highest quarterly volume since the
second quarter of 2001... Do executives know something the rest
of us don't?"

- Why is it that they don't like home cooking?

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

Bill Bonner, back in London...

*** Today's headline from the Guardian:"The high cost of E-Z
credit: debt in arrears up 70%."

In Britain, as in America, consumers have gone into debt at an
alarming pace. The costs are beginning to mount up.

*** And another:"House prices start to fall in many parts of
Britain," says the Daily Telegraph. Last year, house prices in
Britain rose at a 30% rate. This year, they are still becoming
more expensive but at only half the rate.

"The average price of a first-time home is 123,000 pounds,"
reports the paper."For someone on the average salary of 25,000
pounds, this is still impossibly expensive."

*** William Bennett, Jim Bakker, Jimmy Swaggert, Newt Gingrich...
one by one, the great scolds of conservative Republicanism and
religious damnation have fallen, victims to their own sordid
weaknesses. And now, we have the spectacle of Rush Limbaugh's
admission that he is hooked on drugs.

First, a disclosure: a family member, Elizabeth, was once a
fervent dittohead... a Rush Limbaugh fan.

Followed by a condemnation: Limbaugh should be ashamed of
himself. If he wants to take drugs, it is nobody's business but
his own. But for him to confess in such a limp, pathetic fashion
that he is 'addicted to prescription pain medication,' is
appalling. If he is not proud of taking drugs, he may keep it to
himself or blurt it out on the airways. But at least he might be
a man about it. The spectacle of confession, apology, clinical
treatment and rehabilitation has become as tiresome and
fraudulent as a congressional hearing.

How refreshing it would be to find an honest sinner in the public
spotlight. Like the great Southern politician who, accused of
sleeping with a prostitute, gave this public retort:

"It is reported right here in the paper," he began,"that I was
seen coming out of the Sleepy-Time Motel at 5am after sleeping
with a well-known prostitute. Well....I want to tell you that
every word of this is a bald-faced lie. I never laid eyes on the
woman before in my life. And it wasn't the Sleepy-Time Motel, it
was the Triangle Motel. And I didn't come out at 5am... I came
out at 7am... And we didn't sleep a wink."

*** And our own confession: Yes, we admit it; there is no
weakness of the flesh we have not envied and no bad habit we have
not tried to take up. Every man should have at least one
well-developed fault, something to which he can be loyal.

A man with a serious drinking problem, for example, is
practically immune from womanizing; he cannot remember where he
left the girl's phone number. So is a man with a good mistress
immunized from strong drink or gambling; the woman will not
readily share him with another vice. She'll keep him to herself
until she's squeezed the life out of him. Then, when they put the
pulp of the man in the grave, the happy fellow can go meet his
God with only a single blemish on his record.

A man without a sustaining bad habit, on the other hand, is open
to suggestion and prey to any sort of trouble that comes along.
That is our problem; we are always out of step, even at sin we
cannot seem to go along with the parade, nor ever entirely give
up our suspicion that the whole thing is a waste of time. We
almost never see a skirt we wouldn't like to chase... but the one
we find most alluring is worn by our own wife. We drink too much
whenever we get the chance... but we're too busy to make a
serious past-time of it; we rarely drink so much we fall down.
Gambling requires too much attention... we could never master it.
And drugs? We are saving them for later in life, when we really
need them.

So you see, dear reader, if ever we are called to make an apology
on national television, it will be a sad and disappointing farce.
The ratings would go down.

***"Dear Mr. Bonner, read your book: Loved it! Congratulations
for putting such a wise and funny book together."

Readers continue to write in about Financial Reckoning Day,
currently making its way to bookstores around the country.

"What a fantastic book!" writes another."Thank you very much for
sharing such deep insights. Normally, it takes me a considerable
length of time to read a book, by dribs and drabs, 'when I find
time' or when it is convenient. Some books I never complete - I
get so far, and don't find any good information, so I never find
the time to complete them. Unfortunately, there are too many of
those piling up.

"However, your book I could not put down. Every chapter was
better than the last."

"Financial Reckoning Day was a thoroughly enjoyable read," writes
a third."Its perspective surely needs to be considered by any
astute investor. I have positioned my financial portfolio for the
currency crises of the U.S. dollar, which I agree is inevitable
thanks to Greenspan et al. Many thanks for your enlightenment!"

On the other hand, one reader warns:"Beware, your book may end
up being a contrary indicator... signaling a monstrous new bull
market... somewhat like that book written in the early 1990s
called 'The Coming Great Depression of the 1990s'... being
published and released right before the great move up that
started in 1995... LOL"

Unfortunately, we may not get to all the e-mails. So, we would
like to say"thank you" to everyone who has purchased a copy thus
far. And ask, if you liked it, maybe you could recommend the book
to a friend.

Financial Reckoning Day - still discounted 30%
http://www.amazon.com/exec/obidos/ASIN/0471449733/dailyreckonin-20


Thanks again...

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The Daily Reckoning PRESENTS: Marc Faber, on his way to the
ultimate question:"... How much longer will foreign investors,
which are financing the U.S. trade and current account deficit,
be willing buyers and holders of American stocks, bonds, and the
dollar?" The 'answer'? Tommorrow...


LESSONS OF HISTORY, Part I
by Marc Faber

I recently read and reviewed"The Great Swindle - The Story of
the South Sea Bubble" by Virginia Cowles (Collins, 1960). The
book deals with the rise and fall of the South Sea Company and
John Law's Mississippi Company in the early part of the 18th
century.

As I read this entertaining book I became more and more
fascinated by the many parallels between this early period of
speculation in our capitalistic age and today's financial
environment. In particular, I was astounded by the similar role
that paper money, excessive credit creation, and highly
questionable practices - by governments as well as businesses -
played in fuelling the financial excesses in both periods.

From time to time, a wave of optimism spreads around the world
like a bushfire. People believe they are seeing the dawn of a new
era, which will bring unimaginable riches and prosperity to all.
Waves of new era thinking are usually associated with discoveries
(the Americas, gold deposits in California), the opening up of
new territories (the Western territories of the U.S., the opening
of China in recent years), the application of new inventions
(canals, railroads, the automobile, radio, PCs, the Internet,
wireless communication, etc), the rise in the price of an
important commodity (rubber at the beginning of the 20th century,
oil in the 1970s), peace treaties (the breakdown of communism),
or strong economic performances.

A typical feature of"new era" thinking is that it usually
engulfs a country or the world not at the beginning of an era of
prosperity, but towards the end of such a period, and is
associated with some sort of a 'rush' or investment mania. Two of
the most well known examples of this phenomenon are John Law's
Mississippi Scheme and the South Sea Bubble, which occurred
almost simultaneously in the early 18th century. [Ed note: If
you'd like to read Faber's full account of these fascinating case
studies in monetary mayhem, grab a cup of coffee and a cozy chair
and sit down for an exciting read:

"The South Sea Bubble and Law's Mississippi Scheme"
http://www.dailyreckoning.com/body_headline.cfm?id=3480 ]

"The Great Swindle" is an excellent account of the events that
surrounded the South Sea Bubble and the Mississippi Scheme.
Although over the following 300 or so years the stage of
investment manias repeatedly changed, the script, the
accessories, and the nature of the actors participating in the
bubble have largely remained the same.

The"bubble" model always involves a"displacement," which leads
to extraordinary profit opportunities, overtrading,
over-borrowings, speculative excesses, swindles and catchpenny
schemes, followed by a crisis during which fraud on a massive
scale comes to light, then by the closing act during which the
outraged public calls for the culprits to be taken to account. In
each case, excessive monetary stimulus and the use of credit
fuels the flames of irrational speculation and public
participation, which involves a larger and larger group of people
seeking to become rich without any understanding of the object of
speculation.

The saga of the Mississippi Scheme and the South Sea Company is
historically relevant, for example, because it contains all the
major features of subsequent manias: shady characters,
corruption, fraud, dubious practices, the creation of money and
the extension of risky loans in order to keep the speculative
orgy going, the catalyst, which leads to the initial collapse -
usually the revelation of fraud, the inability of a large
speculator to come up with the money to meet a margin call, the
revelation that insiders cashed out, or some adverse economic or
political news - and then the panic during which greed and
euphoria are replaced by fear and the speculators' desire to get
out at any price.

What is also important to understand is that both the promoters
of the South Sea Company and John Law attempted to support the
market at any cost. At some point, however, market forces proved
to be far more powerful than any price-supporting measures they
could ever have taken.

The Mississippi scheme in particular provides a relevant example
of the ineffectiveness of printing money to stimulate the economy
and lighten its debt load. John Law's policies of the day are
reminiscent of those of the current U.S. central bank, the aim of
which is to solve any problem the same way Law tried to solve the
Mississippi Company's problem - simply by increasing the money
supply.

That such monetary policies will lead to the same price
increases, which, at the time of Law's Mississippi Scheme,
destroyed people's faith in paper money, ought to be clear.
Whether, at that point, current central bankers and government
officials will conspire to expropriate investors' gold
possessions, as Law did, remains to be seen. But we shouldn't
forget that in 1933, in the midst of the Depression, the U.S.
government declared the possession of gold by individuals to be
illegal.

But despite its eventual failure, John Law's Mississippi Scheme
is an important event in economic history since it represented an
attempt to introduce paper money on a large scale. The Banque
Générale was primarily a deposit bank and not a lending bank, and
it proved to be a great success for a while. With a limited note
issue (backed by gold) and branches in the provinces, it spread
means of payment away from the financial centers of Paris and
Lyons and therefore had a beneficial effect on trade and
industry.

The problem occurred when the regent took over the bank (it
became the Banque Royal) and began to issue notes with no limit
to their quantity. That having been said, we must realize that
there is, of course, always a limit to the quantity of money that
is being issued, and this limit comes from the market mechanism.
At some point, the French public began to distrust the notes that
had been issued by the Banque Royal, and then - despite all the
efforts of John Law, who was by then finance minister, and the
regent of France - no one wanted to hold paper money anymore. The
result was that the banknotes issued by the Banque Royal began
rapidly to depreciate against gold, commodities, and real assets.


We see, therefore, that a financial system based on paper money
depends almost entirely on the confidence of the public in the
currency that is issued by the monetary authorities, and that
once confidence in a currency is badly shaken, painful
consequences are inevitable.

Therefore, the reader should ask himself the question: for how
much longer will foreign investors, which are financing the U.S.
trade and current account deficit, be willing buyers and holders
of American stocks, bonds, and the dollar?


Regards,

Marc Faber
For The Daily Reckoning

P.S. Surely, there will be a time when, as was the case at the
time of the Mississippi Scheme and the South Sea Bubble, the
present 'chain letter' type of fiat money operation practiced by
the U.S. Federal Reserve Board will no longer work and lead to a
sharp depreciation of the U.S. dollar.

The other possibility, of course, is that the dollar begins to
depreciate, not compared to foreign currencies, but - as was also
the case at the time of John Law - against commodities and real
assets.


Editor's note: Dr. Marc Faber is the editor of The Gloom, Boom
and Doom Report. Headquartered in Hong Kong for the past 20
years, Dr. Faber has specialized in Asian markets and advised
major clients seeking down-and-out bargains with deep hidden
value, unknown to the average investing public.

Looking ahead to where the real growth opportunities of the next
30 years lie, Dr. Faber has distilled his analyses into the
ground-breaking book,"Tomorrow's Gold" - a wake-up call to
Western investors. If you'd like to find out how to benefit from
the dollar's decline in a way consistent with the ideas in this
essay, see:

Tomorrow's Gold
http://www.amazon.com/exec/obidos/ASIN/9628606727/dailyreckonin-20