The Division of Labor... And Gold / The Daily Reckoning

verfasst von - Elli -, 31.07.2003, 19:51

-->The Division of Labor... And Gold / The Daily Reckoning

Ouzilly, France

Thursday, 31 July 2003

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

*** We harp, and await the end...

*** It's halftime... bears more defiant than defeatist...

*** Deep value... and how to get it... And more on Americans,
too... What have we become? Rude? Lazy?

Are we harping, dear reader?

Yes, we are. We are harping on what we think is the Big
Picture... the real effect of the Dollar Standard system and
what is likely to become of it.

Why? Because we believe it is the key to understanding this
economy.

Most economists seem to have no idea of what is going on.
The most preeminent among them, such as Alan Greenspan,
think that all they have to do is lower interest rates and
the economy will spring back to life. They cannot
understand what is wrong; interest rates have been cut 13
times... and still no real recovery.

And what next? The last cut seemed to go all wrong. Instead
of lowering lending rates, it seemed to trigger a near-
collapse in the bond market. Trillions have been lost
already.

"Do you remember when we were down at Amelia Island?" began
Porter Stansberry yesterday."We were getting on a bus with
some other people, and you struck up a conversation with
one of them... She told you that her money manager had lost
a lot of money in stocks during the last three years, but
that now he had put her into bonds... She said something
like, 'Now I'm in bonds because that seems to be what
everyone is doing with their money.' I remember, because we
all looked at each other and we knew the bond market was
soon going to head down. You turned and whispered 'Sell!'
When ordinary people say things like that, you just know
it's time to get out. Well, guess what? That day must have
been the very top for the bond market. It's been down every
since."

Bonds yields fell yesterday... but one rally does not a new
trend make. Mortgage rates have risen to the point that
they are stifling refinancings. They were down 32.9% last
week, says a Bloomberg report. Has the bond bubble popped?
Has the refinancing bubble popped?

We don't know, but it looks more and more like the economy
has taken the turn we thought was months... even
years... ahead. It may have already turned decisively to the
South... That is, away from its route to Japan and towards
Argentina. Instead of a long, slow, soft sushi
depression... we may face a fast-paced, painful salsa
depression, with inflation... and then hyper-inflation...

What could stop it? Someday soon, the nation may need a
tough rate hike... and a tough man at the Fed, like Paul
Volcker, to pull it off. We don't see either. Instead,
waiting to replace Greenspan, we see Ben Bernanke with a
map of Buenos Aires in his hand.

Tango, anyone?

Over to you, Eric...

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

Eric Fry, reporting from Manhattan...

- The stock market did a little running in place yesterday,
as the Dow Jones Industrial Average dipped 4 points to an
even 9,200 and the Nasdaq Composite dropped half a percent
to 1,721.

-"It's halftime," declares a defiant Dan Benton."The
second half of the year has just begun." Benton's
declaration is a thinly veiled taunt that the bears will
"win" the second half. As Benton sees it, stock prices -
especially tech stock prices - will be much lower at year-
end than they are today.

- Why should anyone care what this guy Benton thinks? Well,
truth be told, maybe we shouldn't. After all, he's just a
hedge fund manager who has steered his fund to an 11% loss
so far this year. On the other hand, maybe we shouldn't
summarily dismiss Mr. Benton's outlook. His curriculum
vitae includes the fact that he has guided the funds under
his management to 40% average annual gains since 1944. In
the process, his management company has grown into a $9
billion behemoth - the largest U.S. hedge fund firm that
invests solely in equities.

-"The biggest technology-stock investor in the hedge fund
world is getting clobbered betting against tech," the Wall
Street Journal gloats."Mr. Benton's $9 billion hedge-fund
company, Andor Capital Management LLC, is down a hefty 11%
this year while the tech-heavy Nasdaq Composite Index is up
nearly 30%... So why don't Mr. Benton and his team believe
the [tech stock] rally is for real? They see no evidence
corporate spending is reviving, in the tech world and in
the rest of the economy."

- Benton isn't panicking just yet. Indeed, he is more
defiant than defeatist."You're going to take us out on our
shields if the market is changed forever and fundamentals
and stock prices are now disconnected," Benton recently
told his investors. Such noble words may not be very
comforting to his investors, given the fact that their
capital would be riding out on the same shield.

- But maybe Benton's fortunes will soon improve. If we were
forced to hazard a guess, we'd say that Benton won't be
carried out on any shields this year... although he may yet
wear a laurel wreath...

- OK, so maybe the invasion of Iraq has not been the most
masterful geo-political maneuver in U.S. history. For
starters, the most conspicuous MIAs of the war are the
"weapons of mass destruction." Perhaps we will find them
still. But meanwhile, our military"victory" in Iraq has
gained us the privilege of spending about $1 billion per
week to police a distant land where the citizenry while
away the days launching grenades into columns of American
soldiers.

- Sure, there are a few drawbacks to having invaded Iraq,
not to mention a few nettlesome complications to occupying
the country. But at least we can tap the country's vast oil
reserves, right? Shouldn't that count for something? Well,
it might count for something if it were true.

- Unfortunately, the major oil companies are none-too-eager
to set up shop in the new-and-improved Iraq."Top oil
companies executive have told the U.S. they will not make
large investments in Iraq while the security situation
remains so dangerous," the Financial Times reports."They
have also expressed concern about the lack of political
legitimacy for the U.S.-backed authority in Iraq."

-"The industry's concerns were amplified [recently when]
Sir Philip Watts, chairman of Royal Dutch/Shell said, 'The
safety of our people is paramount. There has to be proper
security, legitimate authority... with a level playing field
and a transparent process by which we will be able to
negotiate agreements that would be longstanding for
decades.'" Apparently, as Mr. Watts sees it, the Americans
leveled almost everything in Iraq EXCEPT the playing field.
The Iraqi oil bonanza may have to wait a while.

- While stocks sagged yesterday, Treasury bonds rallied to
halt a bruising four-day losing streak. The 10-year
Treasury note rebounded a hefty 1 1/32 points to yield
4.31%, down from 4.41% on Tuesday. But one day's rally
hardly changes the fact that yields are soaring. The sting
of higher interest rates is being felt acutely in the
mortgage market."Where's the fork? Refis are done," one
analyst quipped.

- Demand for refinancings as measured by the Mortgage
Bankers Association's refinance index dropped 32.9% in the
week ended July 25, and have tumbled a whopping 58% from
the record high set in the last week of May.

- Now that the refi activity is screeching to a halt, how
on earth will consumers continue to live beyond their
means? How will they borrow the money required to buy the
things that they so desperately (do not) need?

- In the first half of this year about $50 billion of
consumer spending was due to cash-out refinancings,
according to Freddie Mac. For all of 2002, the amount
totaled $96 billion. That's a lot of cash that will not be
making an encore appearance in the second half of this
year, unless rates drop substantially from current levels.

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

Bill Bonner, back in Ouzilly...

***"I'm only interested in deep value," said a very
successful German investor last evening, as we drove him to
the airport.

"What I look for is a company selling for less than its
cash. And I'm pretty tough about it. I do a Ben Graham
analysis. I begin with only cash and near-cash... that is,
stuff that can be easily liquidated for real cash. You know
what value I put down for the factories, plant and
equipment, office supplies and that sort of thing?
Nothing... zero. Then, I subtract debt, other liabilities,
and the value of the outstanding shares. It doesn't matter
particularly whether the company is private or public, the
analysis is the same. If the resulting number is positive,
I look further.

"I want to know who's running the business and what they're
trying to do. It is amazing how stupid business managers
can be. Often you find a little company selling very
cheaply. But then you discover they are about to do
something really dumb, like buy another business or
diversify into another industry. Or, they're just using the
company as their own piggy-bank. Then, I walk away.

"What I want - and I learned much of this from Warren
Buffett - is a solid company, with solid management. Then,
I only buy if I can get it with a margin of safety. I'll
buy companies if I can find them selling for less than 66%
of the cash they have on hand. And even then, they don't
always work out."

*** And here, a letter from another reader with a similar
interest in value:

"Don't know about anyone else out there in investor land,
but I can't complain. My little piddly portfolio contains
mostly high-yield, moderate growth stocks, with an average
P/E around 12! The average yield is in the 3.6 range. And,
their annual up/down range is in the $3-5 range. Since 9/11
my overall value has remained, and even increased somewhat.
Meanwhile, just for a bit of leavening I have been playing
the penny dreadfuls, gaining with some, loosing with some.
But best part, my 'losses' have been offset by my gains and
dividend income, resulting with Uncle having to pay me a
REFUND for last year (first time in a long time he ever
gave me one). So, in terms of net advance/gain (including
the refund), I'm ahead. Not by a hell of a lot, but still,
ahead. Forget the techs, forget the big industrials, they
'don't get you nothin' but the blues' as an old, old Jo
Stafford song said it.

"By the way, one of those stocks is an old-line bank stock
with the following record: since 1850, it has never missed
a single dividend payment, excepting in 1868 (post-war
recession) and 1932 (big Depression). It just closed at
$33.89. I got in around $25 +18 months ago."

Ciao,
Bill T.

*** Readers worldwide write with more comments on Americans
and their special place in the world:

"Dear Sirs...

"I have to write in response to your reference to Father
Richard Neuhaus. He claims... 'In America, people are
energetic, vibrant and filled with technical expertise,
whistles and bells.'

"I suspect Father Neuhaus quotes from another time... If
only what he says were accurate. I have just left the USA
after living in that country 18 years to live in Australia.
The American people no longer run on energy, instead
propelled today by desperation, frustration and a short
fuse. Today the vibrancy I see is a scramble by the
majority of the working class and middle class to pay their
bills, whilst shaking from fear of loosing a diminishing
pool of jobs.

"My work took me to all corners of the USA... the U.S. is
home to a growing cancer of communities closer to third-
world status. No longer is the social machinery holding,
with rudeness and arrogance in customer service and retail
stores the order of the day.

"As a rule, I regret that American adults and children
today possess the worst manners and demonstrate an almost
chronic laziness towards thinking!

"So far as being filled technical expertise - you are
kidding! The average American has less curiosity and
capacity for technical expertise than citizens of other
Western nations, and in comparison with Asian nations, the
gap of technical and social skills is even wider. No... I
regret, there was once a day America possessed energy,
technical expertise and was vibrant. Today what exists is
whistles and bells... Americans have know-how, which remains
intact, but have lost expertise.

"My sense is that America is becoming the back-water of the
world... a country with lots of whistles and bells - but few
in America today have much energy to blow the whistles and
ring the bells. I hope it changes!"

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

The Daily Reckoning PRESENTS: The return of Bill's
gardener... this DR Classique was originally broadcast on 7
August 2000.


THE DIVISION OF LABOR... AND GOLD
by Bill Bonner

"Look," said Mr. Deshais proudly, pointing a finger at the
shelf. There were jars of red balls in some sauce, various
shades of jam, green beans, pickles. Dozens of them.
Hundreds maybe.

"Ah," continued the gardener,"you won't have to worry this
winter."

I had not been worrying about not having enough to eat this
coming winter. It had not even crossed my mind.

Mr. Deshais is fighting the division of labor.

It would be cheaper just to buy the tomatoes and lettuce at
the local market.

And Mr. Deshais, fanatic as he is, produces far too much. I
am getting stuffed with radishes, squash, lettuce, and
green beans at every meal. Occasionally, my nose twitches.

So bountiful is our garden that Mr. Deshais has taken to
canning the surplus. A caldron of water boils almost all
day long, as various legumes get tortured - scalded, cooked
and canned. We are preparing for famine.

A few years ago, everyone maintained an inventory of food.
Only a fool would have trusted completely in his ability to
buy what he wanted when he wanted it. But now we all seem
to have an unshakeable faith in the division of labor... and
the supply channels upon which our lives depend.

Progress has made Mr. Deshais's canned golden squash
unnecessary.

The question I raise in this letter concerns not golden
squash, however, but squashed gold. If it is no longer
necessary to keep an inventory of food, does it make sense
to store cash? Is gold, the ultimate store of value, no
longer necessary?

"It's over."

Readers of these letters may recall the words of the
portfolio manager, quoted by Reuters, who explained that
gold was finished as a financial asset.

It was easy to dismiss the voice of 'progress'! The world
has been making progress for thousands of years. But the
cycles of greed and fear - and the self-interested
reasoning of central bankers and politicians - do not
change. Human wealth grows. Not always, but usually. Year
after year, new innovations... new technologies... further
insights and refinements accumulate.

But homo sapiens sapiens, an animal of whom taxonomists
were so fond they had to name it twice, are still the same
near-ape creatures who wandered off the African savannah
100,000 years ago. Now, these same creatures fill the seats
of London restaurants, the plastic spectator seats of the
Baltimore convention center when the Worldwide Wrestling
Federation puts on its show, and the benches of sweatshops
in Bangkok, where the latest fashions are stitched.

This animal, whether dressed by Kenzo or Benetton, is still
subject to the same hard-wired instincts that beset and
enabled his ancestors. And not just his close kin in the
human species - but the entire line of evolutionary tissue,
from the lowest amoebic bacteria to the most highly refined
matron in the 16th arrondissement of Paris.

This animal, whose collective wisdom priced gold at $825 an
ounce two decades ago, now considers it worth only $280
[and today, $355]. But, an investor's view of what things
are worth is not a consequence of rational, computer-like
analysis. An investment may be worth $15 one day and $30
the next - without any real change in the underlying asset.
An ounce of gold is still the same element, occupying the
same position in the periodic table that it did when George
W. Bush was at Yale. It is not gold that has changed.

These marvelous animals - investors - episodically become
expansive and optimistic... filled with the hope of riches
far in excess of what is likely to come their way. Then,
they reverse themselves, spasmodically, and fear that the
sky is falling.

And yet, progress continues. And progress, too, is a result
of the most basic process of nature - specialization and
the division of labor.

From the beginning of life, millions of years ago - with
single-celled bacteria floating in a sea of primordial soup
- to the crown of creation, the human being, nature has
become increasingly specialized. The human body has
billions of cells - liver cells, brain cells, blood cells -
all cooperating to replicate themselves in a competitive,
unforgiving world. If the liver cells go on strike, or the
brain decides to cease functioning, it's over. Unless the
person has already produced offspring, every cell in the
body will soon be history, and the genetic material that
gave them life will have reached an evolutionary dead end.
Every cell of the human body depends on every other cell to
do its duty.

A Roman senator, Menemius Agrippa, used this analogy to
head off a revolt of the Plebes:

"Once upon a time, the members of the body began to grumble
because they had all the work to do, while the belly lay
idle, enjoying the fruits of their labor; so the hands,
mouth and teeth agreed to starve the belly into submission,
but the more they starved it the weaker they themselves
became. So it was plain that the belly also had its work to
do, which was to nourish the other members by digesting and
redistributing the food received."

Against all odds, this argument worked. The Plebes were
given a couple of seats among the tribunes and the
rebellion was called off.

Not only do cells cooperate within a single body;
individuals cooperate within a society. The society of bees
has been studied for hundreds of years. Some bees collect
honey. Others guard the hive. And one - the queen -
reproduces. Since there is only one reproducing female, all
the bees are closely related. Sharing nearly identical
genetic material, they all cooperate to make sure that it
survives - gracefully sacrificing their own lives for the
good of the hive, as necessary.

Humans have much more diverse genetic material. Most people
breed. Still, they have specialized to such an extent that
most are completely dependent on others.

One man produces bread. Another produces wool. And still
another writes the code to produce electronic games, such
as Grand Theft Auto, which Jules was playing this weekend.
(In the game, contestants steal cars and then get points
for running down pedestrians. They get extra points for
killing policemen and wrecking police cars.)

If the bread-makers and everyone else involved in the chain
of food production - from the farmers to the waiters at the
Tour d'Argent - were to go on strike for a very long
time... millions of people would die. But it doesn't happen.

Farmers go out of business. Waiters quit and become actors.
Truckers go bankrupt. Whole areas of the world suffer
droughts and other natural calamities. But the food keeps
on coming. The division of labor in the agricultural sector
expands.

Even farmers would starve to death if the division of labor
were to break down - for few of them produce more than one
or two crops. And few keep an inventory of their production
for personal consumption. Instead, they find it easier and
more economical to drive to the local grocery store.

Likewise, not even gold-mining companies stock gold. They
typically sell it as soon as they can. As we learned when
the price of gold jumped a few months ago, they actually
sell it before they mine it. Many gold mining companies
actually own less gold than you and I do. They've sold
everything they've produced - and then some.

Specialization has been given a big boost lately - from the
Internet and economic globalization. Do these things mean
"it's over" for gold?

Our guess: when something has retained value for thousands
of years, it's not likely to give it up anytime soon.


Your editor,

Bill Bonner

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• The Division of Labor... And Gold / The Daily Reckoning - - Elli -, 31.07.2003, 19:51