The Daily Reckoning - Vandals Of The Internet (Bill Bonner)

verfasst von Firmian, 03.04.2004, 09:30

-->Vandals Of The Internet

The Daily Reckoning

London, England

Friday, 2 April 2004

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*** Metals on a tear... looking at the Big Picture...

*** The world's oldest steeplechase... Bear on Board?

***"They just don't get it"... remember the New Era? Nation
building... a sad anniversary... and more!

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Platinum and silver are exploding to the upside.

Gold rose 50 cents, following a big day yesterday. At
$427.80, it now well above our last target buying level -
$400.

Copper's hot, too... it gained a cent yesterday, to $1.37
per pound.

People still read the news daily and react to it. Jobless
claims fell. The Producer Price Index rose. The European
Central Bank decided to sit tight, with its key lending
rate twice as high as the Fed's."Coal is hot," says the
Wall Street Journal. Stocks rose.

How people will react, we don't know. But we see nothing
especially new or interesting in these headlines. So we
stand back and admire this old tattered ball we live on.
What's up, we wonder?

Events seem to follow patterns. But the patterns are hard
to see when you're in the middle of them. We believe, for
example, that the U.S. is on the Road to Ruin. But how do
we know? There are no road signs, no maps, no GPS. And even
if we are right, what route will we take... and when will we
get there?

We don't know. So, we just follow the rules. We buy stocks
when they are cheap. We buy businesses we like. We buy real
estate we want to own; whether it goes up in price or not.
And we approach debt like we approach the polling station
and the news - skeptically, and as rarely as possible.

And, oh yes, we buy gold. The yellow metal owes nothing to
nobody. If the dollar-based international monetary system
collapses, gold will still be there. If the credit-fueled
American stock market plummets... or the world's fantasy
economy blows up... gold will sit as still and quiet as a
cigar butt. Inflation? Deflation? Gold will neither laugh,
nor cry... neither panic nor despair.

Looking at the Big Picture, we note that America's economy
has shifted from producing things to consuming them... and
from lending money to borrowing it. Its leaders have gone
from encouraging thrift and moderation... to urging
squandering and recklessness.

Meanwhile, on the other side of the world... the earth's
largest democracy and its largest non-democracy are posing
the first serious threat to Western economic dominance
since the beginning of the Industrial Revolution. Japan
showed the way: Make things cheap and export them to
America. Now, China is making so many things, so cheaply,
it is depressing prices all over the globe. And India -
with its millions of educated, English-speaking people - is
showing that it can compete in services and technology,
too. So, now service workers... and Silicon Valley... are
feeling the squeeze. Deflation in the global price of labor
is probably inevitable.

But $50 billion was added to the dollar money supply over
the last two weeks. At the Fed, Ben Bernanke has vowed to
avoid stable prices at all costs. And all over the world,
growing dollar deposits... and U.S. Treasuries in central
bank vaults... inspire inflation. We see it in the price of
commodities. China is bidding for them. It needs
energy... copper... steel to keep providing Americans with
gee-gaws. Inflation in primary commodities is also probably
inevitable... at least for now.

All over the world, asset prices are propped up by debt.
Take away the credit... and at the margin... prices fall. A
single desperate homeowner can bring down the price of an
entire neighborhood. Once we get to Ruin, there will be
plenty of them. So, what can you expect for your houses and
stocks? Deflation, is our guess.

But who knows. We're thinking about it... but there is so
much thinking to do... and only so much time.

Meanwhile, here's more news:

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

Dan Denning, also in London...

-"You put your money in and get nothing out, ever." Your
London correspondent thought his colleague Dave was
referring to the stock market. But no... he was referring to
an even more entertaining form of gambling, the Grand
National, which takes place tomorrow here in England.

- It's the world's oldest steeplechase. The English have
been betting on the race, all four miles and four furlongs,
nearly every year since 1837. If there were such a thing as
an office pool, your editor might have theoretically drawn
a horse by the name of"Montreal" (although the original
name on the theoretical slip could have been"Silver
Streak," which, as a precious metals bull, he would have
preferred, theoretically.) The horse he really wanted was
"Bear on Board."

- We suspect the bear is now on board in the stock market.
But the bear hasn't yet made his presence felt on the Dow
Jones Industrial index. Said index was up a modest 15
points yesterday. But the Dow's biggest move of the day
was... three. The Index is dropping three Eisenhower-era
components - AT&T, Eastman Kodak, and International Paper -
and adding three new components: AIG, Verizon, and Pfizer.

- Out with phones, film, and trees. In with insurance,
phones, and drugs. Not exactly a trade which makes the
Index more"financial." But if the Index is designed to
represent the U.S. economy, what does the change tell us?
Dow Theory guru Richard Russell says,"IP and EK are
manufacturers, and AT&T does some manufacturing. Verizon
and AIG are service companies and Pfizer is health service,
research and some manufacturing. So the Dow will look more
like a service stock average and less like a manufacturing
stock average - and thus more like what the U.S. is
becoming."

-"Can a nation become wealthy by providing services? Maybe
it can, but I can't see it," Russell adds. We agree. And in
that vein, it's probably good news that the ISM factory
index rose to 62.5 in March. It was the fifth month in a
row the index has risen.

- The number the market covets, though, will appear in
today's employment report. Can a nation become wealthy
without adding jobs? We think not, no more than a nation
becomes wealthier as asset values float higher on a sea of
credit. People may FEEL wealthy when their stocks and
houses go up in price. But they'll BE poor if they hold on
to those assets... and learn the hard truth that prices can
go down, too.

- Investors in Fannie Mae (both in Fannie stock and Fannie-
backed bonds) might be poorer, too, if reports that Fannie
may have to revise previously reported financial statements
are accurate. Fannie's housing cousin, Freddie, has already
admitted it cooked the books to"smooth out" earnings
growth over time.

- Yesterday, the Office of Housing Enterprise Oversight
(OFHEO) announced that it's looking into Fannie's
accounting practices."Our review of this particular
matter," said the Office,"while not concluded, has led to
concerns that Fannie Mae may not have applied the proper
accounting guidance in this area. This could affect not
only the company's manufactured housing portfolio but other
assets as well."

- Hmm."Other assets." Would those be Fannie's bonds? Its
derivatives contracts? The bonds of primary mortgage
lenders that Fannie has bought? We don't know, dear reader.
This is the trouble with the"financial economy." When a
thing's value derives from the value of two or three other
things (interest rates, the reliability of mortgage owners
making their payments on time, bond investors), it gets
awfully hard to know what the thing is actually worth... if
it's worth anything at all.

- For our part, we prefer gold. The yellow metal soared to
a fifteen-year high at yesterday's close; spot gold is
trading at $427.80 per ounce. And right now, gold is rising
against almost all the world's currencies. Think about it.
The yen is appreciating against the dollar, but the yen
price of gold has held firm. In euro terms, gold has risen
nearly 10% in recent weeks.

- What's notable about this? Currencies rise and fall in
value relative to each other. They're supposed to reflect
the"fundamentals" of the economy they belong to. But right
now, they look more like"monkeys strapped to greyhounds,
forced to race," as my friend Dave suggested.

- All currencies are weakening now... relative to gold. Does
that mean the market is starting to treat gold more like
money and less like a commodity? We would humbly
suggest... definitely yes. In fact, it wouldn't surprise us
a bit if the rumored hoarding of commodities in China
includes an awful lot of shiny yellow stuff.

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

Bill Bonner, back in London...

*** The folks in Fallujah just"don't get it," said a
military spokesman. They don't seem to realize that it's a
new era in Iraq... with democracy, peace, and prosperity.

The last time the phrase"they just don't get it" was
prominent in the news was back at the end of the 1990s.
Then, proponents of the New Era used it to describe people
- like us - who didn't understand how you could make any
money buying companies with no apparent means of support.
Henry Blodget and the dot.com mongers had no good response.
"They just don't get it," was the best they could do.

Well, as we recall, the whole New Era hallucination blew
up... and those who 'got it' got it good and hard.

The U.S. announced victory in Iraq more than a year ago.
But the military historian Clausewitz explained that one of
the greatest dangers in war lay in beating an enemy on the
field but failing to win the"willing submission of a
populace." Without that, he observed, your gains become
liabilities... because the enemy makes it impossible for you
to enjoy your successes or advance further. Every step you
take deeper into enemy territory - without secure lines of
supply and support - merely increases the risk of complete
disaster.

Watching the scene on TV, it did not look to us as though
the Iraqis fully appreciate our efforts at nation building.
It was almost as if they liked their nation just fine
without us.

*** Elsewhere in the news, we see that next week marks the
10th anniversary of another disappointment in New Era
annals. After the colonialists were kicked out in the '50s
and '60s, Africa was said to be entering a new era of
democracy, peace and prosperity. But on April 6, 1994, an
airplane carrying the presidents of Rwandi and Burundi was
shot down. Within hours, the Hutus began swinging their
machetes in the direction of anyone who even looked like he
might be Tutsi... and in a few days, hundreds of thousands
of men, women and children had been slaughtered.

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The Daily Reckoning PRESENTS:"News has taken over," wrote
Bill in yesterday's Reckoning. But how far does a barrage
of headlines get us? We've seen what became of the New Era.
Whither, then, the Information Age? This DR Classique was
first published almost exactly 4 years ago today.


VANDALS OF THE INTERNET
By Bill Bonner

"Art" is what Jack Lang called it. He was referring to
graffiti - of the sort you now see all over Paris and other
major cities.

As minister of culture, Lang actually used taxpayers' money
to promote graffiti. The idea was planted. Grants were
given. Money was spread around. Sure enough, a crop of
graffiti"artists" was raised.

Lang held expositions where the graffiti artists were given
a chance to show off their work. A subway car was hauled up
out of the ground for the artists to work on... and then put
on display.

Since then, the"artists" have attacked almost every
building in Paris. Even the most ancient buildings have
been defaced. Even the most beautiful facades have been
vandalized.

And now Jack Lang has moved to the ministry of education,
and the taxpayers' money is used to get rid of graffiti.
Squads of public workers, armed with various solvents and
grinders, battle the new art form. Graffiti, though, is
easier to apply than remove.

"Graffiti" may have a digital cousin.

I have been trying to understand the essence of the
Information Age. What's it all really about? What is
information really worth? How can it make us rich? And how
come, given that the Information Age has been upon us for
many years, companies have been unable to convert this
abundance of information into profits?

Is it possible that information has no value? And that it
is only given value by the circumstances in which it is
used?

In the middle of WWII, a dead man was dressed in a British
officer's uniform and given a set of plans for the invasion
of Europe. The plans were, of course, intended to mislead
Hitler about Allied intentions. The body was then dumped
into the sea, so it would wash ashore where the Germans
could find it.

Hitler also believed that he had a network of spies in
England who would be able to fill him in on the coming
landings. But these spies had almost all been discovered
and"turned," so they were feeding false information to the
German high command.

Thus the information that Hitler was receiving was worse
than no information at all. It not only lacked quality... it
lacked integrity. Of course, there are many examples from
military history in which the integrity of information was
decisive. Solzhenitsyn tells us how the Russian army in WWI
was commanded by German-speaking officers from Prussia.
They would transmit their orders and battle plans in
German.

Curiously, they were often intercepted and read by the
enemy - whereas their own troops found them
incomprehensible. In our own War Between the States, Lee's
plans at Gettysburg had been betrayed to the Yankees when a
Southern officer used them to wrap a cigar - and left them
by mistake to be discovered by Union troops.

Most recently, the nature and value of information has been
called into question by the Internet. Information is free
on the Internet - as is, I hesitate to remind you, this
letter. But free information sometimes turns out to be
worth a lot less than you pay for it.

In the last few weeks, quite a few people have been charged
with manipulating stocks via the Internet. The typical
scheme, such as the one perpetrated by a student at
Georgetown Law School, involves buying the shares of some
marginal company and then going on the Internet to ramp up
the price. This is easier to do than misleading the
Wehrmacht. You only have to announce some new
breakthrough... some new contract... a rumored buyout... new
technology... whatever. The whole idea is to create the kind
of buzz that gets people talking about it.

The very same"investors" who are thought to be too
sophisticated to allow a bear market to occur seem to jump
at the chance to buy a stock they know nothing about, on
the basis of a recommendation from someone they do not
know... founded on information whose accuracy cannot be
affirmed and whose source cannot be traced.

A lawyer defending one of the alleged manipulators has
responded, though, that you can't mislead people on the
Internet. He says that Internet postings are nothing more
than"graffiti," with no more informational content than
graffiti has artistic content.

The lawyer's argument is that his client just used the
Internet as a graffiti artist uses the wall of a public
building... or perhaps a dog uses a tree. He pollutes it,
perhaps vandalizes it... but no serious person would mistake
it for useful information.

But junk life imitates junk art. Pumping and dumping stocks
on the Internet works. In just a few hours, the graffiti
artists of the Internet have been able to sell their shares
at a profit.

In the military, the units charged with gathering
information and separating fact from fiction are called
"Intelligence" units. Mr. Cassady, with whom I stayed in
Normandy, has spent time in U.S. Army Intelligence. He had
even been stationed at Fort Holabird, Maryland.

Separating fact from fiction is tough work. And it gets
tougher - the more facts and fictions you have to work
with. The Internet is ultimately just a means of
communication - delivering an almost infinite number of
facts and fictions. The tough part is still sorting them
out.

Which, of course, is what I try to do every day....


Bill Bonner
The Daily Reckoning

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• The Daily Reckoning - Vandals Of The Internet (Bill Bonner) - Firmian, 03.04.2004, 09:30
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