The Daily Reckoning - Res Ipsa Loquitor (Bill Bonner)

verfasst von Firmian, 26.07.2004, 19:45

-->Res Ipsa Loquitor

The Daily Reckoning

New York, New York

Friday, July 23, 2004

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*** Beware the rogue waves! A new study to frighten any
mariners...

*** Wrangling with the bureaucrats...the federales come
knockin'...

*** Tobacco prices are up...the Amish make money!

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It's Friday morning, we must be in New York. Once again, we
leave the news to Tom, where it's Friday evening...in
London.

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Tom Dyson, from Chiswick, underneath London's principal
flight path...

- Here at the Daily Reckoning, as regular readers will
attest, we love finding different angles from which to view
the markets."We are," said Bill yesterday,"what is known
in the profession, derisively, as 'literary economists.' We
believe more in words, ideas, metaphors - and what we see
with our own eyes - than in the numbers themselves."

- It's no surprise, therefore, that Mother Nature often
plays an important part in this analytical process. Whether
it's something as simple as using a phrase such as"the
storm clouds are a-gathering over Washington" or"today,
the sun shone on investors" to describe the market
action...or for more spurious applications, like attempting
to use the Fibonacci ratio for predicting stock prices.
(The Fibonacci sequence is very common in nature. Shells,
flowers, pinecones and even the human body are all
constructed in Fibonacci ratios. But in finance, it just
seems to help one lose money.)

- Just the other day, our favorite perma-bear, Stephen
Roach, titled his weekly offering"The perfect storm." He
was, of course, referring to the hat-trick of evil forces
he sees bearing down on this year's market. More on this
nasty weather system, below...

- And yesterday, the cold wind, which has been blowing down
Wall Street of late, let up. Or maybe investors just
decided that they had already sold enough stocks. Either
way, they turned up their collars and pushed the leading
averages higher - just. The Dow added a meager 4 points to
10,050 while the S&P mustered up a three-point gain to
close at 1,097. The Nasdaq made the best of the weather,
gaining 15 points or 0.8% and closing at 1,889.

- The dollar didn't do much yesterday, but overnight, the
heat was back on. As of writing, the euro has now been
pushed all the way back to $1.125. Before the mayor of E-Z
County opened his pie-hole, it was trying to break $1.25.

-"More SIRT (Recall, Stupid Interest Rate Talk)," explains
Chuck Butler, editor of the Daily Pfennig,"...And the
dollar gets bought...what are these dolts doing? Don't they
realize that higher interest rates are only going to shut
down the economy? Don't they realize that higher interest
rates are being implemented to combat inflation? Don't they
realize that higher interest rates are going to make all
the Treasuries that Foreign Central Banks own worth less?"

- Still, an avalanche of selling has really battered gold
downhill this week. Not only has it broken decisively below
key resistance at $400, dropping $17 in the last five
sessions, but it has also fallen relative to euros and
pounds. The last time we looked, the barbarous relic was
trading for $391 an ounce.

- But using nature as an analogy for goings-on in the
business world is actually far more appropriate than many
would imagine. Look beyond the flashing neon ticker boards
in Times Square and the huge trading floors, where flat
screen TVs are used like wall-paper. Look beyond the banks
of supercomputers, the Brooks Brothers' suits and the neat
haircuts. The markets, and even the economy, are actually
natural phenomena and are governed by the same laws that
drive nature. The important dynamic they share is, of
course, randomness, and the way it impacts a large number
of independently functioning variables.

- Of all natural manifestations of randomness, waves have a
particularly close relationship with the market. Of
particular interest, to marine and market scientists alike,
is the"rogue wave."

- Rogue waves are defined as monstrous deviations from the
normal sea state. They are huge, sometimes as high as ten-
story buildings, says an article by AFP. The QEII came
across one of these waves in 1995. It was a wall of water
that rose 95 feet high. The captain described it as looking
like 'the White Cliffs of Dover.' Supertankers and
containerships have been sunk by these waves.

- Although there are reams of anecdotal evidence that
attest to the existence of these rogue waves, marine
scientists have clung to their statistical models that show
that, statistically speaking, these waves should only occur
on average, once every thousand years.

- But they were wrong. Not satisfied with the stories, the
European Space agency decided to use their satellites for
something vaguely useful...for three weeks, they monitored
the surface of the world's oceans.

- What they found amazed even the most gin-soaked old sea
dog. In just three weeks, they spotted 10 different waves
at least 80 feet high.

- The waves exist"in higher numbers than anyone expected,"
said Wolfgang Rosenthal, senior scientist with the GKSS
Research Centre in Geesthacht, Germany, who pored over the
data."The next step is to analyze if they can be
forecasted."

- We won't hold our breath, Wolfgang. In fact, you'll
probably have about as much success as the average Wall
Street analyst. Our recommendation: don't bother trying.

- But somewhere in all of this, there is something useful.
There's a strong implication for the stock market and more
worrying, for America.

- Just ask John Meriwether and the eggheads at Long-Term
Capital Management; in 1998 his fully loaded supertanker
was hit by a rogue wave and sunk. They knew that waves
existed, but they thought that the probabilities of one
occurring were so small that they didn't bother building
any leeway in their calculations.

- And what about that perfect storm we mentioned earlier?
"A nascent recovery in the world economy is now threatened
by an ominous confluence of wild cards," says Roach."Three
such forces loom most prominently - surging oil prices, the
China slowdown, and the onset of a Fed tightening cycle. A
general sense of geopolitical angst is an obvious and
important overlay to the economic factors - underscored by
the quagmire in Iraq, a related anti-American backlash, and
the ongoing threats of global terrorism."

- Ripples, dear reader? Maybe. But the ingredients for a
rogue wave or three are certainly present. Translating our
rogue wave theory into the language of chief-economists,
Roach says,"The risk is that we focus on each of these
developments in isolation. It's the interplay, however,
that matters most of all."

- The message must be this: don't blindly assume that the
gentle waters on which the U.S.A. floats, will always be so
gentle. There are many rogue waves out there, far more than
you might have imagined. Balance your portfolio
accordingly...

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Bill Bonner, back in New York...

***"Well, bravo to the Amish," said our friend from
yesterday's remarks."While practically all the other
tobacco farmers in the state have caved into the
government...you know, they're taking the payments for NOT
planting tobacco...the Amish don't go along with any
government program. They're the only ones with any
integrity. They're still out there in the tobacco fields -
sweating like crazy. But since they're the only ones still
working, the price of tobacco is going up. They're making
money. Isn't that great?"

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The Daily Reckoning PRESENTS: Your editor attracts some
unwanted attention. Now he's surrounded by lawyers,
federales and the local press. Here's the full scoop:


Res Ipsa Loquitor
By Bill Bonner

"Thank God for the judiciary," said our lawyer.

The federales caught up with your editor on Wednesday. He
was hauled before a couple of lawyers from the SEC and
asked to explain himself.

At issue was the incident that we reported more than 2
years ago. A colleague, Porter Stansberry, had discovered a
uranium processing company he thought for sure would go up.
He even interviewed an official of the company. The
spokesman told him to 'watch the stock on May 22,' when a
new arms agreement with the Russians was supposed to be
concluded.

Asked about this conversation by the SEC...

"Did not," said the aforementioned official.

"Did so," said Porter.

Before we knew what had happened, the SEC had made a
federal case out of it.

"Well, these government agencies are getting out of
control.but at least the courts still protect us,"
continued our Consigliore. But this week's brush with the
law made us wonder.

"No one needs to remind me that our government, at all
levels, is becoming bigger, stronger and less concerned
individual liberties," began an email received here last
week.

"One of the most appalling and amazing examples was the
recent U.S. Supreme Court decision upholding a state law
(which about half of the states have) requiring people
to identify themselves to law enforcement if asked and
imposing a fine or jail time if convicted of refusing to do
so. The background is this: A cop (I recall it was in
Nevada) got a vague call about a domestic disturbance
involving a man, truck and woman. He came upon a elderly
man standing outside a truck. There was a younger woman
inside the truck. The cop asked the man to identify
himself. The man, a crusty old rancher (not to be
confused with a Jolly Rancher), refused. He was arrested
solely for refusing to give his name (and of course his
name was obtained soon after the arrest), convicted and
fined. The man was not connected in any way with the
disturbance that prompted the cop's inquiry. As I recall
it, he and his daughter (the woman in the truck) were
waiting to meet someone.

"The U.S. Supreme Court held that the law was
constitutional on its face and as applied in this
situation, though some of the justices allowed that one
would not have to identify one's self if to do so would be
self-incrimination. How's that for a Catch-22? If you are
completely innocent, you commit a crime by refusing to
identify yourself. If you are guilty, however, you are free
to refuse to identify yourself and thereby confirm for the
cops that you are a criminal."

Has America become less free? Looking around.the evidence
is mixed. Eighty years ago, you couldn't even take a drink
without risking a visit from the cops. Books were banned in
Boston if they were considered too racy. And shacking up
with a woman other than your wife -- especially if she was
the wrong color -- was likely to get you arrested on a
morals charge.

All that is history. There are no morals charges anymore,
because there are no morals worth charging. What used to be
sin is now not only permissible -- but actually
fashionable. The most sordid spectacles make their way to
prime time -- on the evening news.

But while sinners have been let loose, the honest man can
hardly make a move without running into someone who wants
to protect society from him. Giving his name to the fuzz on
the scene is the least of it. He has to reveal every detail
of his life -- for tax returns, passports, medicare, social
security, insurance, business licenses, gun licences,
hunting licenses, professional licenses, building licenses,
dog licences, liquor licenses.

It may be a licentious age, but never have so many licenses
been required to mind your own business. Except for the
First Amendment, guaranteeing the right to say what you
want, nearly every protection of the constitution has been
swept aside so the do-gooders, regulators, politicians,
inspectors, gendarmes, world improvers and snoops can get a
grip on you.

The team from the SEC were there to help, of course. They
were bright and attractive people. We could not help but
like them. But what they want to do.as near as we can
determine.is force our company to get the equivalent of
another license. They want to be able to determine what we
can say and what we can't. Otherwise, the case makes no
sense.

Porter says one thing. The guy at the uranium company says
another. Even before talking to Porter, they chose to
believe the other guy. Makes no sense.until you realize
that their real objective is to pry open the First
Amendment, reach down and throttle financial publishers.

Typically, the local press got the story all wrong. They
figured if the SEC is after you, it must have something to
do with manipulating stocks or insider trading. Au
contraire, if there had been any stocks manipulated this
case would not have been of such interest to the SEC.
Everybody knows the SEC can throw its weight around in a
front-running or insider trading case. What makes this
juicy to both sides is that there was no stock manipulation
involved. This is a pure First Amendment case. It is a gem
for the courts.a brazen opportunity for the SEC.and a gold-
mine for the lawyers.

"Remember, you're not just fighting to protect your own
right to publish what you want," said our attorney."You're
fighting to protect the First Amendment; it's the most
important freedom we have."

But you have no reason to be interested in our legal
issues. We wouldn't mention it, except it illustrates the
status of the judicial system in America, 2004.

"Don't be so gloomy," our lawyer advised."The courts will
do the right thing. They're not going to throw away the
First Amendment. It's the last one standing. And remember,
this is an important, landmark case. Lawyers will cite this
case for many years."

Let's hope it is cited by the defense.


Bill Bonner,
The Daily Reckoning

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