-->Practicing Random Acts Of Insanity

The Daily Reckoning

Baltimore, Maryland

Friday, 7 November 2003

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*** What a wonderful economy! It is almost too good to be
true...

*** Gold down... dollar up... productivity rising at 8%
rate...

*** China... and gold! Edward's 10th birthday... and more...

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

The Dow rose again yesterday. Our souls squirmed.

Unemployment claims fell to their lowest point in 2 years.
Cisco hit 2-year highs. Gold fell $2. Productivity rose at
an 8% rate in the third quarter. And the economy is growing
at its fastest pace since 1984, with real GDP rising at a
7.2% rate in the 3rd quarter and personal spending up 4.7%.

What a wonderful economy. It is almost too good to be
true... even the dollar rose yesterday.

How could we be so wrong? Despite all of our warnings... our
watching... waiting for the end of the world... The numbers
from the last quarter clearly show we are in a boom!

How can it be, dear reader?

But wait... what's this?

The productivity number is mostly fiction, of course... but
it also turns out that nearly half the 3rd quarter's
magnificent gain can be traced to child tax credits. At
least, that's what Bridgewater Associates reports. The
Treasury sent out $13.7 billion worth of child tax credits
in the month of July, which produced an"orgy of spending."

Another big chunk of the increase in GDP could be traced to
auto sales - which raced along, increasing at a 38.9%
annual rate. Here in Baltimore, we see the evidence all
around us - big, new SUVs fill every parking space.

But while auto sales move fast enough to bust the radar,
personal incomes refused to start at all. The latest
numbers show real compensation per hour rising at barely a
1% annual rate.

How people can increase spending 4 times faster than income
is one of those mysteries we wait to have resolved. It is
just one of the things that make us wonder how real this
boom really is. Another thing that makes us wonder is the
persistence of layoffs and the steady increase in debt. How
people who are losing their jobs can continue spending so
much money... buying so many cars and houses... is another
puzzlement.

But what do we know?

What we do know is that the smart money doesn't care much
for this boom. For the first time in his life, Buffett is
moving money to foreign currencies. Templeton warns
investors to head for the hills. Soros says the whole thing
is going to blow up... and so does his old sidekick Jim
Rogers. What do the old-timers know? More below...

The insiders, too, are getting out while the getting's
good. They're selling 34 shares for every one they buy. You
might want to do the same, dear reader.

Here are more notes from Eric Fry...

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

Eric Fry, our man on the scene in New York...

- Stocks up, dollar up, bonds down, gold down... Details to
follow...

- Your New York editor vacated his post on Tuesday and
Wednesday to attend - and to help lead - a seminar in
Baltimore about"good writing." Most of the attendees found
it very useful and even the most accomplished writers among
us seemed to benefit from the experience.

- After the seminar, 10 of us dined at a nearby Afghani
restaurant. At the end of the meal, your Paris-based editor
graciously picked up the tab... Many of us felt that his
signature on the credit card draft was some of the best
writing we'd ever seen.

- Yesterday afternoon found your New York editor speeding
home from Baltimore on one of Amtrak's spiffy new Acela
trains. The high-speed trains rarely travel at high-speeds
along the Washington-Boston corridor, but they are clean
and comfortable nonetheless.

- Along the way, I chanced upon none of the sorts of
colorful characters that seem to find your Paris
correspondent wherever he travels - there were no gypsies
or German archdukes or French prostitutes... nor even any
New Jersey prostitutes. Instead, I found myself surrounded
by 40-something businessmen blabbing continuously into cell
phones.

- In the New Economy, the drone of inane cell phone
conversations has replaced the deafening whir of big, heavy
machines spitting out textiles and tractors and Tonka
trucks. Our grime-free service economy continues to muscle-
up, while the manufacturing economy atrophies.

- But the crowded trainful of cell-phone-yacking
businesspeople attests to the resurgence of our service
economy. Somebody, somewhere must be buying or selling
something... or all of these folks would not be speeding
toward New York and Boston with cell phones fused to their
ears like space-age prosthetics.

- The stock market duly reflects the economy's buoyancy, as
well as the resulting investor optimism. The worst is
passed and the best is straight ahead, or so the roaring
stock market seems to imply. The overheating stock market
frightens us, but we are delighted that it is doing so
well. A bubbly stock market makes folks feel richer and
happier, even if they aren't, while making the economy seem
stronger and more vibrant, even if it isn't - all of which
makes folks spend money they feel like they have, even if
they don't.

- Yesterday, the Dow Jones Industrial Average spent most of
the day in the red, but rallied briskly in the afternoon to
gain 36 points to 9,857. The Nasdaq Composite added 1% to
1,976, led by the tech sector icon, Cisco Systems. Shortly
after Wednesday's bell, the networking giant reported that
its fiscal first-quarter net income nearly doubled... Cisco
shares soared in after-market trading and held onto their
gains during yesterday's session."CSCO" soared to its
highest level since May 2001, and closed up more than 5%.

- A couple of upbeat economic reports also goaded investors
to add to their stock holdings. The positive economic
reports du jour featured a big drop in jobless claims and a
big jump in third-quarter productivity. Jobless claims for
the week ended Nov. 1 plunged by 43,000 to 348,000... the
lowest number of weekly claims ever seen during the Bush
Administration.

- Meanwhile, U.S. nonfarm business productivity surged at
an 8.1% annual rate in the third quarter - the biggest
increase in six quarters. We don't understand exactly how
the government can measure the productivity of cell phone
talkers, but investors seemed delighted by the dubious
data.

- The robust economic reports boosted stocks and the
dollar, while deflating Treasury bonds and gold. As bond
prices fell, the 10-year Treasury yield jumped above 4.40%
for the first time in about two months. Gold also stumbled
a bit, falling $2 to $380.70 an ounce. The yellow metal had
climbed $5.60 in the past two sessions. But the net gain of
$3.60 over the last three days has inspired very little
buying of gold stocks. The XAU Index of gold shares has
slipped about 1% over the last three days and sits at a
two-week low.

- For the moment, most investors are enjoying the little
burst of 1999 that has arrived on Wall Street... even if it
is 2003.

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

Bill Bonner, back in Baltimore...

*** Gold fell $2 yesterday... landing at $380. That's still
$10 above our target buying price... and $30 above our
previous target. Maybe we should raise our target?

*** China and Gold. Those were the two biggest stories at
the New Orleans investment conference where your editor
gave a short speech. Everyone seemed to want to own a piece
of China and a piece of gold.

"Ivanhoe!" said a friend."Here's a way to kill two birds
with one stone. This company has a goldfield the size of
California. It's in Mongolia. But that's not all. It also
has a huge deposit of copper. And if there's one thing a
growing economy needs - it's copper. They use it in air
conditioners, for example. Right now, most Chinese don't
have air conditioning. But in the south of the country -
where more than half a billion people live - it gets
awfully hot and humid in the summer. People are going to
buy air conditioners like crazy as soon as they can afford
them. And with the economy booming so much, they'll be able
to buy hundreds of millions of air conditioners and other
things that take copper - by the way, did you know that
copper is the essential metal of the whole modern world?
It's the critical component of all electric engines. We
take them for granted here in America, but they're what
makes the modern world work. And China is just getting into
the modern world. So they're going to need lots and lots of
copper. And Ivanhoe's got it. So you get the China
play... big time. And you get gold too - millions and
millions of ounces of it."

***"Not so fast," said another friend, a geologist."It's
one thing to find a deposit of metal. It's quite another to
get it out and make the project profitable. This thing is
in the middle of nowhere. They just don't have the
technical or logistical support to make this work. What's
more, from a mining point of view, the project is no piece
of cake. It's a huge deposit. But the deposit lies under
the surface. You have to get at it somehow. And that's
going to cost of lot of money. No doubt about it, the
Ivanhoe story is going to draw in a lot of investors. You
can probably make money by riding the stock up. But there's
no guarantee that the mine will ever produce a penny of
profit. So, if you get in... don't forget to get out."

*** China's economy is growing at an 8% annual rate. Even
that may be understated. Its currency is increasing (M2) at
more than 20% annually. It recently replaced Japan as the
world's 3rd largest importer - increasing purchases from
abroad by 41% in the first 9 months of this year.

How do you say 'bubble' in Chinese? Oh yes, pao mo.

*** Today is Edward's 10th birthday. A friend sends
encouragement:

Bill,

I read with amusement your apparent reference to your son
having an incident with a BB gun.

I myself had one at the age of 14 or so in New York City.
My parents were against guns in any form, so I had to
promise mightily to be very careful with the thing.
However, I was persuaded by a more adventurous friend to
shoot out some windows in a nearby building. A local beat
cop was called to the scene, and walked up to the roof to
investigate.

We, however, had missed his ascent, and were standing in
the hallway blasting away at a rubber ball lodged behind a
pipe when the good officer made his descent down the
stairs. We were caught red-handed. Officer McCarthy at
first looked like he was going to haul us in. However, when
he hard my Irish name, he seemed a little bit more kindly
disposed. We were no longer hoodlums, just mischievous
lads.

He took the BB gun and gave me a receipt, and told me if I
wanted it back I'd have to bring my parents to the station.
Off he went, and not knowing what to do, I hid the telltale
paper in a cigar box, under a pile of miscellaneous items,
on a top shelf in my private bathroom in our apartment,
while I pondered a suitable story.

However, my room was a mess, and in"helping" me clean it
while I was away at school one day, my mother discovered
the telltale paper in that very cigar box. It was kind of
like Officer Obie finding Arlo's name on the piece of paper
under the half a ton of garbage in Alice's Restaurant.

I was in trouble... however, it was almost"illegal search
and seizure," and I didn't get in as much trouble as I
might have.

I did not get the gun back.

Fortunately, I never killed anyone, and although my ex-wife
might accuse me of terrible wrongs, I've never been
convicted of a crime in a court of law. And I've managed to
be fairly successful.

This all may or may not be reassuring. But I thought I'd
share my experience.

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The Daily Reckoning PRESENTS:"Distilled information"
culled from the wisdom of old, the lessons of history, and -
when in doubt - the"systematic rejection of new ideas"...


PRACTICING RANDOM ACTS OF INSANITY
By Bill Bonner

This little meditation began as a speech. It was delivered
on Saturday to the New Orleans investment conference. Then,
it took a detour, as your editor read a book sent by a
friend -"Fooled by Randomness," by Nassim Nicholas Taleb.

The book is a gem. Its author, a mathematician, coaxes out
of numbers the same insights that we discover by intuition
and accident.

Those of you who read the Daily Reckoning regularly will
recognize our theme. A casual view of some of our articles
might suggest a morbid fascination with the dead. We read
the obituaries, dear reader, in the way others read the
editorial pages - for information and enlightenment, for
the distilled wisdom of saint and sinner alike.

The editorial pages, by contrast, we read only for
entertainment. The editorial pages - like the news pages -
are the distracting background noise of everyday life. It
is like loud music at a bar, where you can hardly
hear... and barely think. The headlines offer one urgent
problem after another. An election contest... a financial
calamity... a traffic accident - each headline crashes into
your mind like a madman through the front door yelling,
"FIRE!" How could you not pay attention?

But that is the trouble with the news. It is hard to know
what is really going on... and impossible to know what is
important... when you only have the judgment of people who
happen to be breathing to rely upon. The living can imagine
no problems more urgent than the ones they confront right
here and now... and no opportunities greater than the ones
right in front of them. We prefer the obituaries.

Take investments, as another example. When you buy a stock
today, the presumption you're making is that you won't be
able to get a better deal on it tomorrow. You can ask
investors what they think, and they'll tell you that stocks
could go down. And if we were to dig up some dead men and
take a poll, you'd find that whenever stocks sell for more
than 20 times earnings, the odds are pretty good that
they're going to be a lot cheaper in the future. If you
asked the ghosts of investors who bought in the 1920s,
they'd say they wished they had waited until the 1930s to
buy stocks. Or if you asked the old folks who bought stocks
in the late 60s... they'd say they wished they had waited
until the late '70s.

But if you ask people today - when stocks are once again
over 20 times earnings - how many wait? Not many.

Fund managers have the lowest proportion of their funds in
cash in many years. And individual investors and consumers
can't seem to wait, either. How many save their money to
buy a car next year... or a stock 10 years from now? How
many set real savings aside - or bury gold in their
backyards - so their children and grandchildren can spend
or invest it on better deals? Not many.

Last week, we read an interview with Sir Templeton. The
great old man said he thought stocks were too expensive and
that the U.S. was cruising for a bruising with its trade
deficit and U.S. federal deficit. He said he anticipated a
long bear market in stocks and a serious slump in the
economy. Implicitly, he advised investors to hold cash.

The person who wrote the article then asked local analysts
and stockbrokers what they thought of Templeton's opinion.
One challenged Templeton's competence, saying that because
of his advanced age, (Templeton is 92) he might be 'out of
touch' with current thinking.

Templeton is not even dead yet, and already his views are
being dismissed.

At the Daily Reckoning, we take the opposite view. We like
old things. Old buildings. Old ideas. Old trees. Old rules.
Old investors. The older the investor, the more confidence
we have in him. He's seen good times and bad times. He's
seen bulls and bears. Maybe the old fellow's even heard
enough absurdities to be able to recognize the voice.

Mr. Taleb explains it in a different way.

"For an idea to have survived so long across so many cycles
is indicative of its relative fitness. Noise, at least some
noise, was filtered out. Mathematically, progress means
that some new information is better than past information,
not that the average of new information will supplant past
information, which means that it is optimal for someone,
when in doubt, to systematically reject the new idea,
information, or method...

"The Saturday newspaper lists dozens of new patents of such
items that can revolutionize our lives. People tend to
infer that because some inventions have revolutionized our
lives that inventions are good to endorse and we should
favor the new over the old. I take the opposite view. The
opportunity cost of missing a 'new new thing' like the
airplane and the automobile is minuscule compared to the
toxicity of all the garbage one has to go through to get to
these jewels (assuming these have brought some improvement
to our lives, which I frequently doubt.)"

Mr. Taleb considers the wisdom of the old... and the lessons
of history... as a sort of 'distilled information.' He notes
that the information revolution has put more raw,
undistilled, information in front of people... making them
more susceptible to error.

"A preference for distilled thinking," he continues,
"implies favoring old investors and traders, that is,
investors who have been exposed to markets the longest, a
matter that is counter to the Wall Street practice of
preferring those that have been the most profitable and
preferring the younger whenever possible..."

Testing the proposition using a mathematical model, Taleb
"found a significant advantage in selecting aged traders,
using, as a selection criterion, their cumulative years of
experience rather than their absolute success (conditional
on their having survived without blowing up)."

In investing, as in other things, it is"survival of the
fittest," he explains."Who will survive are not
necessarily those who appear to be the fittest. Curiously,
it will be the oldest, simply because older people have
been exposed longer to the rate event and can be,
convincingly, more resistant to it."

And then, he gives us all hope for the future with the
insight:"Women prefer [on balance] to mate with healthy
older men over healthy younger ones, everything else being
equal, as the former provide some evidence of better genes.
Gray hair signals an enhanced ability to survive -
conditional on having reached the gray hair stage, he is
likely to be more resistant to the vagaries of life."

We mentioned last week that on a recent trip back to
France, we were seated next to a fellow from Heston,
Kansas. We had never heard of Heston, Kansas... so asked
what he did there. It turned out he was an engineer with
Agco... the company that makes Massey Ferguson tractors.

What was he doing on a plane to Paris? Well, it turns out
they don't make their tractors in Heston, Kansas... they
make them in Beauvais, France. American labor is cheaper.
And America is supposed to be so much more hospitable to
enterprises. But for some reason, Massey Ferguson makes its
tractors in France. Go figure.

The subject of the war in Iraq came up.

"I was sent to Vietnam right after my 21st birthday," he
said."They told me we were trying to protect the U.S. and
make the world a better place. It took me exactly 2 weeks
to realize that it was BS. If I got killed, I would be
nothing more than a statistic. Nothing more."

Of course, in the"here and now" of 1970, the war in
Vietnam seemed like the biggest, most urgent foreign policy
challenge the U.S. faced. Later, Americans came to their
senses, retreated... and Vietnam did fall to the communists.
But was the world better, or worse? No one knew or cared.
Eventually, a quarter century later, the Donald Rumsfeld of
the era - Robert MacNamara - wrote that the war had been a
mistake. But it certainly had seemed like a good idea at
the time.

We mention Vietnam for another reason. Lyndon Johnson's war
in Vietnam was conducted at a time when he was also toting
up the bill for the Great Society. If the old Eisenhower
had been consulted before he died, he would have told
Johnson that you have to choose - Guns or Butter, which
will it be? Trying to do both at the same time was an
invitation to trouble.

But Lyndon Johnson, a Texan, was the George Bush of his
time. He figured he could get away with it. America was a
great power back then, too. And the stock market boom of
the late '60s made everyone think that better things were
coming not just tomorrow and the next day, but forever.

But then the war went bad... and stock market crashed... and
the economy went sour, too... Johnson gave up and Richard
Nixon took over at the White House. Richard Milhouse Nixon
is remembered chiefly for the petty B&E job at the
Watergate... but his greatest crime was committed in August
of 1971. That was when the bills from Johnson's Guns and
Butter policies were coming in. And back then, other
sovereign nations could take their dollar bills up to the
'gold window' at the U.S. Treasury and ask to have them
redeemed in gold.

The French, as usual, were first in line. Years before,
General de Gaulle had realized that an international
monetary system with dollars as the reserve currency had a
bit of a flaw.

"The Americans can pay off their debts in money of whatever
value they choose," he had noticed. So Nixon had a major
problem. He could do the right thing - honoring the
commitment of generations of Americans... who had pledged to
back their paper dollars at a fixed rate with hard gold.
Or, he could renege on those solemn promises... essentially
defaulting on U.S. foreign debt.

Faced with a such a moral dilemma, Nixon did the time-
honored thing - the thing almost all politicians do - the
thing calculated to get his derrière off the hot seat in
the 'here and now'... and make it someone else's
problem... sometime in the future. He closed the gold window
at the Treasury department. Henceforth, anyone who wanted
to trade his dollars in for something of value would have
to take whatever the market gave them.

Well, now... the future is here. The system that replaced
the Bretton Woods, gold-backed system might properly be
called The Dollar Standard system. Where once there were
gold bars, now there are paper dollars and paper Treasury
bonds. And while once there were people lined up to trade
their dollars for gold... now there are people lined up - or
practically so - to buy more U.S. dollar assets.

Who are these people? Well, you will recall that once we
were told not to worry about the federal debt because, as
they said,"we owe it to ourselves." That little ditty may
need to be updated. According to the Treasury department, a
total of $41.2 billion in new money was raised in the month
of August. Who were the buyers? A full 81% of them,
according to the Treasury department, were foreigners, who
now own a net of about $3 trillion in U.S. dollar assets,
which is the equivalent of holding the mortgages on 30
million American houses, at an average of $100,000 each.

But don't worry. The headlines tell us that the economy is
growing faster than any time in the last 19 years... and
productivity is reaching to the stars. That is the news
that occupies our thoughts... and that most investors rely
upon. The economy is so wonderful... it is almost too good
to be true. Everyone is getting rich. We'd be a fool not to
go along with it, the noise whispers.

We prefer the obituaries.


Bill Bonner

P.S. Thank God for all the noise.

Mr. Taleb explains:"I currently look at it [undistilled
information... headline news... noise] with delight," he
writes."I am happy to see such mass-scale idiotic
decision-making, prone to overreaction in their post-
perusal investment orders - in other words I currently see
in the fact that people read such material an insurance for
my continuing in the entertaining business of option
trading against the fools of randomness."