-->From Funeral To Funeral

The Daily Reckoning

Paris, France

Friday, 21 November 2003


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*** When do people begin to wonder...

*** New trade barriers... has Hawley met Smoot?

*** Stocks down... terrorism up... and more...

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Today's International Herald Tribune has front-page photos
of the blast in Istanbul. We ask ourselves... when do people
begin to wonder, if ever? When do they wonder if America's
War on Terror can really be won? Or whether it makes any
sense at all.

Maybe it just stirs up more problems? (Addison, explores
one potential problem splashed across the headlines in
London this morning, below... )

And when they begin to wonder, mightn't they wonder about
America's current account deficit, too? And whether
Americans will be able to pay their debts? And what
America's paper money is really worth? And the stocks and
bonds issued by U.S. businesses and government -
denominated in the aforementioned currency... what are they
really worth?

Today, the Chinese must be wondering. Along with the
Japanese, they are the largest buyers of American debt in
the world. Most of their nations' currency reserves are in
dollars. And their largest single source of new jobs,
factories, profits, and technology is the U.S. market. The
Chinese have even pegged their own currency to the U.S.
dollar in order to stabilize this very important
relationship.

But day after day, the dollar drops... and with it falls the
real value of China's billions in U.S. dollar reserves,
most of which are in Treasury bonds. The bankers buy U.S.
debt partly in order to keep Americans supplied with E-Z
credit, so they can continue to buy. But they must be
wondering if it is worth it.

The slipping dollar does them no harm, it might be argued.
Since the yuan and the dollar are linked, it poses no
danger to their U.S. trade, and against the rest of the
world, it actually makes Chinese products more competitive.
But along comes the conservative Bush administration with a
relic of Soviet-era central planning - a tariff against
Chinese textiles. Henceforth, the Bush team would have it,
if you wanted to sell a pair of Chinese-made underpants in
the Land of the Free at the free-market price, you'd have
to smuggle them in.

We wonder about the misbegotten moment when Mr. Smoot first
met Mr. Hawley. The two protectionists of the early '30s
couldn't have known it at the time, but theirs was a
meeting as comic as when Abbott met Costello and as
lamentable as when Lincoln encountered John Wilkes Booth.
The rendezvous doomed millions of Americans to poverty.
After the passage of the Smoot-Hawley Act, world trade
collapsed... and with it the U.S. economy. Soon, one out of
every four working men were out of a job... and the stock
market took a quarter of a century to recover.

"China to raise tariffs on U.S. goods," says yesterday's
news from Reuters.

It must have made somebody wonder...

Over to you, Addison, with more news:

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

Addison Wiggin on dollar watch...

-"Bloodbath!" writes our London correspondent Adrian Ash,
"Yesterday's attacks on the British Consulate and HSBC [one
of England's largest banks] in Istanbul dominates the press
here today. 'Will Britain Be Hit Next?' asks the Daily Mail
in two-inch lettering."

- The Istanbul Stock Exchange shut down trading after it
dropped 7.4%... stocks fell across Europe.

-"With gunships hovering over London," continues our
colleague,"an air exclusion zone up to 35,000 feet
above... the gates to the Mall locked... 5,000 extra police
on the capital's streets... and retailers reporting a 25%
loss of business thanks to the Emperor's visit... it looks
like al-Qaeda has done what it does best. It caught soft
targets off-guard, unprotected and unprepared."

- The attacks, as you would expect, gave ammunition to the
crowd already assembled to welcome George W's visit to the
city."This would not have happened had we not gone to
war," an anti-Bush protester told the FT. Police estimate
110,000 protesters marched and shouted 'F**k Bush!'
together - making it the largest mid-week demonstration in
the nation's history."They toppled a homemade statue of
'the Emperor' in Trafalgar Square," Mr. Ash says,"mocking
the U.S. felling of Saddam statues in Baghdad in March."

-"Those who can never win elections, always take to the
streets," writes Antti Nupponen, an Iranian writer,
referring to the demonstrations in London."Street politics
enables them to escape debate on complex issues that cannot
be reduced to a few simplistic slogans." The article,
passed on to your editor by a helpful Daily Reckoning
reader, suggests that perhaps it was no accident the bombs
were exploded while the president publicly supped on tea
and crumpets with Her Majesty, the Queen.

- The protest in London was organized by a group called the
"Stop The War Coalition," a rag-tag group of Ex-Leninists
and Islamists brought together for one purpose: to stop the
War on Terror."The first to advocate a leftist-Islamist
alliance against Western democracies was Ayman Al Zawahiri,
al-Qaeda's #2." The idea has apparently been endorsed by
Ilich Ramirez Sanchez, the Venezuelan terrorist known as
"Carlos the Jackal."

-"Only a coalition of Marxists and Islamists can destroy
the U.S.," the cheerful Carlos wrote in his recently
published book: Revolutionary Islam. The folks who have
taken to the streets in London yesterday also consist of a
rag-tag group of U.S. haters: anti-abortion groups,
opponents of capital punishment, anti-globalization
fanatics, and advocates of the Kyoto protocol. But,"a good
part of the planned demonstration will," writes Antti
Nupponen,"as always, consist of what Lenin called the
'useful idiots,' men and women of good faith whose
political naïveté makes them natural targets for experts in
agitation propaganda."

- Organizers of the demonstration, for example, have only
"authorized" 4 slogans to be printed on signs and t-shirts:
"Stop Bush","Stop Blair""U.S. Out Of Iraq and
Afghanistan," and"Bush Go Home!" So much for the madness
of crowds, huh?

-"Ironically," comments our reader who furnished the
piece,"the protestors are ignoring the president's two
greatest [current] follies: excessive unbalanced fiscal
spending and trade protectionism!"

-"Street politics is for those who wish to abolish
individual political judgment," Nupponen sums up,"the
cornerstone of democratic life. Street politics encourages
the irrational tendencies of crowds that could turn into
hunting packs or lynch mobs. Power won in the streets
produces only ochlocracy (rule by the worst)."

- Despite the origin of the ochlocracy's message - that
Britain should distance itself from America, and fast - Mr.
Market seems to have assumed the role of useful idiot. The
dollar fell back a penny against the euro, finding its way
to $1.19 for the second time this week."Investors are not
prepared to hold U.S. assets," Tony Dolphin, a money
manager at the $32 billion at Henderson Global Investors,
told Bloomberg."When you get news like this of attacks,
investors are inclined to run away from the dollar."

- Investors maybe, but what about the Bank of Japan? If the
BoJ's late trade support of the dollar on Tuesday is
officially confirmed, the move would take the total number
of U.S. dollars Japan has bought since August to around $80
billion - almost exactly $1 billion a day, and enough to
fund nearly 75% of America's foreign trade gap over the
same period.

- How long, we keep wondering, in light of the geo-
political absurdity, can the BoJ continue to ride to the
dollar's rescue? According to Derek Halpenny, a currency
economist at Bank of Tokyo-Mitsubishi, not too long.
Halpenny told the Financial Times the BoJ has only Y8,500bn
left in its foreign exchange fund. By today's exchange rate
of 107, that means the BoJ can continue to support the
dollar... for just 79 more days.

- Oil futures contracts for December and January fell
across the board. The falls were arrested on news of the
Instanbul blast... and fears of another wave of terrorist
activity in the Middle East following the bombings in
Turkey and Iraq. The markets in New York didn't seem to
take the bomb news too kindly, either; all fell. The Dow
lost the most - 71 points to 9619.

- Curiously, gold fell on the news, too... back again to
$393."Investors continued to unwind gold futures from near
record-long positions," currency trader Kevin Morrison told
the FT, echoing comments made by our own Dan Denning in
this space yesterday. We were wondering if last week's
front page spread on gold in the USA Today Money section
would signal a worrisome contrarian indicator... and well,
it looks like it has.

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Bill Bonner, back in Paris...

*** Fortune magazine tells us that federal government
liabilities are expected to grow by $1.6 trillion this
year... and every year. That amount is equivalent to the
value of all the gold ever brought up from the earth since
the beginning of time.

Gold, or paper? The supply of paper is exploding. The
supply of gold is still very limited. We don't know which
nag will win this race... but we'd be a fool not to take the
odds offered by gold.

*** Patriotism has been called"the last refuge of
scoundrels." It may also be the first. We were thinking of
protective tariffs and wondering...

.. as a practical matter, why would we want to pay more for
a pair of underpants in order to help George W. Bush get
re-elected?

.. and as a moral or ethical principle, why is so important
for an American to earn 10 times more than a Chinaman?

The world economy grows by specialization. Bananas, to
choose an example that we had for breakfast, are not grown
in America, because foreigners can grow them better, and
cheaper. Everyone benefits. But force Americans to grow
bananas - using protective tariffs, quotas and other
restriction - and the world economy shrinks; Americans pay
more for bananas and people are poorer everywhere.

Protectionism is sordid and absurd, but that doesn't mean
it isn't popular. 'Saving American jobs' has a nice
campaign ring to it.

*** Every bubble has to find its pin. That is not our
plan... it just seems to be the way things work. American
military power swelled to bubble proportions following the
collapse of the Soviet Union in 1989. Where would it find a
pin, we wondered? No nation... and no conventional
army... could stand against it.

With no pins sharp enough to do the job, new ones had to be
invented. Somehow, and unintentionally, the Bush
administration had to extrude a titanium enemy worthy of
itself. Thus did the"War Against Terror" come into being.
Finally, a foe had been found who could not be defeated by
high technology and superior military force. The trouble
was, this new enemy was too small, too weak, too dispersed
and unfocused to be anything more than a very dangerous
nuisance... especially after 9/11, when the whole world
turned against it. But now we read, in yesterday's
International Herald Tribune, that the war against Iraq
seems to have helped terrorists"regenerate" themselves.
"Now they are once again able to carry out attacks on a
major scale," noted August Hanning, head of German military
intelligence.

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The Daily Reckoning PRESENTS: In an world where science and
reason do not suffice - and where the future can be
anticipated, but not predicted - lives and dies a funny
little creature called man...


FROM FUNERAL TO FUNERAL
By Bill Bonner

"Come now, you who say, 'Today or tomorrow we will go to
such and such a city, and spend a year there and engage in
business and make a profit.' Yet you do not know what your
life will be like tomorrow. You are just a vapor that
appears for a little while and then vanishes away."

- James Chapter 4


The New York Times, as reported in France's Le Monde, marks
the 25th year of its"Science" coverage with a worry. It
notes that while 90% of Americans say they are interested
in science, barely 50 out of 100 are aware that it takes a
year for the earth to make a full circle around the sun.

In an election year, of course, people will believe
anything. A politician might go all the way to the White
House, in our opinion, by proposing to add a month to the
calendar in order to give everyone an extra 4 weeks
vacation. He might also suggest rounding off the number Pi
in order to make it easier to remember... or reducing the
boiling temperature of water, in Fahrenheit, to a round
number, say 200 degrees.

But how the chattering classes would screech! They have
come to adore 'science' the way jackals adore road kill;
they would be nothing without it."Better living through
chemistry" was their motto back in the 60s, when mood-
altering drugs were popular. We mustn't lose"the primacy
of reason," says French president Jacques Chirac, 40 years
later.

The burden of the following little reflection is that
Jacques Chirac is a dreamer and much of what pretends to be
scientific is a fraud.

Reason never was primal. Not even secondary. Whoever made
an important decision based on reason alone? What fool ever
decided what he would eat... what he would drink... with whom
he would sleep and work... and what he would do with his
life... on the basis of unadulterated reason? No one we have
ever met.

Instead, reason is so heavily diluted with greed, fear,
envy, love, hope, and other emotions, you can barely taste
it. It is rarely more than a rationalization for what
people want to do anyway."The head is merely the heart's
dupe," noted la Rochefoucauld famously. Reason is really
only used for things that don't really matter, such as
choosing stocks and cooking eggs.

Still, when the Federal Reserve tells us that the economy
is likely to improve in the coming quarters, most people
believe that there is something more in this pronunciamento
than just wishful thinking. They imagine there is some
'science' backing it up. A man reads such a forecast like a
favorable report from his latest physical examination. 'All
clear,' he thinks the doctor wrote. He cannot hear the
quacking noises in the background. Nor does he realize that
there is no real science behind the Fed forecast at all.
Just statistics... and many of them phony.

Science is marvelous; who are we to argue with it? But
Daily Reckoning readers are cautioned: don't take it too
seriously. We recall that Harry Markowitz won a Nobel
Memorial Prize in Economics for proposing a model to
predict future risk in markets. Two of his disciples and
fellow Nobel winners, Myron Scholes and Robert Merton, used
his work to help them run a hedge fund, Long-Term Capital
Management. Within 4 years, Long-Term had come and gone -
blown up by a 'science' that any decent trader would have
laughed at.

Science evolves from funeral to funeral, it is said. Each
corpse is another lesson... another scientist gone mad and
another theory gone bad. Each exquisite cadaver is another
reminder that there are only two kinds of scientific
theories - those that have been disproved, and those that
have not been disproved yet.

Science is all very well for predicting when a soft-boiled
egg will be done. But it is little help in predicting when
people will get spooked by the market. At sea level, water
will begin to boil at 212 degrees Fahrenheit. Investors
could boil over any time.

'Scientific' market forecasts... and detailed economic
models... pretend that man is something he definitely is not
- reasonable and rational. He is neither. If he were, the
whole jig would be over. Since he could be expected to act
in a rational way, 'scientists' could model his behavior
and figure out what he would do next. Would he buy
stocks... or sell them? Having the answer, the rational
investor would position himself immediately to benefit from
whatever future the model showed. But in a matter of
minutes, the model would blow up... for our rational
investor's positioning would have changed the model's
inputs.

People believe that things improve. They think Darwin's
Theory of Evolution describes a world constantly mutating
towards perfection. Every day, we add more and more
information... and every day, our formulas become more
accurate and more reliable.

If only it were true!

"The more data you have, the more ignorant you are,"
explains our friend Michel."If, for example, you get
quarterly reports of corporate earnings, rather than annual
ones, do you know more? No, because it's easier to
manipulate quarterly returns. Imagine that you got returns
every month... or every week... or every hour. You'd have
much more data, but actually much less knowledge of what
was going on. You'd suffocate under all the data."

But in the world of finance and economics, confidence
increases with data. If stocks go up one year, people are
happy, but not confident. If they continue to go up... year
after year... confidence increases with every passing year.
Thinking scientifically, they reason: if stocks have gone
up for so long, odds are that they will continue to go up.

As confidence grows, the odds become exaggerated, skewed by
emotional inertia. Unpredictable by real science... risk is
under-priced. Eventually, a collapse comes, as it always
does.

It has been a long time since the world's money system - or
its reserve currency - have fallen apart. The event happens
so rarely, it is practically unimaginable to most
investors. They believe the current system will live
forever. Consequently, insurance against its demise is
extremely cheap. We don't know, but it may turn out to be
one of the best investments ever made... when the funeral is
finally held.


Bill Bonner