-->Crazy-Making Cognitive Dissonance

The Daily Reckoning

Rome, Italy

Monday, 29 March 2004

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*** Lapidation...

*** The zenith and nadir of the Center of the World, and a
1,000-year bear market in between...

*** Expensive Roman hotels... a warning... rooftop
dining... and more!

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"Lapidation."

A woman had been caught in flagrante delicto with a man
who was not her husband. The priest used the word
'lapidation' to describe what a mob was about to do to her
when Jesus came along.

"Let him who is without sin cast the first stone," said
the Nazarene.

That shut them up. They must have been looking forward to
lapidating someone, but Jesus' remark took the fun out of
it. None of them could pick up a rock without his
neighbors laughing at him.

Lapidation has nothing to do with today's financial
remarks. But we just learned the word and wanted to try it
out.

Today, we have no new insights on finance. And as our
market correspondents are otherwise engaged this morning,
we bring you few new figures (though Eric promises an
update from New York tomorrow). We only note, not
particularly helpfully, that trends can carry on for
generations and often carry much further than anyone can
imagine.

We celebrated mass yesterday in a magnificent church, at
the top of the Spanish Steps, built by Louis XV of France
to the glory of God... and his own, of course. Typical of
the many places of worship from the period, the interior
is embellished by gold leaf, paintings, marble, carvings,
and other do-dads. Too bad for you if you want to add a
little garnish... every square inch is already taken up.

Our son Henry is being confirmed in St. Peter's today.
Yesterday, his class from Paris took over the Trinita dei
Monti and conducted a sumptuous service in French. Henry
served as an altar boy and looked as though he might choke
on the smoke from the incense burners.

When the service was over, we looked around for Henry. But
the seminarians have him for 3 days... and shuffled the
boys off quickly before parents barely had a chance to say
hello.

Here, on the banks of the Tiber, for hundreds of years,
masons, stone cutters, and hod carriers must have sweated
like marathon runners. In every direction you look, there
is something big they left behind. Even after 1500 years
of robbery, looting, erosion and neglect, the place is
like an antique shop you can scarcely turn around without
knocking something over. Old stones are everywhere, as
common as the sins they were meant to punish.

There was a time when these stones were the most precious
on the planet. Rome was the center of the Empire... and the
Empire was the center of the world. At least in the
Western world. No surer investment could have been found
than real estate around the coliseum or the forum.

Who would have thought... when Rome was at its peak under
Trajan's reign... and the bricks and stones were being laid
up all over the city, building princely villas,
mausoleums, arenas, baths... that the place was about to
enter a bear market that would last more than 1,000 years?

The visitor to Rome today can imagine neither the city at
its zenith nor at its nadir... for it is just a common city
today, with an uncommon number of ruins, churches and
pretty girls. But in the 1st century AD, the city had a
population of 1,500,000 - the largest city in the world -
and by far the richest, by far the most spectacular. No
other city came close until 18 centuries later.

But Rome had a problem. It had once been a city of honest
farmers and merchants. But by the time of Julius Caesar,
Rome became an imperial city with a serious balance of
payments deficit. The empire in general, and Rome in
particular, no longer earned its way in the world.
Instead, it needed forced tribute from its foreign
possessions - especially grain to keep the mobs fed and
slaves to provide muscle power and entertainment.

Rome's bread and circuses were sustained by imports that
the Romans couldn't afford and couldn't sustain. Rome had
become a consumer society - like America today - living
beyond its means. As time went on, more and more of what
Rome needed was outsourced... including its soldiers, its
generals, and eventually, even its emperors.

"There is a lot of ruin in a nation," said Keynes. Rome
was a great empire. It had so much ruin in it that it took
7 centuries to squeeze it out. When it was finally over,
that is when the husk of what used to be imperial Rome
reached the bottom of its bear market, in the 7th or 8th
century - the city would have been unrecognizable to
Trajan. Where there had been more than a million
people... there were only a few thousand. Where there had
been immense stadiums, villas, monuments, statues, and
palaces - there were just ruins. The people who had once
carried off the Sabine women, and lived on the tribute
from foreigners found themselves invaded by barbarians -
who carried off everything they could carry... and
destroyed most of what was left. By the 8th century, the
dust of the 7 hills of Rome had returned whence it
came... back to dust. And sheep once again grazed on the
palatine. Marble had been stripped off the
buildings... ancient columns had been buried in
rubbish... the noses, arms and private parts of statues had
fallen off.

Rome had become de-lapidated.

*** For our own Roman holiday, we booked a room at the
Locarno Hotel. It had been described in the guidebooks as
having an"Agatha Christie" kind of charm. What we
discovered was that it had an Agatha Christie kind of
plumbing. We decamped to the Piranesi, which suits us
better.

*** All the hotels in Rome are expensive. Everything else
seems reasonable, compared to London or Paris. But the
hotels are twice as expensive.

*** The price of gold shot up $5.20 on Friday. But here's
a little warning to would-be coin buyers from our friend,
Jim Cook:

"Just because a coin dealer has been recommended by a
newsletter doesn't mean they can't fail and take your
money down with them. Sometimes I'm amazed to see a big
gold buyer sending a six-figure amount to a coin shop
whose proprietor is probably behind on his car payment.
The writer, John Kamin did a study and found that nine out
of ten of these dealers fail every decade.

"The crazy thing is that most of the big failures and
frauds in the past came when gold and silver were moving
up in price and business was good. Many of those dealers
played the futures market and lost everything. Human
nature being what it is, a lot of people can't handle a
sudden influx of money. They get big headed and spend
foolishly. The religious philosopher C. S. Lewis wrote
that"pride is the greatest sin." I don't know if that's
true, but I do know that in my life pride caused me to do
the stupidest things.

"I've watched so many small dealers fail because of a
sudden burst of success, that a year ago I came up with a
saying to describe it. 'Success carries the seeds of its
own undoing.'

"One of the sure signs that a company will fail is that
they constantly promote the lowest price. You can't
survive on such low margins, so another round of dealer
failure is assured. Years ago I attended a monetary
conference in California and at the closing banquet my
wife and I were seated at a table with several other
couples. Next to me was a brash Hollywood producer without
a shred of humility. As the evening progressed, he
determined I was a gold dealer and announced to everyone
that he would never do business with me. He could get his
Krugerrands cheaper from Jonathan's, a well known Los
Angeles dealer. Jonathan had achieved celebrity status and
had his own radio show. Sometimes it seemed that
Jonathan's prices were so low they sold gold at no
commission just to get the cash flow. My suspicions were
confirmed when the company didn't deliver a lot of the
gold they sold and Jonathan was arrested. His customers
were out millions. I always wondered if the producer was
one of them.

"The precious metals trade is a tough, competitive,
difficult business requiring highly skilled management and
marketing. It has both honest dealers and a fair share of
scoundrels. The failure rate is astronomical. I can count
over forty failures just among the people who worked for
me and went elsewhere during the past three decades. So a
word to the wise for newsletter writers who blithely
recommend a dealer without knowing a thing about their
financial condition. You may be creating a monster and,
instead of helping your subscribers, you can wind up
hurting them.

"Usually, when a dealer fails, there's no hope for their
customers to retrieve anything. I can't tell you how many
hundreds of calls I've received from people asking for
advice on how to get the coins they bought. Before you
send a big chunk of money half way across the country to
someone you don't know, you should at least talk to their
banker, or get some financial information."

*** Friday was Elizabeth's birthday. We celebrated, again,
Sunday night with dinner at the rooftop restaurant of the
Hasler Hotel, a famous haunt of wealthy foreigners. The
food was quite good... and the view was spectacular.

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The Daily Reckoning PRESENTS: Double-digit commodity
inflation, soaring cost of energy, producer prices at a 9-
year high... and yet Greenspan's posse insists that no,
there is no and will be no consumer price inflation. The
mind reels!


CRAZY-MAKING COGNITIVE DISSONANCE
By The Mogambo Guru

The CPI increased by 0.3% in February, and the news flash
was slipped to me under the door of the Mogambo Bunker, as
I had been dreading the announcement. One of these days we
are going to see not only inflation, but roaring price
inflation, which is guaranteed by all the monetary
inflation.

The Associated Press tried to find a little silver lining
in the news, and reported that"The increase in the
Consumer Price Index marked a slowdown from the 0.5
percent jump registered in January." Ain't dat nice?

Then the press all apparently went to lunch and got real
drunk and bought some mind-altering drugs from some guy on
the street named Carl on the way back to their offices,
and this allowed them to continue in Greenspan-speak. I
can imagine that they spoke with slurred voices, swaying
unsteadily on their feet, their pupils alternating between
dilated and constricted, as they said that"Excluding
energy and food costs, 'core' consumer prices rose by just
0.2 percent in February for the second month in a row.
That suggested the prices for many goods and services were
fairly stable."

See? If inflation is the same for two months in a row, no
matter how much higher prices are, then prices are stable.
Wow! See how simple this stuff is when you're the
government and you can't be fired for saying something so
stupid that you would slap your kid if they dared insult
your intelligence like that?

Of course, the press included the obligatory corroboration
that"Federal Reserve Chairman Alan Greenspan and his
colleagues said inflation is not a problem for the
economy." What they meant to say is that Greenspan and his
colleagues said that disguising and lying about inflation
is not a problem for the economy, because it is not a
problem for them, and they figure that they ARE the
economy! So, no problem! Yet you can't pick up a newspaper
or hear the news or listen to one of your irritating
neighbors these days without hearing a whole lot of
whining about the high cost of things.

And almost at the same time, we have this Greenspan person
telling us that prices are not going up! It makes you
crazy at the cognitive dissonance, when supposedly
educated and trustworthy people are telling you that what
you are seeing with your own eyes is not happening right
in front of your own eyes!

On the same day last week, crude oil went over $38 a
barrel, commodities zoomed in price, and gold jumped
$4.50... so it looks like these are examples of things that
are NOT"stable" in price.

Similarly, the Economist magazine notes that their dollar-
based index of commodities has risen by 28% since January
2003. The yen-based inflation is right behind it, at 17%,
followed by the sterling index at about 12%, and then by
the euro-based index, at 10%. The lynx-eyed among you will
no doubt notice that in every single instance the
inflation in commodities was in double-digits.

Then, and I hope you are sitting down for this and have an
IV inserted into you arm that is dripping some kind of
powerful tranquilizer into your veins by the quart, the
long-awaited PPI came out, and the guy who delivered it to
me must have glanced at the page and noticed that it said
that prices were up strongly. It doesn't take a genius to
realize how that kind of news is going to affect me, so he
just tied it to a rock and heaved toward the Bunker du
Mogambo. It hit the door with a thud and lay there on the
ground. I fired off a few bursts from the Mogambo
Machinegun System (MMS) to suppress any incipient hostile
activity, and I quickly opened the door to the Mogambo
Fortress of Solitude and snatched the report up off the
ground and ran back inside. Quickly slamming the door
shut, throwing all the locks and activating the Mogambo
Monitoring and Surveillance System (MM&SS) into Full-On
mode, I gobbled down a few nitroglycerin pills as a wise
precaution, and then leisurely read that prices were up
for the month, and by 0.6%. In March, the Philly Fed's
prices paid component surged 9.7 points to 53.4. The
'prices received' subindex climbed 3.7 points to 22.6.
Both are at the highest levels in nine years.

My immediate reaction was an involuntary tightening of my
trigger finger as I staggered about clutching my heart,
and then, according to expert testimony, was enveloped in
a confluence of outrage, fear, and panic in doses that
were, according to sensitive instruments developed
specifically for the purpose, off the charts!

Of course, there was the rush by government wonks and the
stupid class of people in America, which is the class
known as"American economists," who all decided that
prices going up did not mean that prices went up, and even
if they did, then it is okay, and it is nothing to get
worried about, and that it actually meant that this was
the perfect time to buy some stocks or bonds or houses or
something.

And then the next day, in the WSJ column"Ahead of the
tape," by Aaron Lucchetti, we read that"The big question
for bond investors is whether factories and other
'producers' will eventually pass on some these small, but
growing, price increases to consumers." Then we are
treated to the opinion of an American economist, namely
Michael Ryan of UBS Financial Services, who thinks that
maybe these producers will not be able to pass along those
price increases to consumers. He says that while there is
a historical tendency for consumer prices to rise
following producer prices rising,"It doesn't always
transfer."

"Historical tendency." I like that.

Well, I am here to tell you and Mr. Ryan that rising
producer prices rising are always paid by somebody. Either
the consumer pays them, or the stockholders pay them in
the form of reduced profits. Either way, somebody pays,
and they take the whack to the head.

Christina Wise of Investors Business Daily wrote a column
entitled"PPI Rose 0.6% in Jan; Prices Up in Pipeline,"
and it shows that she is on the same page as the Mogambo,
too, as she writes,"Others see inflation ahead, saying
eventually higher production prices will be passed on to
consumers."

David Littmann, chief economist at Comerica Bank, pretty
much agrees with me and Christina's un-referenced
"others," and says,"All commodity prices are up and I
think that's a worrisome sign because these wholesale
prices do precede CPI. There's no nice way of toning it
down. It presages a great deal higher inflation next
year."

So, will producers be able to pass along the higher
prices? I am here to tell you that there are very few
stockholders that are going to let the executive
management staff sit around on their fat keesters, soaking
up gigantic loads of perks and benefits and stock options,
while the income of the stockholders goes down, all
because the company is absorbing higher costs. Those
managers who are still around next year at this time will
have figured out some way, some ingenious way, some
desperate way, to increase the prices that consumers pay.
And if you want REAL"historical precedent," this is it.


Regards,

The Mogambo Guru
for The Daily Reckoning

--- Mogambo Sez: Each day I wake up more scared than the
day before.