-->Chaco Canyon

The Daily Reckoning

Los Angeles, CA...where it never rains

Friday, August 13, 2004

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*** Problems...problems...problems...and painful
resolutions!

*** Are you okay...Steve Sjuggerud speaks at the Wealth
Symposium...

*** A 94-year old deaf man with ID to prove it!

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"Things are getting better all the time, and if they're
not, we'll fix it."

The words of Michael A. Ledeen brought a malicious smile to
our face. So many people seem to have been born
yesterday...the hospitals must have run out of diapers.

How are we going to 'fix' a half-a-trillion trade deficit?
How are we going to 'fix' another half-a-trillion federal
deficit? How are we going to 'fix' a debt to GDP ratio at
the highest level in history? How are we going to 'fix' a
real estate market where the typical house is so expensive
the typical house buyer can't afford it? How are we going
to 'fix' an oil market...when nearly half the world's oil -
formed over billions of years - is used up by two or three
generations? What's the 'fix' for the American consumer -
who earns less and less each year...but goes further and
further into debt...while approximately 5,000 Asians stand
ready to do his job at 1/10th the price?

Some problems - like old age - can't be fixed. The best you
can do is to reckon with them...to endure them...to face up
to them...and live through them.

Other problems, such as a debt problem, can be fixed,
temporarily - by providing more credit at lower rates. It
will appear to work, for a while. Later, the real problem
will be worse than ever.

Alan Greenspan has tried to fix America's economy by making
it easier for people to borrow. Time after time, he's faced
up to crises by providing more credit and lower interest
rates. Now, the U.S. economy has gotten used to it...and
lives on the savings of the rest of the world.

That problem can't be fixed because no one in the Federal
Reserve or the U.S. government has the courage to fix it.
The system would not tolerate a real fixer. What politician
is going to cut services and raise taxes? What Fed governor
is going to stiffen up interest rates enough to cause a
recession?

No...some problems cannot be fixed. Instead, they fix
themselves. Painfully.

More news from Tom:

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Tom Dyson, from the corner of Georgia and Hornby...

-"Are you okay?" We didn't know what else to say. I mean,
what do you say? We felt so helpless.

- Addison had invited us to breakfast yesterday morning. We
were going to the Elbow Rooms, a restaurant that makes its
franchise out of being rude to the customers.

- We had just stepped out of the hotel, and turned the
corner onto Hornby St. when the sound of shrieking rubber
interrupted us. A young girl had just been hit by a car,
and was now lying in the street, virtually at your editors'
feet. The girl had whacked her head on the car's windshield
with such force that the glass has smashed.

- She was okay, she said, sitting up and scratching her
head. She had a look of utter befuddlement. It was as if
she didn't quite realize what had happened. The driver
too...he just stood there with a dopey expression on his
face. And soon more people arrived...they all formed a
circle around her and stood gawking."Are you okay?" They
repeated. No one knew what to do with themselves.

- Are you okay? Steve Sjuggerud gave a speech at the Agora
Wealth Symposium yesterday afternoon. He told a story in
which he posed a similar question to a group of high-
powered figures in the Indonesian central bank, only he
didn't express it quite like that.

- He was really enquiring how these men intended to deal
with the their country's severe economic problems. He
wanted to know how they were going to pay the debts, reduce
the deficits and restore faith in the currency. After a
long pregnant pause, the most senior of the three men
looked up at Steve and said:"Got any ideas?"

- Steve gave a great speech...this is a man with plenty of
ideas. One of his more controversial ideas - especially to
readers of The Daily Reckoning - centers on bonds. He
thinks interest rates could possibly still go much lower
for much longer.

- Are you okay? The audience might have been wondering
about Steve's mental disposition. After all, isn't the U.S.
government so extraordinarily indebted? Isn't inflation
boiling up? Aren't China and Japan going to dump their
dollar denominated debt when they realize how financially
irresponsible the U.S. administrators are? Hasn't the bond
market already begun to crumble?

-"Maybe not," says Sjuggerud."Everybody hates bonds these
days and they think yields can only go higher...but that
maybe a dangerous attitude."

- To illustrate his point, Steve produced a couple of
charts. On the first, he had overlaid the graph of Japanese
10-year interest rates from the late '80s with U.S. 10-year
rates beginning in the late '90s. He set the two graphs so
that they are lined up by the dates of the respective stock
market peaks, showing that U.S. yields are following a path
uncannily similar to that traced by Japanese yields 10
years ago.

- On the second chart, Steve showed U.K. government bond
yields from 1720 to the present day and U.S. 10-year
government bond yields from 1795. The long run average is
4.7%."This," says Steve,"shows that, historically
speaking, bond yields are not remarkably low."

- Yesterday, bond yields dipped a couple of basis points,
settling at 4.25%, only 45 basis points below the long run
average. And for the second day in a row, markets were
weak. The Dow shed 124 points, and is now down on the week.
The Nasdaq continues to plummet putting your editor's $50
in serious jeopardy. It fell 30 points to 1,752. Readers
may recall that, last Friday, we bet a colleague that the
Nasdaq would finish higher exactly one week later. The
vicious sell off last week made us think the market was
oversold. Apparently, it wasn't. Could this signify the end
of the year's range-bound trading? Your editor thinks it
does.

- And speaking of losing money by betting against
colleagues, it's always a bad idea to take the opposite
side of a trade with Steve Sjuggerud. As we told readers
last week, your editor is short T-bond futures. And despite
the danger of taking the opposite side on a Sjuggerud
trade, we will keep our position...for now.

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Bill Bonner, with more from the road...

*** Is the world really running out of oil? Byron King
answers:

"Yes, we have been"running out of oil" since about 1859,
shortly after Col. Drake dug his first well near
Titusville, Pennsylvania. It has all been downhill since
then. The battlefields of predictive geology are littered
with the corpses of wise men who reviewed the discovery
rates and the production data, and determined with
empirical certainty that, by such-and-such date, we all
would be up the creek without a paddle and freezing in the
dark. Wrong, wrong, wrong. Wrong some more. And wrong
again."

"Until a geologist from Shell Oil Company, named M. King
Hubbert, predicted in 1958 that by 1971 the production of
oil in the U.S. would"peak," and then commence an
irreversible decline. Which is exactly what happened in
1971 and thereafter. Hubbert lived long enough to be
vindicated, although it took about 20 years of hindsight
clearly to see the"peak" in the rear-view mirror. Was he
lucky? Or was he good? Or was he both lucky and good?
Whatever he was, he was correct. You can't beat being
correct, especially when you predict an event and a time
frame. That is the kind of thing that people want to take
to the bank.

"In the past few years, the Hubbert analytical methodology
has been applied to a world-wide data base. It is
problematic, because the world is a very big place and the
data is not always all that good.

"But we know enough about planetary geology, the
arrangement of sedimentary basins within the crust, and the
formation and entrapment and preservation of oil to know a
few things.

"We (that is, the very smart people who work in the geology
biz and the petroleum industry) know where the sedimentary
basins are. The rest of the crust is basalt or other"hard"
stuff with zero petroleum potential.

"We (id.) are pretty sure we understand what it takes to
form and entrap petroleum, not the least of which is many
millions of years of a very specific type of geologic
activity. (Forgive me for not going into detail just now.
That is a lunchtime discussion.)

"We (id.) are pretty sure that we know how much petroleum
we have found, and we know how much has been produced over
the past 145 years.

"We (id.) are pretty sure we know where to look for more
petroleum, and about how much there is to find.

"We (id.) have identified about 90% of all the recoverable
oil that we will ever find, and about half of that has been
produced and consumed.

"The world is presently at or near the"peak point" of oil
production, currently about 81 million barrels per day, all
of which are being consumed. About 20+ million of those
daily barrels are consumed by the U.S.; a lot of it up in
smoke as people are idle in traffic jams (another lunchtime
discussion). It is highly unlikely that the total world
production will ever exceed that number of 81 million.
Using Hubbert methodology (lucky and good, recall), total
world oil production is about to enter a phase of
irreversible decline. Demand will have to decline as well,
in the face of reduced availability.

"The price of oil will rise (noticed anything lately?). The
biggest demand growth has been in China, which has tripled
its oil consumption in the past 15 years. China is now a
significant oil importer, sucking up essentially"all" of
the incremental increase that comes onto the market. And
demand for oil in China is growing.

"'What if we can sell a gallon of oil to every man in
China,' asked John Rockefeller of Standard Oil Company,
over 100 years ago. 'What if they all buy one?' is the
question for today. The trends are not out friends.

"Some day you will tell your grandchildren, 'Yes, I
remember a time when we would burn oil to power ships and
to drive cars.'"

"They will say, 'Wow, grandpa, you mean you burned that
precious resource as just plain old boiler or motive fuel?'

"And you will say, 'Yep. I remember one time, a bunch of my
friends and I jumped into a car and drove 150 miles just to
go to a restaurant to eat steak.'

"And they will say, 'Wow, grandpa. What's a steak?'"

***"I'm 94 years old," said a man at the LAX airport.

He didn't look 94. We asked for proof. He took out a
driver's license. Sure enough, he was born in 1910.

When the old, the dead, and the near-dead talk, we listen.

"This is a great country," he said.

"How do you mean?"

"I'm 94 years old," came the reply.

"Well, yes...but in what way is this a great country? What
did you mean by that?"

"You don't believe it? Here...didn't I show you my driver's
license?"

Again, he offered his proof.

"No, I was just asking what you meant by saying that this
is a great country," we yelled.

"I came here after the war. You know, [of course, we did
not...] that I speak 5 languages? I came here from
Czechoslovakia. I was an engineer.

"This is a great country...but it's not that great...truth
is, I'd like to go back to the old country...you know,
where I came from..."

"What do you mean...why do you say the U.S. is 'not that
great?'"

"I'm 94 years old...want to see my driver's license? It
proves it."

"No, we believe you. But you don't look a day over 93." [By
now we realized that he may have spoken 5 languages, but he
couldn't hear a single one.]

"The trouble with this country is it has too many
politicians. Better to have just a few...good ones. Even a
good king is better than a lot of bad politicians. I've
seen them all. Bush and Kerry, both of them are stinkers.
Still, this is a great country..."

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The Daily Reckoning PRESENTS: The Bonner family run out of
water when out hiking...there are lessons here for the
whole family. Enjoy!

CHACO CANYON
by Bill Bonner

"Nobody knows where they came from...the original pueblo
people. They are referred to as the 'Anasazi' or 'ancient
ones.' They are part of the great diaspora of tribes that
apparently came over from Siberia about 12,000 years ago."

Elizabeth was imparting knowledge. She was explaining to
the rest of the family how the ruins in Chaco Canyon came
to be there.

At least a dozen conglomerations of houses, storerooms,
workrooms and religious chambers have been found in the
Chaco Canyon. Some of them include hundreds of rooms, built
of stone - not higgledy-piggledy, but finely crafted
according to a design that seemed to have been worked out
in advance.

It must have been a wetter period in the region, for now
the place is as dry as a pharoah's tomb. It does not seem
possible for it to support even a dozen people, let alone
5,000.

"The Siberians were not the first to arrive in America,"
Elizabeth continued."A few bones have been discovered that
belonged to a much earlier race. But there are not enough
of them to come to a conclusion. They are a bit of a
mystery and a source of argument."

The Navajo, Pueblo, Apache and other tribes in the area
refer to themselves as 'native American.' They didn't like
the term 'Indian,' the handle imposed upon them by the
first European explorers - who thought they had arrived in
the East Indies.

"How come they call themselves 'native Americans?' Henry
wanted to know."Didn't they immigrate to America just like
white people, only earlier?"

Henry was right. The first appellation was a mistake, but
the second is a lie."Native Americans" are immigrants -
just like the rest of us. And like the rest of us, they
probably hunted, exterminated, infected or simply beat out
the locals - an earlier group of immigrants of whom little
trace remains.

"They were in New Mexico at least 12,000 years ago," our
tour guide continued."They've found the remains of a huge,
extinct bison with arrow points in the bones. They carbon-
dated the bones...and besides that species has been extinct
for about 10,000 years.

"The first inhabitants of this area were hunter-gatherers
for a very long period. But they seem to have had contact
with other people from the south and gotten from them a
type of grass seed...and later, corn. Gradually, they
planted more and more and hunted less and less. They lived
in caves at first and then built houses of stone - about
1,000 years ago."

We explored 'Pueblo Bonito,' the most impressive of the
Anasazi towns and then headed up into the rocks for a hike
around the mesa. The trail led up over and around the hills
and then up between two immense boulders, a defile so steep
and narrow, it could have guarded the gates of heaven.

Once at the top, we gazed down on the ancient
pueblo...clearly able to see the outline of the rooms and
exterior walls - including the round 'kivas' in the center
- from the height of several hundred feet. We set off on
what was to be a hike of 5.2 miles.

"Do we have to do this," Jules asked. The desert sun in
August had made us tired even before we started out.

"Yes," came Elizabeth's reply."It's good for your
character. Let me tell you more about this place..."

In the parking lot, we had heard another group of tourists
discussing the ruins.

"They built this 1,000 years ago," said one.

"When was the Roman Empire?" asked a second.

"Maybe it was about the time of the Egyptians," said a
third.

"And there were Greeks too," replied the first.

"Oh my God," Elizabeth was disgusted. Here were people who
had not been improved; people to whom the vital knowledge
of our history and pre-history had never been imparted.
Here were philistines, know-nothings, and dumbbells. These
people should be ashamed of themselves. Everybody knows the
Romans crucified Christ. And this is the year 2004, AD.
Duh... So the Romans were around 2,000 years ago, not
1,000. And the Greeks and Egyptians were even more ancient.

"This town was built about the same time that William, Duke
of Normandy, conquered England...and a little after the
cathedral of Notre Dame was built."

"Mom," Jules took up for the dumbbells."So they didn't
know what was going on 1,000 years ago. Big deal. What
difference does it make? You feel so superior because you
remember a few dates and a little history."

"It's not that," his mother replied."It's just that you
need a little basic knowledge and culture or you can't
understand who you are or where you've come from. Let's get
going..."

We set out over the rocks. Pater Familias led the way.
Elizabeth did the talking.

"This civilization peaked out in about between the 10th and
12th centuries. The climate seems to have become hotter and
drier. The land could no longer support so many people.
There is also evidence that the pueblos were attacked and
burned by invaders from the north. Other tribes came into
the area - the Athabascans from Canada, who were more
warlike. They're the ancestors of today's Navajo and Apache
tribes.

"Recently, they've found evidence that the ancient pueblo
Indians were cannibals. They've found human bones with
butchers' marks on them...and human DNA in human feces. But
their descendants don't appreciate the insight; it's become
very controversial..."

"Why would they want to come all the way down here from
Canada to attack the Indians around here," Henry asked.

"Well, I'm sure they didn't come for that purpose. But it
is really amazing. The whole continent was practically
empty. Still, for some reason, men will go out of their way
in order to attack other men. Remember when there were only
two tiny European colonies on the entire Atlantic Coast. In
the early 17th century. We visited one of them,
remember...the French fort at Port Royale, Nova Scotia? An
English expedition from Jamestown, Virginia sailed all the
way up the Atlantic seaboard just to burn it down. War just
seems to be part of our genetic makeup."

From time to time, humans kill each other on a grand scale.
They always have a reason that seems good at the time. But
when historians look back on it, the reasons are almost
always absurd.

Every once in a while, usually after the misery of the last
tussle has been forgotten, war fever sets in. Watching the
Democratic National Convention a couple of weeks ago, we
thought we saw temperatures rising. Even the Democrats seem
to want war...or, if they don't want it, they seem to
accept it as inevitable. John Kerry was put forward as a
gifted, reliable leader for the great patriotic war that
lies ahead. He's a man who you can trust when the going
gets rough, said his supporters...a man who will report for
duty when his country needs him.

None of the lame brained speakers suggested that killing
Iraqis was a bad idea. None thought we should get out of
the Middle East and mind our own business. None proposed
renouncing preemptive war as national policy. None doubted
that the U.S. was under attack (though none said why). None
questioned the merits of the 'war on terror;' they merely
thought that their man Kerry would do a better job of it.

"For one reason or another - it might have been drought, or
maybe war...or maybe disease - the Anasazi abandoned these
cities just before the Spanish arrived. They migrated down
to the Rio Grande, where water was more reliable."

By this time, we had been hiking over the hot rocks for
nearly two hours. Water was on our minds.

Whether it was good for Jules' character or not, we don't
know. But after a couple of hours of vigorous hiking, we
began to be concerned for his health. Jules' face had
turned red. None of us were used to the altitude or the
temperature. The desert sun had wicked the moisture right
out of us.

"Drink some more water," we advised Jules.

"There isn't any water left."

"What? How could we be out of water so soon?"

We opened up the backpack. There was only one bottle with
any water left in it. And it had only enough for one gulp
each. The family of Parisians had greatly underestimated
how much water it needed. If it continued on its present
course, it was likely to end up as a candidate for the
Darwin Awards, the prize given, posthumously, to those who
cleanse the gene pool in some particularly moronic way.

"We have to go back now," we told the group.

"Yeah, but we have a long way to go," said Jules, thinking
about his own bones bleached by the side of the trail.

"And Mom," Jules went on."Remember those tourists who
didn't know when Rome was around? Well, at least they knew
enough to bring water."

Regards,

Bill Bonner
The Daily Reckoning