-->The Day the Earth Stood Still

The Daily Reckoning

Ouzilly, France

Friday, August 20, 2004

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*** The Day the Earth Stood Still...

*** Pump and dump...oil up, Google up, gold up...stocks
down...

*** Old-school investors...the tulip mania...why own
stocks...and more!

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For months

...the stock market has teetered back and forth at 10,000.

...gold has teetered back and forth around $400.

...and the economy teeters on the edge of"recovery." A
real recovery requires real spending of real money. But
real money must come from real jobs. And there are not
enough of them. Real incomes are still going down.

But it's still summer, and people have better things to
think about.

But recently, the price of oil has been attracting
attention. People go on summer vacations. They load up the
car and take off - to the nearest gas station. There,
instead of paying 25 cents a gallon - as we did in the
early '70s - the price has risen to over $2.

Gas may be an incidental for you and us, dear reader, but
for many people it is a major expense. And many Americans'
family budgets are already wrapped so tightly there isn't
room to crowd in another expense.

But thank God for credit cards. The family sets out as
planned - it will figure out how to pay for it later.

Oil closed over $48 yesterday. Soon, it will be over $50,
say analysts. How they know these things is a mystery to
us...but oil does look as though it is headed that way.

"It's going up because they don't have as much of it as
they thought," explained Merryn Somerset-Webb yesterday.
"Remember when OPEC set up its quota system, after the last
"oil crisis"? The quotas were set on the basis of how much
each country had in reserve. So naturally they all lied
about their reserves. And even though they've been pumping
like mad for the last quarter of a century, they've never
lowered their reserve estimates. Some have actually gone
up. Now they are being forced to admit that they only have
about half the oil they claimed."

If we were selling oil, we'd want more than 48 measly
dollars for a barrel of the stuff, too. Adjusted for
inflation, that's still less than was paid for oil at the
end of the Carter years.

But it was a different world back then...as we explained to
our audience in Vancouver last Saturday (more below...).
That was before Ronald Reagan...before the U.S. trade
balance went negative...before the United States became the
world's biggest borrower and its biggest debtor...before
the Republican Party had its lobotomy...and before the
Earth Stood Still.

Here we are in 2004 already...wondering when the teetering
will stop and which way things will fall. Stocks will drop,
we guess. Gold will stay steady or rise. And when they get
back from vacation and have to face their bills, Americans'
standard of living will decline.

More news...Tom?

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Tom Dyson, 100 yards from the Washington Monument, Mount
Vernon...

- Caveat lector. Our friend and colleague Porter Stansberry
sends us warning of a new"pump and dump" scheme."Beware
if you've gotten a"breezy, intimate" voice mail message
from a female caller with a hot stock tip who sounds like
she's dialed the wrong number," cautions the AP.

- The SEC said these tantalizing voice mail messages were
being left all over the country. They have received
hundreds of complaints. The female caller appears to be
mistakenly leaving a message for a girlfriend -"I've got a
hot stock tip from the stock exchange guy I'm dating," she
confides. The idea is to ramp up the price of the company,
at which point the con artists bail, leaving the suckers
high and dry.

-"Jeez..." exclaimed Addison, nearly spilling his second
cup of coffee."Check out oil...it's going nuts." Your old
Parisian editor had just noticed oil had broken above $48 a
barrel.

-"Damn. You know, Tom...when I first started writing for
The Daily Reckoning, oil was selling for less than $10 a
barrel and gold was at $235 an ounce." Addison was
lamenting missed opportunities.

-"I know, it's a shame you didn't put some money down,"
your misplaced British editor agreed."And what about the
Nasdaq? You were telling people to sell the Nasdaq when it
was trading over 5,000...if you'd taken your own advice,
you wouldn't be sitting behind that desk..."

- You see, dear reader, here at The Daily Reckoning, your
editors pump, but we never have anything to dump...except
the occasional coffee maybe."No - I 'd definitely still be
here...or more likely in Paris," countered Addison,"I
would just be more cavalier about it all...you know, with
my opinions, whether or not they're correct..."

- Oil gained $1.48, to end the session at $48.75 a barrel,
and then continued higher into after-hours trading...to
$48.98."$50 [a barrel] is, I would say, a foregone
conclusion," said a spokesperson at Platts, the energy
market analysts."Now the market is thinking $60,
possibly."

- Gold followed suit, adding $2.60 in New York. An ounce of
the yellow metal is now worth $407.

- Surging oil costs are bad news for stocks. But so far,
investors have turned a blind eye. Should oil hit $50,
it'll feel more like a black eye. Over at the stock
exchange, traders cringed, and pushed equities lower. The
Dow lost 42 points, to close at 10,041, while the S&P
dropped 4, to 1,091. The Nasdaq finished the day at 1,820,
11 points off.

- Speaking of pumping and dumping, Google made its debut on
the stock exchange yesterday. And as predicted right here
in The Daily Reckoning, the shares did well...they jumped
over $15 a share, to $100.34."We think that all the
negativity surrounding the auction is bullish," we stated
yesterday.

- Of course, it's all just hot air. The media pumps, Wall
Street dumps and the lumps get humped. Is Google worth $100
a share? At these prices, Google has a market cap of $27.22
billion, making the search engine 17% more valuable than
General Motors.

- And here's news from someone else with the inside
track...Chuck Butler, our favorite currency analyst. Chuck
always has the jump on the currency markets...and now he
thinks the dollar is about to be trumped."Guess who got an
invite to the G-7 meeting," he gossips...

-"There's a story circulating around this morning that
China is going to be invited to the next G-7 meeting..."
elaborates Chuck."That's October 1...you can smell this,
can't you? Yes...why else would they invite China to a G-7
meeting other than to talk revaluation? I don't know of any
other reason...so let the rumors, lies and video begin!"

-"But doesn't this smell like the scenario I presented to
you before? In case you missed class that day...my thought
was that China would do something before the U.S. election
to revalue their currency in a"payback" to the Bush
administration for providing protection of their oil
tankers in the Gulf... So... October 1, eh? Hmmmm..."

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Bill Bonner, back in the heart of France...

***"Perhaps you can explain why anyone would want to own
stocks in the first place?" asked a Daily Reckoning reader.
"No one has ever been able to do so to my satisfaction.

"Say I'm an 'owner' of Coca-Cola or GM or whatever - so
what? I'm not getting a salary out of them. They can do
fantastically well and rake in profits up the wazoo, but
for my 1,000 shares, I get absolutely nothing - except
perhaps a paltry dividend every quarter.

"The theory that people own stocks in the expectation of
income from a future dividend stream seems absurd. Who in
his right mind would hold a stock for 10 years awaiting
such an unguaranteed boon?

"It all seems to be based on the 'bigger fool' theory -
that someone down the line will want my shares more than I
do and be willing to pay a higher price for them. But why?
On the hope that someone else will want them even more
later? Tell me, how does this differ from the"Tulip Mania"
that gripped 17th century Holland?"

We have wondered the same thing.

When you buy a company, you study it carefully and decide
whether or not the sum of all its parts is worth the money
you pay. It may produce no profit, but you may like the way
the morning light filters through the curtains in the
president's office. Or maybe you can drive around in the
company car...or take a business trip to Milwaukee and stay
- at company expense - in a nice hotel.

But when you buy a share in a company, you have only the
slimmest hope of ever getting anything out of it. The
dividend yield on the Dow is only a hair over 2% - that is,
considerably less than the rate of inflation. All other
things being equal, you will lose money. Buying stock at
today's prices, investors are betting that all things will
not remain equal...they are betting that they will somehow
change for the better! It's a remarkable bet.

Before the Reagan Era...that is, before people became so
optimistic and positive that they couldn't think
straight...stock buying was limited to people who had a
fair idea of how stocks worked. They knew that stockholders
were minority owners - with little information and no real
power. They knew that the businesses whose shares they
bought would be unlikely to make any money and that they
would be last in line to get any of it - after the
insiders, the employees, the government, the lawyers and
the managers.

The old-school investors were no fools. They demanded low
prices and high dividends to make up for what they saw as a
risky investment.

"Markets make opinions," however. As the boom of the '80s
and '90s proceeded, more and more people saw stocks as a
way to make money without working for it. Popular books on
stock market investing crowded the bookstores. People such
as Peter Lynch became"household names." And gradually,
more and more people were suckered into stocks...with more
and more illusions about how stocks work.

"People buy stocks, first for the right reasons," Warren
Buffett once explained,"and then for the wrong reasons."

People who buy stocks now are buying them for the wrong
reasons, we think - because they think they will go up.
Good luck to them.

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The Daily Reckoning PRESENTS: Here's a cleaned-up and
improved version of the speech Bill gave last Saturday at
the Agora Wealth Symposium in Vancouver...enjoy!

THE DAY THE EARTH STOOD STILL
by Bill Bonner

What you see depends on what you have seen. And breathed.

You may want to write that down. Just remember us when you
quote it.

We say that after spending a few weeks driving across the
country...and giving an interview to a local financial
show. The reporter had set up a camera on the steps of the
Art Museum across the street and asked us what we thought
was happening in the economy. We began by describing all
the terrible things that we see heading towards us...and
explaining how the end of the world is coming. But behind
us, a group of bums had lit up. Soon, great clouds of
marijuana smoke billowed over us. We continued to explain
the many terrors of the dark night ahead. The debt bubble.
The trade deficit. Federal liabilities. The rise of China.
Peak oil, and so forth. The smoke thickened.

And by the time we finished the interview, things didn't
seem nearly as bad as they had at the beginning.

As for our drive across the country...by the time we
reached the Western states, Elizabeth had read a book on
geology - The Roadside Geology. She saw precambrian,
Cambrian, Paleozoic, Mesozoic, Cenozoic, Triassic,
Jurassic, Cretaceous and various other geological
formations that we can't remember. In the back seat, the
boys saw only rocks. And by the time we had reached
Arizona, they had seen enough of them, they thought, to
last a lifetime. Henry could barely be persuaded to look up
from his Isaac Asimov books. For his part, Jules had draped
a towel over his head so he could watch reruns of Seinfeld
shows on his portable computer without the interference of
the bright sun.

Our speech topic - America's Revolt Against Fate - requires
a little introduction. Because Americans no longer believe
in Fate. They believe in themselves - at least they have
since the Reagan revolution helped them out of their
Carter-era funk. They believe that they are the captains of
their own fates."Everything is getting better," wrote
Michael A. Ledeen, a neo-conservative dreamer at the
American Enterprise Institute."And if not, we'll fix it."

There are some things beyond fixing, we note. Precambrian,
Cambrian, Paleozoic, Mesozoic, Cenozoic...all the great
epochs of the Planet Earth knew no fixing. There were no
votes taken. No opinions asked. They just happened.

Many things just happen, without anyone's say-so. A man
gets struck by lightning crossing a field...or by a
crosstown bus while making his way to the other side of the
street - accidents happen.

As do major events of history, largely beyond anyone's
comprehension, let alone anyone's control. Who wanted World
War I? Who gained from it? Whose fault was it? Looking
back, the answer is no one. And yet, it was the most costly
war in human history. After a couple of years, it was plain
to everyone that nothing would be gained...that it was a
lose-lose proposition. Newspapers spoke of peace. Soldiers
on all sides threatened to take matters into their own
hands and lay down their arms. And then, Woodrow Wilson
stepped into the breach to"fix" it. He managed to prolong
the war...add millions of names to the casualty list...
practically destroy Western civilization. Every major
government of Europe fell in the aftermath. In their place
came the ugly"isms" of the 20th century - communism,
Bolshevism, fascism, syndicalism, modernism, abstract
expressionism - and the world was a different place.

Who wanted the Great Depression? Who made it? Who gained
from it? Whose fault was it? We do not know the answer. But
we know it got worse after Franklin Roosevelt stepped in to
"fix" it.

Not only are events largely beyond your control, but Fate
has a way of bringing you what you least want, least expect
and most deserve. There are patterns to life, some of them
inescapable...some of them inexorable.

Every man born is fated to die. Every breath inhaled is
fated to come out. And even the brightest day that dawns is
fated to end in a dark night.

So, too, does Fate decree that acts have consequences.
Invite the wrath of the gods...and you will regret it. Sow
the wind, says the Bible, and you will reap the whirlwind.
Give and ye shall receive.

There seem to be certain natural laws that govern life.
What goes up must come down. What goes wrong must be set
right.

The last time"natural law" was discussed in public was
during the confirmation hearings for Supreme Court Justice
Clarence Thomas. In an unguarded moment, Thomas had made
approving remarks about natural law. The politicians
recoiled in mock horror - as if they had found a moth in
their soup. The idea that there could be any authority
higher than the U.S. Congress was as abhorrent to the
politicos as term limits.

But natural law used to be something people believed in.
The old English common law had no lobbyists' fingerprints
on it...no congressional sponsors...no pork-barrel
amendments. Instead, judges and juries merely tried to
"find" the law. They assisted Fate, rather than trying to
straighten it out. They saw it as their duty to make sure
that what ought to happen did happen. People ought to get
what's coming to them; a common-law jury of 12 men"good
and stout" helped make sure they did.

But it is a new world, we keep saying. Now a congress of
men - neither good nor stout, but conniving and willowy,
grasping...whose convictions rarely go beyond drunk driving
or sodomy - make all the laws. And a whole nation is
convinced that there is no gravity. We can get not what we
have coming - they say - but what we want.

Fate...?

"The best news about our future," says the neo-con scholar,
"is that it's still in our own strong hands."

The U.S. economy - and by derivation, the economy of the
entire world - is thought to be in the strong, bony grasp
of Alan Greenspan and the Federal Reserve. This too is a
departure from former times - back in some paleo-time
before the earth cooled...before there was rap
music...before even central bank of the United States was
formed - under the selfsame President Woodrow Wilson who
almost single-handedly derailed Western civilization...and
even before there was a United States of America - the two
Adams...Adam Smith and Adam Ferguson...began what was to
become the study of modern macroeconomics. But the two men
were hardly economists of the modern stripe. They called
themselves"moral philosophers." They believed that their
mission was to study economies as naturalists studied birds
and bees - and to discover the laws by which they operated.
The two ur-economists believed in fate...that an"invisible
hand" - which they took to be the extended hand of God
himself - made sure that things worked as they should.

But in this new world, it is the hand of Alan Greenspan
that is supposed to make sure things work out - not as they
should, but as they wish.

Markets make opinions, as they say. Markets, for the last
quarter of a century, have been so delightful that they
have encouraged in Americans a delightful opinion of
themselves. They believe themselves capable of just about
anything - including controlling their own fates. What they
have seen over the past 24 years leads them to see a future
as rosy as daybreak. The"new dawn" that the Reagan era
began, they believe, will last forever.

As markets make opinions, it should not surprise us that
opinions are as cyclical as markets themselves.
Technological progress is cumulative and universal.
An internal combustion engine is the result of many
generations of accumulated progress in metallurgy,
chemistry, mechanics and so forth. It will work as well in
Vancouver as in Calcutta.

But in other things - love, war, markets and central
banking, for example - there is little real progress.
Instead, we merely repeat the same mistakes, over and over
again, in patterns that are cyclical and local.

The internal combustion engine works as well as in Paris,
France, as it does in Paris, Texas. But war is far more
popular in the hollows of West Virginia and the plains of
West Texas than it is in France. This was not always so.
Napoleon Bonaparte had led the most expansionist, action-
oriented, pre-emptive-attacking foreign policy in history.
His large, enthusiastic armies - often coalitions with his
allies - had beaten every enemy in Europe. Finally, all
Europe made common cause against him, rallied by France's
hereditary enemy - England. Americans, whose cause of
independence had been won with French help only 36 years
before, did not come to his aid.

Then, France began a long, bad experience with war. The
French were beaten in 1870 by the Prussians. Then, in World
War I, no nation suffered more - except perhaps the
Russians. In World War II, France had the biggest army in
Europe, yet it surrendered in six weeks. Then France was
booted out of Vietnam...followed by Algeria. Americans were
puzzled and indignant that the French did not follow them
into Iraq. But given what the French have seen of war, it
is hardly surprising that they were not eager to see more.

Meanwhile, Americans have a taste for expansion...for
war...for debt. We are"conquerors," says Ledeen. We can't
imagine that the wheel still turns, that Fate still waits
for us as it has for so many before us.

"Remember the vogue of Japanese-style capitalism in the
'80s, which, according to a bevy of fashionable
intellectuals, was destined to buy America and leave us in
the dust?" writes Ledeen, triumphantly.

"Remember the oil sheiks of the '70s who, according to the
usual suspects, were going to by America with the
petrodollars?" he continues.

"Remember the fanciful European expectations of dominating
the world market with the euro"? he went on in 1999.

Ledeen was able to see the blockheadedness of others, but
not of himself. He was unable to imagine history would
continue grinding down the ambitions and pretenses of the
world's success stories...and that Americans would be next
on the list of those brought low by Fate.

Precambrian, Cambrian, Paleozoic, Mesozoic, Cenozoic...

Tribe...monarchy...empire...democracy...

Americans seem to think that history has come to a dead
stop - with them on top of the world.

To be continued...

Regards,


Bill Bonner