by
Bill Bonner
"Trees do not grow to the sky," say the old-timers. They don't. They grow about as high as they are supposed to grow. Then, they rot and fall down. Just as trees, markets have to do what they are "supposed" to do. When things are out of whack, they have to get back into whack one way or another. When they are far beyond the mean, they must revert back to the mean. If not, there would be no mean to revert to. There would be no "normal," no usual, no ordinary, no common, no standard, no regular. That is to say, there would be no familiar patterns to life. Everyday would be a surprise. But there are patterns. When markets reach an extraordinary peak, somehow they have to fall down to an extraordinary valley. That's just what they do. But they don't have to do it in a way that suits us. Or even a way we can anticipate. If we could anticipate it, we could take advantage of it. And if we could take advantage of it, we could stop it in its tracks. Let's suppose, for example, that after the market had reached an epic high at the end of the 20th century, we could reasonably expect the next chapter of the story to tell us how it reached an epic low. So, skipping ahead, speed-reading investors might figure that they should sell their shares. And then, reading between the lines in their concise Book of Market History, they would realize that everyone else would also be selling in anticipation of the next big move and that they should try to sell first! But then, the book would be open to everyone, so everyone would be trying to sell earlier and earlier than the next person, to avoid the rush...until they had all sold before the big bull market even began. In fact, there would be no bull market. If everyone knew what the future would bring, no one would bother living through it. History would stop. Fortunately, we live in a world of perpetual darkness, at least insofar as tomorrow is concerned. All we know is that the fundamental patterns of the past will probably repeat themselves; we just don't know how or when. Many gold bulls, for instance, expect an exact replay of the late '70s, wherein rising inflation rates led to a soaring price of gold. In this, as in so many things, we are less than sure. We are a gold bull, too, of course, but we have a feeling this bull market in gold may not take the anticipated course. The real danger to the U.S. economy remains deflation, not inflation. Not too much money chasing too few goods and services, but too little money to keep up with the load of debt. "Fear Grips Phoenix Housing Market," is an actual headline from the weekend press. What people are worried about in Phoenix is what they are beginning to worry about everywhere: how are they going to pay their debts? Nearly $1 trillion in ARMs (adjustable rate mortgages) is scheduled to be reset in the next 12 months. How will people make the higher payments? Meanwhile, the biggest debtor of all time, the U.S. government, has its own ARM. If we read the schedule correctly, a third of the entire U.S. debt burden – almost $3 trillion – needs to be refinanced in the next 12 months. Where is the money going to come from? It's not the size of the U.S. debt load that really matters; it's the ability of the debtors to pay it. As debt payments increase, interest rates are rising everywhere. And as they rise, so does the need for cash to make payments. That's why the dollar is not likely to be worthless. Not soon. That is for the next stage...when Bernanke's back is to the wall. For the present, what we are seeing is the need for more cash, and a demand for dollars to keep the system going. Yes, the dollar is inherently worthless. And yes, it too will eventually do what it is "supposed" to do. It will go away, but nothing happens as simply as you expect. • "I read Empire of debt last year..." starts one reader's email to us, "The U.S. government 'cooks the books'! Take the unemployment numbers...
"1. 1.5 % of the working age population is incarcerated! "2. Those fortunate enough to receive unemployment benefits are conveniently removed as job seekers after 6 months...In Europe it is 5 years in some cases! "3. Another 1% of available workers are in military uniform doing a service which is in not in demand by consumers... "4. Germany used to count (up to 03/2005) workers as unemployed who worked 15 hours/week or less. Most other nations went by ILO standard of 1 hour/week.
"Seems to me the U.S. unemployment rate is as high and in some cases higher than some European nations!
"I believe it was once stated that the economy is 90 % a state of mind...The mainstream media does nothing to dispel any myths! This whole charade goes on until the duped Chinese and Japanese realize they made some unwise investment choices...If they want to bail out, what do we do...say our military is bigger than yours?! Come and get it!" • "Can we just go to a hotel?" The boys were unhappy about our living quarters. Elizabeth, favoring architecture over comfort, had rented an odd garden house on the Dunmore estate near Stirling. For the first time in our lives we were lodged in a pineapple. But it wasn't so much sleeping in a tropical fruit that annoyed the boys; it was the fact that there was no television. "What are we going to do?" they wanted to know. Not that they typically spend a lot of time watching TV. Just the contrary; they rarely get to watch it. Which is why they look forward to staying in hotel rooms; hotels usually have TV, and cable TV at that. This place had nothing. Not even soap. But what it lacked in comfort it made up for in particularity. Its builder, Lord Dunmore, was the Governor of Virginia just before the American Revolution. He seems to have discovered the pineapple, which was used in the colonies as a symbol of hospitality, and taken to it. Chased out of Virginia by the sons of liberty, he returned to his home in Scotland and built a house in the shape of the fruit. After his death, the estate fell to rack and ruin, but the pineapple, built of carved stone, survived. It was purchased by the Landmark Trust, which converted it to a cottage and rents it out to tourists. What one learns while touring Scotland is the same thing one always seems to learn: things are more complicated close up than they appear from a distance. We had imagined Scotland as the land of the fierce and freedom-loving Scots, valiantly resisting the encroachments of the English until the bitter end. Our own ancestor Seamus McCeney (the name barely resembles the original Gaelic form), fought against the English at the Battle of Culloden, was captured, and then sold into indentured servitude on Kent Island, in the colony of Maryland. But when we visited Culloden, we discovered that Scots and English were not the only ones on the battlefield; there were French and Irish, too. And not all the Scots were on the same side! Elizabeth got out the guidebook and we found that the Scots themselves were not exactly what we thought they were. The Scottii tribe was not from Scotland at all, but from Ireland. According to the book, they invaded the west of Scotland and created the Kingdom of Dalriada. The Pictish tribes to the North and West – who were probably the people we think of as the original Scottish Highlanders – were actually squeezed between these invaders from Ireland and Viking raiders from Norway. Eventually, they were squeezed so hard they disappeared. Meanwhile, the Anglo-Saxons had invaded from Europe, replacing the Romans, who left after the collapse of Rome. And then came more invaders, from Normandy, in 1066. The Normans defeated the Anglo-Saxons at Hastings, and then marched north to Scotland. The Lowlands of Scotland thus became a "melting pot" of culture and language. Robert the Bruce, who later beat the English soundly at Bannockburn, was descended from a Norman family. So was much of Scotland's lowland nobility. And some of the best-known clans, such as MacDonald and MacDougal, were Viking in origin. Nor were all the Scots wearing kilts, sharpening their dirks, and eating haggis. In the 18th and 19th centuries, one of the most dynamic and prosperous parts of Briton was here in the lowlands between Glasgow and Edinburgh. James Watt, who invented the steam engine, was from this area. So were the great economists Adam Smith and Adam Ferguson. They were among the leading figures of what came to be called the Scottish Enlightenment. And it was here in Dumfermline that Andrew Carnegie was born. "Oh yes," said our guide in Dumfermline, "not only was this the home of five Scottish kings, Robert the Bruce was buried here in the church and Andrew Carnegie was born right over there in a humble weaver's cottage. And see that big park over there? It's beautiful, isn't it? Well, when Carnegie was a boy, it was a private park. He couldn't go in. Only rich people could use it, so Carnegie would stand at the bars of the gate and look through. And he vowed to make his fortune in America so that he could buy that park. And he did. He bought it and gave it to the town. Now, anybody can use it."
"They still burn coal in the power plants," our guide explained. "But now they get the coal from Chile."
But at least they are easy to escape. Drive over the hills, away from Glasgow and Edinburgh, and the scenery is delightful once again. June 23, 2006 Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis. Copyright © 2006 Bill Bonner |
