| THE COMEDY OF THE COMMONS [DUE TO A TECHNICAL ERROR, WE WERE UNABLE TO SEND OUT THE
DAILY RECKONING YESTERDAY. THE PROBLEM HAS BEEN CORRECTED.
HERE, IN ITS ENTIRETY, IS THE DAILY RECKONING INTENDED FOR
YESTERDAY. TUESDAY'S DR WILL FOLLOW SHORTLY.]
THE DAILY RECKONING
PARIS, FRANCE
MONDAY, 29 NOVEMBER 1999
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In Today's Daily Reckoning:
*** Dollar down dangerously...
*** Nasdaq up dangerously...
*** Slaughtering a bull... * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *** The important action on Friday was in the currency
markets. Practically unnoticed by the financial press...the
dollar fell to 101.22 yen.
*** I have worried about the exchange value of the dollar
on occasion...living overseas, I depend on it.
Remember...look for the yen, dollar and euro to come
together. They're close. Except the yen has two extra
digits...which the Japanese have proposed to knock off to
make the math simpler.
*** Yield on Japanese bonds is just 1.87% -- not much more
than U.S. stocks. But U.S. bonds yield more than 6%. How
could the dollar go down against the yen? They're almost
giving away yen. And yet the Japanese central bank had to
jump in and buy dollars to keep it from going down further.
*** The Grand Confusion over the money supply
continues...with the press and many economists widely
supporting the view that money is tight and inflation non-
existent. But Dr. Kurt Richebacher points out that monetary
reserves are exploding. And economist Robert Parker, cited
by this week's "Barron's," adds that the velocity of M2 is
way ahead of the `60s, `70s, and `80s. You have to multiply
the growth in M2 by the velocity to get the true picture --
which is a picture of a sharply rising money supply.
*** Parker also notes that private debt levels are
soaring...at a 25% annual clip. He calls it
"megaleveraging" and has no doubt about where it leads --
inflation.
*** Inflation is showing up in the price of oil...which is
near $27. And the U.S. economy is growing at a 5.5% pace.
Labor costs are rising...as you would expect.
*** And inflation is certainly showing itself in the
Nasdaq...which hit a new peak on Friday. It is still
spiking upward...its sharp, pointy tip headed for the
biggest bull market of all time.
*** Dr. Richebacher calls the dollar the "Achilles heel" of
the U.S. economy. It may be more like the Achilles tendon.
This weekend I read an account of how bulls are slaughtered
out on the pampas of Argentina -- they are pulled up to the
house with a rope around the horns. Then, a gaucho
dismounts, darts behind the animal and slices its Achilles
tendons. The poor beast's hind legs are useless...it falls
to the ground, whereupon the cowboy drives his knife into
the neck, piercing the main artery. Blood spurts out...the
animal bellows...and soon goes down.
*** Stocks seem to have lost their legs about 19 months
ago. That was when the majority of stocks began to fall.
This 19-month period is the longest period of divergence
ever recorded...longer than that which preceded the '29
crash...or the '73 bear market.
*** While the Nasdaq hit a new record, the Dow, Transports,
Utilities and the S&P were all down. There were 964
advancing stocks last week...and 2,472 declining ones.
There were 121 new highs...and 516 new lows. This is a bear
market. The Nets and techs are on their own.
*** Britain holds its third gold sale today...disposing of
25 tonnes of the metal. The price of gold was a little
forlorn on Friday...let's see if its spirits rise today.
Watch oil, too...
*** Wonder why Newt Gingrich was so quiet during the Monica
scandal? Bill King reports a remark by Rep. Bob Dornan on
"Judicial Watch" radio that Newt had been blackmailed. He
had a sordid affair of his own that Clinton supporters
threatened to reveal. A pox on them all! . For information on Bill King's service, just call 1-800-
433-1528 and ask for code 3457.
*** The World Trade Organization meets today in Seattle. My
comments on WTO drew criticism from two directions -- those
who pointed out that WTO promotes government-managed trade,
rather than free trade...and those who saw it as a tool of
greedy corporations seeking to exploit weak labor and
environmental regulations oversees. Both comments are
probably correct. In a better world, there would be no
WTO...corporations and workers would be free to exploit
each other...right here at home.
*** Spain and Italy have argued over which country was home
to the earliest European. Now, new finds at Dmanissi,
Georgia, show they are both arrivistes. Two skulls of Homo
erectus...an ancestor of modern man, with a small brain
...have been found in the Caucasus mountains. They are
about 1.7 million years old. One had a crushed cranium. No
apologies issued as yet.
*** We enjoyed our Thanksgiving meal on Sunday. Beirne put
aside his regional irredentism (I have waited years to be
able to use that word...it refers to a yearning to recover
territory that has been taken over by a hostile power...in
Beirne's case -- the territory south of the Mason Dixon
line) and joined us for a Thanksgiving dinner that would
have rivaled anything from Maine to Mississippi.
*** Everyone pitched in...Sister Marie Francoise dropped by
during the week and gave us a bottle of her own homemade
aperitif...with a peach flavor and enough alcohol to raise
the dead. (You know you are in a civilized country when the
local clergy delivers homemade hooch to your door.) The
baronness, and poultry raiser, Chantal, brought us a turkey
which I would put up against a Butterball
any day. Beirne stuffed the turkey with his own recipe,
including sausage and chestnuts (details available upon
request). A family friend, Edouard, contributed his
opinions on various culinary matters. Elizabeth found some
berries, very similar to cranberries...and adding a little
sugar and lemon...whipped up something that could pass for
cranberry sauce. And my mother carved the insides out of a
pumpkin and produced a couple of county
fair-quality pies.
*** My contribution to the occasion was to go into my wine
cellar and pull out a few dusty bottles -- including one
that must have been there since The Flood. Alas, it was
about 100 years too late for that one. Buy and hold is not
always the best strategy. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
THE COMEDY OF THE COMMONS
On Friday I wrote about how the "tragedy of the commons"
issue relates to population growth. You may recall that I
thought it had little practical application...since it is
not possible to say what the "carrying capacity" of the
United States or the world really is. A DR reader informed
me that the ultimate limit is the amount of energy
available...which would support, theoretically, about 35
billion people. However, if 30 billion extra people were
placed on Earth tomorrow...most of them would surely die.
The current carrying capacity is a function of various
things -- capital, technology, creative imagination,
standard of living, culture...and so forth.
What's more, it is also not clear what a "commons" is in
modern society. We don't all graze on the same grass. If I
live in Paris and earn my living by writing for a, mostly,
American audience...what ecological niche is shared in
common...with whom? In Paris, I can hardly find a parking
place. This must be one of the most densely populated parts
of the Earth. But it is not unpleasant.
The countryside, meanwhile, is empty. In Paris, one of the
major focuses of public handwringing is the abundance of
dog poop on the sidewalk. In the country, hands are wrung
over the continued loss of people! Houses are abandoned.
Fields are left to go "en friche" -- back to nature. The
small roads are empty. There were once nine bars in our
little town. Now there is just one. That is a tragedy by
any measure.
In Italy there are so many people who fail to marry and
fail to reproduce that at least one town has proposed
levying special punitive fines on single people.
Birthrates have fallen in developed countries. But why? The
prevailing idea is known as the "demographic transition"
hypothesis. Economic growth, it is widely believed, brings
down fertility rates while it supports those who have
already been born in a handsomer fashion.
Virginia Abernethy's book, "Population Politics," shows
this to be untrue. Birthrates in France fell while France
was still largely an agrarian society in the 19th century.
In most Third World nations, population growth has risen
along with economic growth. Indeed, Ms. Abernethy believes
economic growth is the equivalent of the "ecological
release" that permits animal populations to expand when
conditions are favorable.
But if this were so...why do population rates continue to
fall in Europe, Japan and the United States -- despite
sustained economic growth. And why is it that rich
countries have lower birthrates anyway --- since they
plainly have a higher "carrying capacity" than poor ones?
What we come to is the realization that the tools of
anthropology and animal population biology are of limited
use in trying to understand human population dynamics in
the post-industrial era. In fact, they are more useful in
describing how markets work.
But on Wall Street, the Tragedy of the Commons is more like
a comedy. It is the second act of the dictum that "History
repeats itself...first as a tragedy...then as a comedy."
A bull market may be seen as an "ecological release." All
of a sudden, investors need no longer be satisfied with
P/Es of 10 or 15. There is an opportunity for growth. New
companies are started. More investment money (immigrants)
comes into the system. More innovation and more competition
is created. The "commons" -- the underlying economic niche
-- gets crowded.
Under ideal conditions, the release can reach a mania
phase. "And away we go," is how Ms. Abernethy describes it,
referring to America's population growth of only 1.1% per
year. The Nasdaq, though, is growing at more than 30% per
year. The Nasdaq 100 is up 95% over the last 12 months.
This is surely a good place to talk about "regions of
instability"...where faster and faster rates of growth
become mathematically impossible. But to investors, the
sky's the limit. All the constraints seem to have been
removed, released or simply ignored.
And if you're looking for the cause of "ecological
release," look no further than the Internet. The
possibilities for economic growth are nearly infinite...
The Internet is seen as though it were the New World...a
huge, virgin territory to be explored, colonized, exploited
and developed. Every new company that promises a
development scheme...a colony...or mode of passage...is bid
up to fantastic levels. And still the money pours in.
The hope of the bulls is the same hope manifested by the
population optimists...that "demographic transition" will
boost growth rates and that high-flying companies will earn
enough money to justify today's high prices.
Investors are hoping that a huge wave of Christmas sales
justifies their faith in Internet share prices. But share
prices...like runaway populations...are rising so fast that
it becomes harder and harder to meet expectations. As
prices rise, each share represents less and less of real
business value. In the case of Amazon and many others, it
seems impossible that they could make the transition to
solid businesses trading at reasonable stock
prices...without going through the comic, bust part of the
cycle.
In 1754 Ireland had a population of 3.2 million. People did
not marry and have children unless they could support
them...so many people remained unmarried and childless.
Then the potato was introduced from the New World,
providing the "ecological release" from the former
limitations. Even the power of the Catholic Church waned,
as people turned to reproduction and material success.
Farms were cut up into smaller and smaller holdings. And
the population more than doubled to 8.2 million in 1845.
It was onto this happy scene that the exterminating angel
of plant bugs...a kind of living Y2K... arrived, a nasty
little fungus called phytophthora infestanus. The crops
would look good...then in a matter of days would wilt and
die. Millions of Irish...among them my own ancestors, as
well as those of many other readers...starved...died of
disease...or emigrated. Soon there were so many Irish in
America that they were cheaper than slaves. When digging
began on the Pontchartrain canal in New Orleans, they used
slave laborers. But so many died from fevers that they had
to stop, It was just too costly. So they turned to Irish
laborers...who had no capital value.
When the cycle was over, the Irish population was back to
where it was in the middle of the previous century. But
suppose my bog-trotting forebears had been granted the gift
of prophecy. Suppose in 1844...they could have foreseen the
huge problem coming. Would it have have been a better world
if they had not had children? You, or other "Daily
Reckoning" readers may disagree, but I am grateful that my
ancestors had enough faith in the future to have children.
Millions of other Americans owe their existence, too, to
the lack of birth control, both voluntary and mechanical,
among the Irish of the early 19th century.
The population boom in Ireland has had its bust. The
underlying ecological niche could not reliably support 8
million people in 1845. My contention is that the
underlying economic niche occupied by today's Internet
companies cannot support current stock prices. They do not
earn enough profit today...nor will they be able to make
the transition to sufficient profitability quickly enough
to satisfy investors' expectations.
So far, the comedy has been limited to a few pratfalls,
double entendres and hyperbolic wit...a little like the
polite repartee of Cary Grant and Katherine
Hepburn. Soon it will be more like the Three Stooges.
Bill Bonner
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