- Balzac
You can tell a leopard by it spots. Can you tell a boom by its fattest cats? Maybe.
But, first, how do cats get fat?
It is not the goodwill of the baker that puts bread on a man's table. Thank god. Otherwise, we'd all go hungry.
Nor does the busboy bus for the benefit of mankind.
Instead, everyone schleps, humps, sweats and toils for reasons of his own.
This insight – that people can pursue their own interests, and in so doing improve the lot of everyone – is the central insight of modern economists, at least those who aren't idiots. The theory is simple enough; a man bakes bread not to put bread on others' table, but to put it on his own. That others have bread to eat too is merely the happy consequence of a virtuous system.
Likewise, the electrician doesn't fix your wiring because he likes to see sparks fly. He has to earn a living too, and he does it by providing something useful to others.
The symmetry of it is elegant. The morality of it is appealing. Do unto others, and they will do unto you.
And the more you do for others, the more you can expect them to do for you. That is why a properly functioning economy does seem to deliver something close to rough justice. Henry Ford brought the benefits of automobile transportation to the masses. He deserved to make a lot of money. Andrew Carnegie provided the nation with steel. John D. Rockefeller rolled up and rationalized an early market in oil. Who can say these tycoons of yesteryear did not deserve what they got?
Just look along the 'Gold Coast' of Connecticut in the US. By the early 20th century, you could find the mansions built by the kings of industry and commerce of the period. Greenwich was home to the Simmons family, who made a fortune in mattresses, the Phelps Stokes family, who made their money in copper products, the Milbanks of Borden Condensed Milk and 'Sugar King' Henry O. Havemeyer. Their grand houses were testament to their grand contributions; they were the people who built the wealth of America.
The rich got their money honestly back then, or at least most of it. They put their family names on their products and spent their loot grandly. Silk shirts, top hats, spats, great limousines with chauffeurs, grand balls with orchestras, and servants dressed in proper outfits.
But now, what's this? A new bunch of kings has taken its place in Greenwich, dressed in perma-pressed khaki pants with blue, open-collared shirts. They are richer and busier than any group of bees the honey-pot nation has every produced. Still, don't bother to look for their last names on your refrigerator, or on your armchair, or even on your liquor bottles.
Paul Tudor Jones, who lives in a house in Greenwich that resembles the mansion in 'Gone with the Wind,' we are told, is a very rich man. But what did he do for the money? He is not a king of industry. He does not bring milk to the masses, nor provide copper pipes for their water systems, nor mattresses to rest their weary bones.
Mr Jones is a Bubble King, who manages a $15 billion hedge fund.
In another little town favoured by the new moneyed classes, Norwalk, the granite mansion of steamship magnate and head of US Steel, James Augustus Farrell, has fallen into the hands of another Bubble King - Graham Capital Management, a hedge fund with $5 billion in assets and 150 employees. Graham's chief financial officer lives on the other side of Long Island Sound and is said to commute to work by boat. We wonder why. At this point in the credit cycle we are convinced that bubble kings can walk on water!
Last week we argued hat the present boom is a 'fraud.'
This week, we look at those whom the fraud is rewarding so generously. If they are so richly paid, says the theory of modern capitalism, they must richly provide.
But what?
Take Lloyd Blankfein. The Goldman Sachs man took the wheel at the firm after Hank Paulsen went on to greater glory at the Treasury Department. In the six months from the time he took the job until the end of the year, he is reported to have earned $53.4 million. Let's see, that is about $9 million per month, nearly $2 million per week, or about $400,000 every working day.
And here, our eyes roll up to heaven as we wonder; what hath this man done? This is where the theory of meritocratic markets begins to pinch the common man like a starched shirt at a summer wedding. He's sure it's what he wants to wear; but he's beginning to get uncomfortable in it. There is no better system than free and unfettered capitalism, he tells himself. He loathes the thought of mobs at Mr Blankfein's door...and thinks he is clever enough to resist the meddlers who want to put a limit on how much a man can earn. Still, he senses that there is something not quite right.
How is it that – in a free market system, where people are supposed to be rewarded according to how much they provide to others – today's biggest prizes go to those who provide so little? Mr Jenkins and Mr Blankfein do not add in any appreciable way to the world's wealth.
Instead, they merely move it around; from middle and lower class taxpayers to the super-rich, from householders to speculators and by loading up the world with debt, from the future to the present.
The answer is to be found in the details of modern finance.
Since 1995, the US money supply has risen at about 10% per annum. The world's supply of gold, meanwhile has risen at only about 2% per year. And the world's supply of goods and services only about 3%. A free market presumes that money itself is an honest measure.
Otherwise, all the "information" that free prices give is distorted and untrustworthy.
"The introduction of a non-market driven money controller into the financial system invalidates the assumptions on which free-market economic theory is based," writes Martin Hutchinson. "In 1929-32, as Milton Friedman and Anna Schwarz demonstrated in their 'Monetary History of the United States' that non-market player, the Federal Reserve system, kept money too tight and precipitated a depression of a duration and severity that should, under the classical theory have been impossible."
Central authorities have kept money too loose, deceived a whole generation, and redistributed more wealth than ever in history. Like a cosmetic surgeon moving fat around, they've fashioned a financial world so lumpy and lop-sided, its own mother wouldn't recognize it.
Hutchinson adds:
"Lax monetary policy has continued for far longer than would normally have been possible, fully 12 years, a period of monetary ease and low real interest rates entirely without precedent. For more than a decade price signals have been distorted and resources have flowed in artificial directions.
"Globalization and the greater ease of outsourcing have kept wages down at the bottom of the scale in the US and Europe (an effect which excessively lax immigration policy has compounded.) However at the top of the scale those able to benefit from IPOs, those with excessively large homes, the managers of hedge funds and private equity funds and above all the gatekeepers such as Goldman Sachs, who control access to the overwhelming flood of liquidity, have all benefited far more than they should have in a well-functioning economic system.
"The US and world economic system has been distorted in these people's favour for more than a decade, to the excessive benefit of their net worth. They have enjoyed a bubbling bull market for twelve years, and the wealth of the world has been artificially redistributed into their pockets. They have come to expect such benefits; the Goldman Sachs participation in the Initial Public Offering for the Industrial and Commercial Bank of China, in which the firm and its partners, mostly the latter individually, made a $6 billion profit due entirely to its insider position in the world financial markets, might have landed them in jail for insider trading in a more stringent environment but in this market only further fattened their bonus pool."
Neither central bankers nor bank robbers create wealth.
They merely redistribute it.
The mob idolizes hold-up men; then often, it lynches them. What they will do to the central bankers and their accomplices in the financial industry, we wait to find out.
Regards,
Bill Bonner
Them that has, gits.
Barron's cover story this week – "Rich Man, Poor Man" – illustrates our theme.
The top 1% of the US now has 190 times the wealth of the median American. This ratio has shot up from 131-to-1 in 1983. The core reason is the 'new inflation' over the last 20 years that has gone into financial assets, not into consumer prices. The easy money makes it possible for a group of investors to buy a business they don't really understand, with money they don't really have, at a price that is probably more than it is really worth.
The Feds, in their wisdom, no longer report the number for M3, the US money supply. Adrian van Eck, however, guesses that it is increasing at about a 10% rate. He figures that $1 trillion of additional 'money' will be put into the financial system in 2007 alone.
This is also why the people who control access to money – the people who run financial firms – are making so much of it. Goldman Sachs, for example, has never been more profitable.
That is also why the hottest game in the big casino is private equity.
We give you a personal example. An old friend of ours just announced that he sold his business, which he had started from his home about 35 years ago with almost no financial backing - a genuine American entrepreneurial success.
Now in his 60s, what was our friend to do? He might have run it for another 10 years or so himself. He might have passed it on to his family. Instead, he sold out – for $140 million.
To whom did he sell? Someone in the same business?
Another entrepreneur?
Nope. He sold to a group of investors, who, as near as we can tell, have little actual experience in his industry.
This, dear reader, is how the financial world works now.
Our friend was a rich man before he sold. Now he is very rich and his business has become "financialized." Now it is a financial asset, ready to be sliced, diced, repackaged, loaded up with debt, leveraged, derivatized, securitized and traded in the public markets as though it were a Jackson Pollock painting at an auction for blind people.
Let's imagine that the company made $10 million last year. But now, when the IPO comes out, it will probably reach a market capitalization of over $200 million. Dow stocks are trading at an average PE of 21; even at $200 million, the stock would be a bargain. The CEO and top executives would have stock options. And the venture capitalists and the investment bankers and Wall Street strategists and financiers, would all get a piece.
And where did the investment group get the money to buy the firm? They probably borrowed it, so money was made there, and made again when it was refinanced, and then again, when the refinanced debt was packaged into derivatives, against which swaps were bought and sold.
The whole thing makes our poor head spin. Upon this one company, this one stream of income, a whole industry of money shuffling can go to work.
More news, from Adrian outside The Big Smoke:
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Adrian Ash, from the snow-capped Weald of Kent:
- Don't whisper it too loudly, but gold suddenly seems all-too popular. The preserve of bloody-minded contrarians for more than 20 years, gold is now finding new friends every day.
- But that doesn't mean the bull run starting in 2001 has finished – not by a long way. This week so far gold has shot higher, breaking above $654 per ounce in New York yesterday, only to slip back from that five-month high when London closed for business.
- This sudden rally looks well-timed for the mainstream financial press – a fact that bloody-minded contrarians shouldn't like. Both the Times and the Telegraph in London just ran bullish reports on gold. The Financial Times notes that institutional money has a "growing love affair with the metal..."
- Deutsche Bank AG, the world's largest securities firm, expects gold to rise as the US dollar falls further, and individual traders and dealers are also backing gold to go higher this year. Bloomberg says that 22 out of 31 finance professionals surveyed earlier this month all advise buying the metal.
- Gold's right up there with Google, in fact! The top 100 amateur investors tracked by Marketocracy.com now recommend Goldcorp, a major gold mining stock, alongside shares in the internet search engine.
- Yet Google now trades for 64 times its 2006 earnings.
Both Goldman Sachs and Bank of America just reiterated their "buy" recommendations on the stock. What on earth did gold do to deserve this red-hot dotcom for company?
- "Now that everyone expects [gold] funds to continue powering ahead, expect a downturn," warns one City fund manager. There's too much "hot money" in the metal, says another.
- Could they be right? There's a lot of speculative money riding on the answer. Net longs in the US gold futures market rose 19% last week. For UK investors, gold broke above £330 per ounce for the first time since late November. It's now trading around €500 for European investors. The Canadian Dollar has now sunk to an 8- month low versus gold, just like the Japanese Yen.
- What's driving this sudden surge in gold demand, we wonder – clueless as ever. Well, the Russian central bank today reported that its gold and foreign currency reserves increased $1 billion to more than $302 billion in the week up to Jan. 19th.
- But even if the Kremlin is growing the portion of its reserves held in gold, that in itself wouldn't explain this week's surge.
- Mining companies are meanwhile buying back gold production they've already sold forward – before it was mined – adding to demand in the physical gold market.
"I'm hearing there are some buy programs," one Swiss fund manager told Reuters on Thursday. "That's why gold is quite well supported."
- But good support doesn't explain today's leap above $650 per ounce. Take Gold Fields, for example, the world's fourth-largest gold producer. It's spending $528 million to claw back gold sold before it was mined from the Western Areas, a mine it just bought. These forward sales were terminated at an average spot gold price of
$622 per ounce. Gold has since risen to $645 as we type...and the gap between those two prices represents a loss to the miners – and extra demand amid today's rising gold market.
- But the new surge in gold demand can't solely be down to Gold Fields. Against the Australian Dollar, gold is now trading at its highest price since Sept. Versus the Swiss Franc, gold has now hit its highest levels since June. Something else must be afoot.
- "I'm very bullish on gold," says Frank Holmes, chief executive officer of US Global Investors Inc. in San Antonio, USA. His firm manages the $876 million World Precious Minerals Fund, so you'd hope he knows what he's talking about.
- "Gold's in a long, secular bull market," he goes on.
"It's quite amazing to see that the gold ETFs are now bigger than all the gold-equity funds combined."
- But the exchange-traded gold funds still don't count for much versus the broader stock market. The US gold ETF, StreetTracks GLD, has the same market cap as Mattel Inc. In London, the LyxOr GBS is equivalent to Grainger Trust, the mid-cap real estate company.
- Meantime the famous Dow/Gold ratio says it would now take nearly 20 ounces of gold to buy the Wall Street stock market index. At the top of the DotCom Bubble in 2000, the ratio reached more than 43. At the top of gold's last bull market peaking in Jan. 1980, the ratio sank to a reading of just one. A single ounce of gold bought the entire Dow Jones Industrial Average.
- In other words, gold may have found lots of new friends. But they haven't all bet the farm on gold going higher – not yet. The time to sell will be when everyone's "long gold". That's a long way off today.
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And more views from Bill:
*** Oh my! Ford reported its worst year ever. In 2006, the automaker lost $12.7 billion.
*** "US home sales in 2006 have biggest drop in 17 years," says a headline in yesterday's news.
First, sales go down. Then, as buyers realize that the market ain't what it used to be, prices go down.
According to yesterday's report, the prices on the houses that were sold last year were actually slightly higher than the year before. But...this is a new year.
Meanwhile, David Lereah ought to get some kind of bonus...or at least a health check up. The man is chief economist for the National Association of Realtors and a fine shill for the industry. In his view, the US housing slump has "established a bottom." Now, wait a minute.
We're having trouble picturing it. A bottom that is higher than the top? What kind of strange animal is this? Oh, it is one standing on its head!
Hey...anything is possible.
*** Vanity...vanity...all is vanity.
Human vanity must have reached some epic peak. In today's 'Metro' newspaper, an article tells us what we can do to "Save the Planet." Widespread is the notion that the earth has been given to us...rather than we to it. We are expected to take charge of it, to protect it, to nurture it, as if it were an orphan. Presumably, we are all now masters of the universe. If something bad happens to the earth, well, we'll just have to move to Mars. And then we can destroy that planet too.
Maybe it is true. Maybe we are the crown of all creation. Maybe we are meant not merely to lord it over the fowl of the air and the fish of the sea...but over the entire solar system.
We don't know.
>From the dust of the earth have we arisen, dear reader.
We are part of it...we have evolved no further than any other species. Just differently. Perhaps the grace of God is upon us, or perhaps it is not. And even if it is, it is by no means a sure thing. God can change his mind about his chosen people. It wouldn't be the first time.
And as for the bubble planet. "The earth would stand by unmoved at the destruction of the entire human race,"
says the Marquis de Sade in "The Persecution and Assassination of the Marquis de Sade as Portrayed by the Inmates at the Asylum of Charenton."
*** And ah...the wages of vanity...
"Who the hell is shooting at us," an American sergeant wants to know. Quoted in the International Herald Tribune, Sergeant Biletski was under pressure. He and his men were trying to conduct an operation in Baghdad.
They were trying to suppress 'insurgents.' But they didn't know who the insurgents were, where they were, or what they were doing. Either the Sunnis were shooting at them. Or the Shiites. Or the Iraqi army. Or just people who are sick of having their doors smashed in by foreigners. All they knew was that people seemed to be shooting at them from all directions...and their Iraqi allies had vanished.
"This place is a failure," Biletski suggests.
If it weren't for people getting killed and maimed, the whole thing would be a farce. For reasons of pure vanity, the US invaded the place. All we had to do was to knock that wicked Saddam Hussein off his perch and white doves would come out everywhere in the mideast.
And now, poor Sergeant Biletski, sent to a dreadful place to do dreadful work, finds out the truth.
The Iraqis, even those who are supposed to be sympathetic to the invaders, don't fight like Americans.
Can you believe it, dear reader? These people fight, well, like Arabs! After all these generations; they have still not learned the 'western way of war.' Instead, they hit and run, they stab us in the back, they take pot shots and go back to drinking their disgusting tea.
They kill each other and then, when we intervene, they all turn on us.
Who would have imagined? Who could have guessed? Who could have known?
Even the war mongers are trying to wash their hands of the whole business...
"I for one have become disillusioned with dreams of transforming Iraqi society from the top down," says David Brooks in the New York Times. The delusional hawks now say they are moving on to new illusions.
That is how it works. The world improvers don't fight their own wars. That's for others. And let others pay the taxes, too. Then, when the whole adventure inevitably goes bad, they are on to the next new thing.
Soldiers...taxpayers...voters – somebody's got to hold the bag.
Sgt. Biletski, you're on your own now.
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