By Bill Bonner
"I've got to admit it's getting better...a little better all the time."
The Beatles
Waking up in the tropics is a pleasure. At 5am, we open up the double doors
to our bedroom and look out at the sea. Already, the sky is lightening. A
soft, pink hue surrounds the hills to the east; the beach is still in
shadow. The sea remains a dark grey; all we really see is the lines of white
foam made by the waves crashing on the shore and advancing up onto the
beach. We imagined ourselves watching an attack of foot-soldiers from a
lookout post, like Robert E. Lee watching the attack on Cemetery Ridge. The
white line moved ahead in a jagged formation, some troops making more
progress against the enemy than others...but all of them are then driven
back as the beach counterattacks and the wave recedes.
Below the crest of the hill and above the line of furthest advance of the
white foam is not the quaint village of Gettysburg, but a group of
condominia built in the last couple of years. Walking past in the evening,
we found the condos full of Norte Americanos – soft, white people sitting on
their soft, white plastic chairs enjoying the last soft light of day.
They seemed to be having a good time, too. The area must be a paradise to
them, as it is to us. The beach is empty. The sun is warm. The beer is cold.
What more could they ask for? The most remarkable thing is that they are
here at all. This life is now affordable even to a mid-level manager at the
Gap or even a union factory worker in Milwaukee; they can live in a way that
used to be reserved for the rich.
Since we are on vacation ourselves, we don't feel the need to have a
particular object to our ruminations.
But as we looked out our door this morning, we had an insight. A trivial
one. But one worth passing on.
In the 1920s, the tycoons and stock jobbers took the train from New York all
the way to Palm Beach, where they built their mansions and enjoyed their
repose.
They were followed by the well-to-do middle classes...and then the
not-so-well-to-do lower middle classes. The Venetian-style great houses on
Palm Beach were followed by the bungalows two blocks back...and then by the
trailers in Central Florida. But all of them found a new way of life in the
Sunshine State, a life of leisure and luxury and warmth ...a life that they
never could have had in the North.
The whole phenomenon was new. It was only in the 20th century that the idea
of leisure came into being in a major way. Before that, everyone expected to
work from childhood until the end of his days. Then, thanks to the internal
combustion engine, assembly lines and electricity, fairly large numbers of
people accumulated enough capital so they could live without working at all.
And then, later, after the imposition of the Social Security system in the
1930s, everyone came to believe that he deserved a period of rest and
'retirement' after the age of 65. Of course, relatively few people reached
65 back then.
Now the dream is ubiquitous. Everyone takes for granted that he can have
'vacations' during his working years, and that when his work is finished he
can enjoy many more years of retirement – preferably in a warm place.
In Europe, this dream is even more elaborate than in America. And among
government workers, in both places, it is more extravagant than in the
private sector. A government employee in France can count on six weeks of
vacation each year...and, depending on his particular career, he may retire
as early as 55 or even 50.
Thereafter, he lives entirely at the expense of the rest of the society.
Americans are more niggardly with their vacations...and more long suffering
about their work. The typical American worker earns more take home pay, but
he has to work a lot more hours to get it. And when he has finally earned
his reward – he is likely to head for the sun. Until recently, he aimed for
Florida or Arizona. Now, he is more adventuresome. He may get out the map
and find Mexico, Puerto Rico...or even Nicaragua. Coming in large numbers,
they are changing
the places they come to.
"How do we know when we actually make things better?", we asked Elizabeth.
It was a leading question. We already had our answer.
But conversation and cross examination often work better when questions are
put to the witness.
"I guess you just have to look at the results," was the answer. It was not
the answer we were looking for.
We've found that Elizabeth rarely gives us the answer we want. Which is what
makes her an ideal wife; she helps us maintain our humility.
"But how do you know if the results are beneficial...if they are good...if
they actually make the world a better place?" we wanted to know.
"You have no choice but to apply your own standards...your own aesthetic and
moral sense.
What else is there?"
"Well, that's just the problem....
"I was thinking about what we've done here," she went on. We came here to
Nicaragua before anyone else. Now, there are roads, houses, condos....the
local people have work. Money is coming in. And the gringos seem to be
having a good time, too.
"But suppose we had decided that what we wanted was simply to buy up land on
the coast and keep it for ourselves. We could have had a big house and
employed guards to keep others out. That might have been 'better' from our
point of view...but would it have been better for others? Would it have been
better for the world?"
We had our answer ready at hand: "I don't know, but I think it might. This
was such a lovely place when it was virgin tropical woodlands. It's not
necessarily better because it has condos on the beach. And this idea
'better' is a rather loaded term, don't you think?
It depends on what you mean by it. Better for whom?
Better how?"
Elizabeth is used to our arguments, so she explained patiently, "Well, of
course, it's freighted with our prejudices, and tastes, and desires. But,
suppose we
had done nothing. It would have been better for the
people who like virgin tropical woodland...yes...but we, and the local
fishermen, would have been the only ones to appreciate it."
We were not done, however.
"But, suppose we had decided that we wanted to build a community where
everyone had to live in green houses?
What about that? Would that have been better?
Maybe...but only if you like green houses...
"What I'm getting at is that the only way to tell if you've really made
things better or not is by following the money. If you had made more money
building green houses than pink houses, it would have told you that more
people liked green then pink. And the only measure of what is good...or what
makes things better...is what people are willing to pay for, isn't it? If
you disagree with that, aren't you merely substituting your judgment for the
judgment of others? That's what communists, neoconservatives and central
planners do.
If they decide that the world would be a better place if everyone lived in
pink houses, they force everyone to live in a pink house – whether they want
to or not.
When you take away the freedom of choice, and the free movement of prices,
you no longer know what people really want...and so you don't know how to
make things better."
"Surely, not everything is reducible to money,"
Elizabeth replied. "Paris Hilton might make a fortune producing a sex video.
Is that really making the world a better place? You can pander to people's
weaknesses...to their flaws and foibles. You can make money. But it doesn't
necessarily make the world a better place, does it? I guess I would say that
the world is always a worse place when you force people to live in pink
houses when they don't want to. But it's not necessarily a better place when
you sell them pink houses either."
The dove of peace...or at least agreement... hovered a moment over the
Bonner ménage.
"Yes, that's it, isn't it? You can try to make the world a better place by
holding a gun to people's heads...or by stealing their money...or killing
them.
But it rarely goes well. Because if they are not free to express their own
private wishes – even if they are depraved or tacky – you have no way of
knowing whether you're really doing good or not. People express what they
want...and what they regard as making their lives better...by how they spend
their money. If you over- ride them, by forcing them to do things they
wouldn't otherwise do, you are bound to make a mess of things.
Of course, even if you proceed without violence, you can still make a mess
of things. But that's just life.
You do your best. Sometimes you succeed and sometimes you don't."
We both looked out the door again. There, on the Pacific Coast of
Nicaragua...a country that was once a banana republic...then an experiment
in mass delusion...and lately, a tourist destination...plumbers and dentists
from North America are enjoying a few days in the sun. They have the ocean
in front of them...air- conditioning behind them...and ice-cold drinks
inside of them. They bought their condos and their vacations of their own
free will. And now, with the sun peaking over the hills, they rise and
stretch...and look out their own doors too...
..and who can doubt that they have found a better world?
Bill Bonner in Nicaragua:
"Bubbles Brewing in Shanghai, Tokyo, and London."
Thus Gary Dorsch, editor of the Global Money Trends newsletter:
We will hear the evidence later, dear reader. First, we will render our
judgment: Too much liquidity.
"There is a bubble growing. Investors should be concerned about the risks,"
said Cheng Siwei, vice- chairman of China's National People's Congress in a
January 31 interview with the Financial Times. "But in a bull market, people
will invest relatively irrationally. Every investor thinks they can win. But
many will end up losing. But that is their risk and their choice," Cheng
warned.
The Shanghai Composite "A" share Index has gone up over 200% in the last 16
months. The market is limited to Chinese nationals, which just goes to show
that the Chinese can be as silly as Americans.
"On the smaller Shenzhen market," Dorsh continues, "three new IPO's soared
into orbit, suggesting that the Chinese stampede into stocks hasn't run its
course.
Non-ferrous metals maker Yunnan Luoping Zinc soared to
30.94 yuan, triple its IPO price of 10.08 yuan.
Zhejiang Sunwave Communications jumped to 19.65 yuan, double its IPO price
of 9.15 yuan. And China Haisun Engineering 002116.SZ surged 178% to 19.16
yuan.
"Investors opened 50,000 retail brokerage accounts a day in December and
mutual funds raised a record 389 billion yuan ($50 billion) last year,
quadruple the
2005 amount. January turnover was five times early 2006 levels. Beijing is
now ordering banks to prevent retail borrowing for stock investments."
What is the source of this bubbly activity? Is it the same 'tide of
liquidity' that is washing over the rest of the world? As the Chinese sell
more and more goods to US consumers, Chinese firms end up with more and more
dollars. These are turned in to the Chinese central bank, which now has
foreign currency reserves of more than $1 trillion - the biggest pile ever
built up – most of it in US dollars. In return, the bank of China gives out
local currency, the yuan. What are the gambling-mad Chinese to do with all
that money? Play the stock market!
Meanwhile, in neighbouring Japan, the Topix stock market index is at a 15
year high. The much-despised yen has been driven down to such low levels
that it has made Japanese exports cheap. Japanese exporters – notably Toyota
Motor Company – are having a great time of it.
Dorsch: "Since the BoJ dropped its overnight loan rate to zero percent in
March 2001, the Euro has advanced from around 105-yen to as high as
158.70-yen today.
Aided by the Euro's strength against the yen, Japanese exports to the
European Union nearly doubled to 1.06- trillion yen in December. But on the
flip side, European exports to Japan have waffled between stagnation and
deterioration.
"Last year, Japan racked up a 18.6 trillion yen ($160
billion) current account surplus, while the Euro zone suffered a 16.8
billion Euro ($21.5 billion) deficit.
Yet the power of the "yen carry" trade was able to swim against the tide of
these trade imbalances, by pushing the Euro 12% higher against the yen last
year."
Just last week, Japan began to 'normalise' its interest rates. But it did so
in such a weak and waffly way that it merely served to convince speculators
that the 'yen carry trade' would last a long time.
Dorsh again... "Japan's interest rates remain abnormally low and far out of
alignment with the rest of the world, and the "yen carry" trade lives on."
Finally, Dorsch looks to another island nation:
"The Bank of England (BoE) delivered a nasty New Year surprise on January
11th, its third quarter-point rise in interest rates in six months.... But
London's FTSE- 100 all but shrugged off the rate hike. It suffered a
30-point fall to as low as 6,140 just after the announcement, but then
closed the day 70 points higher.
After stabilising above the 6,200 level, the Footsie- 100 tacked on another
5% gain to 6,450 last week."
While the Bank of England raises rates, it keeps the money flowing. Money
supply figures show available liquidity increasing as much as four times
faster than the economy last year. As a consequence, house prices in Britain
went up more than 10% in 2006 and the stock market reached its highest level
in 6 years.
On Tuesday, the Bank of England not only read the past,
but predicted the future:
"Investors are likely to take advantage of this ample liquidity and the
associated easy credit to purchase other assets, driving risk premiums down
and asset prices up... In due course, those higher asset prices may be
expected to feed through into higher demand for goods and prices, putting
upward pressure on the general price level."
Yes...and then what?
We've giving up guessing. This liquidity bubble should have blown up a long
time ago. That it has not yet doesn't mean it won't. It just means that
when it does, many more people in many more places will hear the loud
crashing noise...and feel the walls shake.
-------------------
More news:
Adrian Ash, chewing on a sausage roll from Greggs the bakers:
- "It may not be surprising that in these times of excess and extreme
wealth, 'Let them eat cake' has become 'Let them eat gold'," sniggered an
article in the Boston Globe back in November 1999.
- On the Nasdaq, Enron was about to go from $40 to $70 to $90 (and then
zero). Amazon's stock was trading above $75 (it's now $41). And in New York,
"select restaurants [were] sprinkling gold – real 22-carat gold flakes –
atop their sashimi salad, roast lamb, and other pricey dishes..."
- Ten years before, Tokyo financiers were also eating gold flake atop their
sashimi – as well as drinking gold-laced sake to wash down their gold-foil
rice crackers and gold-wrapped sweets. Drunken "sarari-men"
in Roppongi sushi bars struggled to eat golden food with golden chopsticks.
- But just as the DotCom Bubble found its pin, the sheen came off Tokyo's
financial mania, too. The crash starting in 1990 took gold-flaked noodles
off the menu all across Japan – for the bigger the bubble, the bigger the
bust, to paraphrase Ludwig von Mises. And so far in post-war history, the
collapse of Japan's credit bubble has been unmatched.
- The Nikkei dropped 75% of its value by 2001. Japanese industry suffered
three recessions to leave its total production unchanged after 12 years.
Prices of residential land relative to consumption fell by nearly
two-thirds, according to a study by the Dallas Fed. And the male suicide
rate went from 20 per 100,000 to 37 per 100,000 – only just behind the rate
of growth in male unemployment.
- Fast forward to London 2007, and gold's on the menu once again – this time
as a drink at the Baglioni Hotel in Kensington. It serves a rum-peach
cocktail (basically a Peachy Keen) with gold dust floating on top. Jeremy
Paxman guzzled one for BBC Newsnight viewers on Wednesday. Paxo also gasped
at the hotel's suites costing £1,900 per night plus VAT...the staff dressed
entirely in black (Ermenegildo Zegna, no doubt)...and the courtesy car, a
Maserati Quattroporte.
- Could London's gold-lipped fund managers be sipping their last glass of
bubbly soon, too?
- "It was the monetary equivalent of 'shock and awe',"
writes Gary Dorsch at SirChartsaLot.com. "The Bank of England (BoE)
delivered a nasty New Year surprise on January 11th, its third quarter-point
rise in interest rates in six months...But London's FTSE-100 all but
shrugged off the rate hike. It closed the day 70 points higher [because] few
traders take the Bank o England seriously. Bringing the UK economy back into
balance will unfortunately require a lot more discomfort than the slap
delivered by Mervyn King and his chums last month."
- For now, the stock market just doesn't care.
Interest-rate futures now put base rates up at 5.75% by June. That signals
another pair of rate-hikes ahead!
But the FTSE continues to knock around 6-year highs regardless. Global
inflation, after all, always sounds like good news to London equities. Just
yesterday the FTSE 100 closed up 24 points at 6,381. Mining stocks accounted
for six of the top 10 rising shares.
Commodity stocks all told made up nearly one quarter of the index's advance.
- But the sharp spike in your cost of living has little to do, we think,
with rising oil prices and stronger copper. Instead, "years of monetary
abuse by the Bank of England are finally coming home to roost," as Dorsch
puts it. You can't have the supply of money rising by 10% and more for two
years running without expecting the value of money to fall – and domestic
prices to start rising. And lo!
- Dig into the latest official inflation data – as your editor did this
morning – and you'll find the mischief of cheap money lurking down the back
of the sofa like an old piece of chewing gum covered in fluff and stuck to
the cushions. Housing costs last month stood nearly 8% higher from one year
before. Services in general – the haircuts, plumbing, legal advice and
nights in the pub that we can't outsource to China – became 6.1% more
expensive. Seasonal food, meaning what's grown in Britain, rose 7.5% in the
year to January, as vegetables became 10% more pricey, while fresh fruit –
more likely to be imported at New Year, of course – rose only 3.5%.
- Home-killed lamb rose 6.9% against 2.2% for imported lamb, while rail
fares rose 5% - as did the cost of holidaying in Britain. Foreign holidays,
which you'd expect to use up more fuel, rose only 3.1% from a year earlier.
- You get the picture, gentle reader, even if the Old Ladies would rather
you didn't. Compare the price of domestic with imported items like this, and
it's clear that Sterling's strength on the forex markets has "saved" the Old
Lady from runaway rises in the headline inflation rate.
- Now, as Gary Dorsch says, "in order to get a handle on the explosive M4
money supply, the Bank of England would probably have to hike its base rate
by at least
75 basis points to 6%."
- If you're out sipping gold-sprinkled cocktails tonight, make sure you
enjoy it...
----------------------
And more views from Bill:
*** Did you notice what happened to gold on Wednesday.
Up $23. Then, yesterday, it gave up just one of those dollars. Gold is
watching this liquidity bubble. It is wondering too...when will it end? And
it is getting in position. All this excess liquidity has to go somewhere.
Asset prices now. Consumer prices later? Or collapsing asset prices?
Anywhere it goes it is bound to raise the price of gold, because gold is
more durable in value. Historically, it is the thing to which investors'
turn when they smell something fishy in all that liquidity. The bull market
in gold probably has a lot further to run.
*** Writes Robert Samuelson:
"The concerns about "excess liquidity" stem mainly from the
low-interest-rate policies adopted by the United States, Europe and Japan
after 2000. The aim was to avert a deep recession. The Federal Reserve cut
its overnight rate to 1 percent; the European Central Bank got down to 2
percent, and the Bank of Japan actually went to zero. With low short-term
rates, investors have poured money into longer-term securities with higher
interest rates - government bonds, mortgages, "junk"
corporate debt, bonds from emerging market countries - and into stocks.
Often, these investments are financed by short-term loans at low interest
rates."
What happens when there is 'excess liquidity'? "The danger is that a sharp
shift in exchange rates (either the borrowing or lending currency), or
higher interest rates in the lending country, could make these appealing
trades unprofitable. A panic might ensue as investors seek to escape.
Historically, "excess liquidity" often evaporates through losses."
Yes, it evaporates dear reader. It does not change hands. It simply
disappears. If a company issues a billion dollars' worth of bonds, for
example, those bonds are held as assets by their purchasers. The company has
the money...the bondholders have the paper.
Then, if the company spends the money and goes broke...then what? The money
has changed hands. But the bondholders have nothing. The $1 billion they
thought they had has disappeared. They will never see it again.
If a work of art suddenly declines from $1 million in price to only
$500,000...a half a million dollars has disappeared too. No one has it. It
is gone. And if the financial industry cuts its bonuses in half...that money
too, just no longer exists.
That is how excess liquidity goes...up in vapour.
Then, there is no more excess. In fact, there may
be a shortage. Something else to look forward to,
dear reader.
*** Lent began yesterday. We would have forgotten about it, but we ran into
Padre Walter on Tuesday, who reminded us that good Catholics have to observe
the Lenten season. Of course, we had forgotten that we were good Catholics
too. Since we are in the New World, we thought we might get away with going
back to our New World ways. In the old world, we were always Catholics –
both before we immigrated to America and after we went back. But in the New
World, we've always been Episcopalians. Besides, we're on vacation with a
young family headed by an atheist.
"Our children go to the local Presbyterian church in New York. But I told
the preacher that I was a practicing atheist," said our friend. "Religion is
a hot subject in our area. Our son came back from school and they had told
him evolution was 'just a theory.' He also learned about 'Intelligent
Design.'"
The discussion began with the pancakes. It grew with the papaya and
melon...and finally matured with the coffee. All through breakfast, we
discussed the limits of science and the reach of religion.
What surprised us was not evolution...about which people seemed not to care
particularly...but global warming. Here, the younger generation was of one
mind:
global warming threatens the planet.
We confessed that we knew nothing about it; but what makes us so irritating
to kin and company is that we suspect that others know not much more.
"Are temperatures really rising? Is it unusual? It is caused by man? Is it a
bad thing? Can it be controlled?
Would it be worth controlling? There are a lot of question marks between
here and having a firm view of this issue," we offered modestly.
"You can't just stick your head in the sand. You can't just say, 'I can't
know everything...therefore I won't try to know anything.' You can't just
deny responsibility for what goes on in the world and how future generations
are affected by it," said Henry.
"Oh, I don't know," we replied gamely. "Has any major disaster in history
been caused by people who hesitated...by people who wanted to think
twice...or even three times? Or by people who decided they should mind
their own business...and stick to their own knitting? Wars, pogroms, forced
starvation, mass murder, revolutions, murders – they're always sins of
commission, not sins of omission."
"Yes, but here we're faced with an unnatural disaster – as if the tsunami in
Asia had been caused by a man-made nuclear test underwater in the Pacific.
If something like that had been caused by man...or even if it hadn't
been...shouldn't you still try to warn people...tell them to get off the
beach....try to do something to reduce the number of people who will die?"
"Well, yes...but that doesn't reduce the number of question marks here. We
don't know if there is a tsunami. We don't know what caused it or how to
stop it...or even if there is any reason for trying. If you think the sea
level is going to rise, you should definitely move to higher ground. But
maybe you don't want to force people to stop using air-conditioning or stop
keeping their milk cold just because you have a theory of how it will affect
the world climate 50 years in the future."
The argument ended badly. There were no victors, only losers. Everyone felt
bad about arguing so aggressively about something that none really knew
anything about.
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