The New
Error
by Clyde Harrison
Rogers Raw Materials Fund
The
American public's expectations of its elected officials are now
so low that they may now live up to those expectations. Some
countries offer rule of law. We suffer from rule of lawyers.
The definition of politics is: "The advance auction of goods
that have not yet been stolen." Whenever the government
does something for someone it must do something "to"
someone. When a politician talks about sacrifice, he means the
U.S. Taxpayer. Federal taxes have increased 15% since 1995, to
21% of national output. We need a Tax cut twice the size of Bush's
now. If the economically illiterate congress passes a tax cut
with a trigger, the gun will be aimed at the brain of the voter
and the heart of the economy.
According to the Policy
Innovations Institute, the average family now pays 49.6% in taxes:
Federal Income, Social Security, Social Security Employment,
Gas and Excise, State and Local Sales, State and local Income,
State Corporation Income, Taxes on Goods Produced, etc.
Consider the following:
- The Lord's Prayer: 66 Words
- The 10 Commandments: 179 Words
- The Gettysburg Address: 286 Words
- The Declaration of Independence: 1300 Words
- U.S. Government Regulations on the sale of Cabbage: 26,911 Words
We already have a government too large
and expensive.
The last central banker to get it right was Joseph, in the Bible.
7 good years followed by 7 bad years. FED Greenspan, The Fed,
The Committee To Save The World...I thought central planning
was totally discredited when Russia collapsed. The Fed is like
the post office giving out money instead of stamps. Faith in
the Fed is based on elaborate mathematical models relying on
the breathtakingly faulty assumption that human beings behave
rationally. Greenspan, with the assistance of his invisible hand
of intervention, has been playing a marathon round of global
financial pinball. Each time the machine says, "game over",
he inserts another $25 billion. Greenspan, Rubin and Summers
these mighty super-heroes of finance have placed global
prosperity on the rock solid footing of over-speculation and
market manipulation.
U.S. business debt
and consumer debt exploded by almost $1 trillion last year, while
savings plunged into negative territory. Now we have an L shaped
recession.
When capital gains
are gone, debt lingers on. That's when you find out Murphy was
an optimist! The one lesson history teaches in the financial
markets is that there will come a day unlike any other day. Today,
the two largest economies on the planet, Japan and America, are
printing money as fast as they can. The U.S. has borrowed $1
trillion from overseas. Soon it will be repatriated. The exchange
of wealth for paper will go into reverse. We will get our paper
back, and have to return real wealth.
The dollar says right
on it, "In God We Trust." Placing your faith in the
Fed could be a dangerous plan. Prior to the creation of the Fed,
the worst bank panic caused 2.8% of the banks to fail in 1873.
Following the creation of the Fed, almost 50% of the banks failed
during the 30's. The Fed made a local problem national. Now,
the problem is global. A brilliantly executed, bad plan. Someday,
the Dollar could fall to its intrinsic value. Denial is not just
a river in Egypt. Currencies do not float, they sink at different
rates. Currencies are abstractions not redeemable in any specific
amount of anything. They are an "I owe you nothing"
certificate. The Fed is now slashing interest rates and ballooning
the money supply with unemployment at 4-1/4%. The result will
be stagflation.
If you believe Alan
Greenspan and the Fed guide the economy you must also believe
the twelve birds sitting atop the rhinoceros guide him through
the jungle.
In September's Business
Week, an editorial, "The New Era" stated the following:
For five years, at least, American business has been in the grip
of an apocalyptic, holy-rolling exaltation over the unparalleled
prosperity of the "New Era," upon which we, or it,
or somebody, has entered. A North American millennium is imminent.
We have seen an amazing increase in man-hour production in industry.
We have seen new industries rise like rockets and old ones grow
tired and die. We have seen the machinery of distribution formed
and reformed into new patterns changing every day before our
eyes. We have seen security prices soar out of sight of earnings.
Broker's loans swell till they absorb a third of banking resources
of he country. Banks merge and emerge in chains, trailing trusts
and holding companies while industrial corporations pay dividends
not by producing goods but by buying each others stock and by
borrowing and lending everybody's money in the market.
The foregoing isn't
from this September's Business Week. The editorial is from the
very first Business Week ever published, September 7, 1929.
Stock Market
In January of 2000 even the homeless owned
equity mutual funds. The pin has hit Allen Greenspan's stock
market bubble. Scores of billions pore into equity mutual funds.
Five trillion in asset values dead and gone to money heaven.
The Bible says we come
into this world with no earthly riches and we will leave the
world with no earthly riches brokers are just doing the
Lord's work.
Price Matters!
When you own a financial instrument, what
you basically own is an opinion. When you reach for additional
returns, the more likely it is that you are speculating and placing
your investments at risk.
Graham and Dodd go to great length to emphasize the importance
of the price of an investment, as well as its quality, in determining
safety of principal. Quoting from their book: "In our opinion,
the great majority of common stock of strong companies must be
considered speculative a good part of the time after a bull market
is well under way, simply because the price is too high to warrant
safety of principal in any intelligible sense of the phrase."
The purchase of securities at one price may be an investment,
but at a higher price speculation, and at an even higher
price irrational exuberance, and recently, thousands of
points higher the greater fool theory.
The highest expectations
create the greatest disappointments. The law of gravity has not
been repealed. Historian, David Boorstein said, "the greatest
obstacle to discovery is not ignorance. It is the illusion of
knowledge." It isn't so much what we don't know that hurts
us, as what we know that isn't so.
If money can move freely,
it can move stupidly. Dr. Koop has turned to poop. The sock puppet
is dead.
Dot com was a device
that sucked millions of dollars from public investors and deposited
the money at brokerage firms or with their friends.
Venture capital is
turning into a black hole, the money goes in but never comes
out.
The Nasdaq traded at
over 200 times earnings. People were paying 200 years of earnings
for bubble companies that didn't survive 2 years. 210 Internet
companies went under in 2000 and that was before it got nasty.
Hundreds of companies were created that have no reason for being.
Warren Buffett recently
said, "We make no attempt to pick the few winners from the
ocean of unproven enterprises we're not that smart."
"Promoters have
in recent years removed billions from the pockets of the public.
The bubble market allowed the creation of bubble companies designed
to make money off investors rather than for them. These companies
are an old fashioned chain letter with fee hungry brokerage firms
acting as the postman. More money stolen at the point of a pen
than the point of a gain."
Price Matters!
Which reminds me of a story: This guy was
driving down a country road in a Mercedes when he saw a bunch
of sheep crossing the road. He pulled over to wait as more and
more sheep crossed until he finally saw the Shepherd, and motioned
him over. "Shepherd", he said, "I got a bet for
you. I'll bet you my pick of your flock against $500, I can tell
you how many sheep are in your flock." The Shepherd thought
for a minute. Those sheep were spread out all over, there's no
way he could guess how many, I'll take the bet." So the
guy says "6,387." The Shepherd can't believe it, but
he says, "That's right, take your pick." So the guy
takes his pick and puts it in the back of the Mercedes. And the
Shepherd says, "I've got a bet for you. I'll bet you your
pick of my flock against $500 that I can tell you what you do
for a living." The guy thinks, we only talked for a few
minutes, how would you know. I'll take that bet. The Shepherd
says, "You're a security analyst." The guy is just
amazed, he can't believe it. So he asks, "How did you know?"
The Shepherd answered, "You picked my dog."
The definition of a security analyst is a Promoter pushing his
firm's products, stock distributions and excess inventory.
Security is his
pay check.
Analyst what
do we need to sell to the public today?
Security Analysts should
be required to own what they recommend. Pay
them the minimum wage plus a percent of what their recommendations
earn in the next twelve months.
I believe the market
just made or is making a bottom. A bottom, not the real bottom.
The real bottom will be later and lower.
We're going into the
trading market cycle. Years of the Dow between 12,000 6,000
and the Nasdaq between 1,000 3,000. P/E ratios are still
around 100 in the Nasdaq and the earnings are dropping like a
stone.
Now that everybody
owns index funds they will make little or no money. In a trading
market cycle you need to own funds with competent trading management.
The coming migration
out of mutual funds will be a more borrowing trip than the one
endured by the pioneers.
We were told we were
in the Goldie Locks economy. Now we're in the latter part of
the story. Goldie became complacent and fell asleep and not one
but 3 bears showed up. So far we have seen baby bear clawing
the Dot Coms and the techs. In the next few years Mother bear
will come and then Papa bear to ravage the whole list. The Dow
may visit the 6000 area before it's all over.
The history of capitalism
tells us that cycles are the norm; indefinite business trends
simply are not. The stock market isn't any more likely to go
straight up forever than it is to go straight down forever. Cycles
occur because of temporary imbalances in supply and demand, imbalances
that eventually correct themselves.
Long-Term Is Now In California
California
is becoming a third world country thanks to the stupidity of
the not in anyone's back yard mentality. Soon 35 million Californians
will be in the dark, with no air conditioning and maybe not enough
water to flush the toilet. Draining the reservoirs to make electricity
will result in the worst salmon production in history. But
the desert ant is doing much better.
California refused
to allow increasing supply while demand increased; now they are
suffering rolling blackouts and tremendous price increases.
We want our SUV, but
not the oil wells to fuel them.
Today, 56% of our oil
comes form foreign sources, a 20% increase over 1973. Our oil
problem rests not with lack of supply, but our refusal to use
our natural resources.
The only question is
at what price will the public demand drilling $60/BBL,
$100/BBL, $200/BBL? Our short-term politically correct policies
could result in a bounty on Caribou in the long-term with bus
loads of hunters heading to Alaska on weekends.
Peace put 2-1/2 billion
people in the world labor market. India and China alone contain
2 billion consumers. Suppose each of the 2 billion people consumes
a mere quart of gasoline per week as their economy booms. That's
an additional 1.7 million barrels a day, new demand that is sure
to increase price. Today, China is booming. They have declared
the national bird the construction crane. The Chinese will go
from walking to bikes, to motorcycles and to autos. They will
need oil and gas, chemicals, forest products and metals.
In the first 6 months of 2000, China's oil imports increased
100%. The Chinese eat less meat in a year than we eat in a weekend.
Raw materials are now close to their lowest prices in history.
Tops and bottoms are creatures of extreme. Markets rise above
all rational expectation and then go higher and then they fall
farther than common sense suggests. The most desirable investments
for the future might not be in cyber space, but back to the basics.
By the end of 1998
the only drilling rig in Texas not lying on its side was at the
Midland petroleum Museum. Oil in 1982 was $28 a barrel. Allowing
for 3% inflation that would equal $47 a barrel today. In 1981
there were 4,530 oil rigs operating in the U.S. In September
of this year there were 800, up from 500 in April of 99. It takes
a long time to add to capacity. Aggressive EPA regulations have
so discourage refinery construction that there is no major refinery
operating today that is less than 25 years old.
The capacity to produce
most raw materials has declined, dramatically in some cases in
the last 20 years, while demand has continued to increase. As
you climb the ladder of financial services, check to make sure
it's leaning on the right wall. I believe raw materials will
be one of the best investments for the next 10 to 15 years.
Editor's Note:
Clyde Harrison is a Managing Member of The Rogers International
Raw Materials Fund, L.P. (the "Fund") a newly formed
Illinois limited partnership. The Fund will invest and trade
in a portfolio of exchange-traded commodity futures and forward
contracts. The Fund will invest and trade exclusively on the
"long side" of the market. This means that the fund
will only buy positions in commodities and will not engage in
any short-selling. The Fund intends to close out all positions
by making an offsetting sale and does not intend to take delivery
of the actual commodities. The Rogers International Commodities
Index was developed by Jim Rogers, author of Investment Biker:
On The Road With Jim Rogers to be a balanced, representative,
international raw materials index. For more information on the
Rogers International Raw Materials Fund, L.P. write to Beeland
Management Co., 1000 Hart Rd., Suite 210, Barrington, IL 60010
or call toll-free 1-866-304-0450.
