2007 is Heating Up Already

And you thought 2006 was hot! Well, 2007 could be even hotter. The Dow is hitting new records already. Private equity is announcing even bigger numbers. Derivatives are still swelling up…and then there’s Miss Nevada!

And now come British meteorologists predicting that this year will be the hottest ever recorded! You’ll recall that the United States of America was never hotter than the first six months of last year. We’re talking temperatures!

But the same might have been said for the financial markets – with new records set in almost every sector.

Well, hold onto your hats…and get your air-con system tuned up…because this year is heating up already.

We pause a minute to remind readers that we don’t care how hot it gets; we’re short the whole damn capital structure. We don’t own expensive stocks (well, we’ve got a few quirky, contrarian shares). We don’t own bonds. We don’t own any more residential housing than we think we live in. And we don’t hold any more dollars than those with which we need to pay our bills. We don’t own a Picasso…a Pollack…a Klimt…or even a baseball signed by Mickey Mantle. In other words: we are short, short, short.

But that doesn’t mean we are fool enough to think we can tell when this ‘wave of liquidity‘ might finally wash up. By the look of things, it might go on for another year – or more. Which would mean, of course, that we’re missing some opportunities to make money. All right by us. We’ll take the risk!

As recently as the 1960s…this kind of liquidity bubble could never have gotten out of hand. Then, the surplus dollars spent by Americans on overseas purchases would come back to the U.S. Treasury, where they would be redeemed by gold. The Treasury – watching its gold carried off – would be forced to take action. It would have to turn off the taps!

But in 1971, Richard Nixon was saddled with the spending of his predecessor – Lyndon Johnson – and confronted by a group of Europeans lined up in front of the Treasury. They had dollars. Nixon did the dishonorable thing; he reneged on a centuries-old promise – that the U.S. Treasury would redeem its paper with gold. Instead, he closed the ‘gold window’ at the Treasury. Thenceforth, the world’s financial system has been faith-based. As long as people have faith that somehow, some way…some time…it will all work out okay, everything will be fine.

What we are wondering now…indeed, what is the whole mission of these Markets and Moneys…is how much faith is there? When do the world’s moneymen run a little low on faith…and begin to want something a little firmer, a little heavier, a little more solid in their vaults?

Also in the International Herald Tribune this morning is word that Americans are not particularly concerned about global warming. What Americans are worried about is terrorism. The French, and most Europeans, on the other hand, have the opposite concern. It’s global warming that makes their palms sweat…not Osama. In the United States, 48% of respondents rate terrorism as the biggest challenge facing the globe. In France, only 26% think so. In France, 54% of respondents think the warming up of the planet is the greatest challenge; in America only 32% think so.

To Each His Own Delusions, we say.

Delusions must be cyclical, like crops. Urged on by the press…amplified by TV blabberers…shaped by their own unique historical conditions…people can come to believe almost anything.

Europeans are not especially interested in terrorism, war, or military glory. They’ve already been through their imperial epochs. Now, they are softer, more mature, more rigid and arthritic…with their marshal glories inscribed in granite on monuments throughout the continent.

By contrast, America is a younger society. Our friend Nicholas Nassim Taleb, born in Lebanon and educated in Paris, tells what is good about the United States.

“Whenever you hear or read a snotty European presenting his stereotypes about Americans, he will often describe them as ‘uncultured’, ‘unintellectual’ and ‘poor in math’ because, unlike [their] peers, they are not into equation drills and the constructions middlebrow people call ‘high culture.’ Yet the person making these statements will likely be addicted to his iPod, wearing t-shirts and blue jeans, and using Microsoft Word to jot down his ‘cultural’ statements on his (Intel) PC, with some Google searches on the Internet here and there interrupting his composition. Well, it so happens that the [United States] is currently far, far more tinkering an environment than that of these nations of museum goers and equation solvers…

“[America] fosters entrepreneurs and creators, not exam takers, bureaucrats or, worse, deluded economists. So the perceived weakness of the American pupil in conventional and theoretical studies is where its very strength lies – it produces ‘doers’, Black Swan [exceptional results] hunting, dream-chasing entrepreneurs, or others with a tolerance for risk-taking, which attracts aggressive tinkering foreigners. And globalization allowed the [United States] to specialize in the creative aspect of things…

“The world is giving us more ‘cheap options’, and options benefit principally from uncertainty. So I am particularly optimistic about medical cures…People are starting to realize that a considerable component of the gravy in medical discoveries is coming from the ‘fringes’… It is not just that hypertension drugs lead to Viagra…but that even discoveries that we claim to come from research are themselves highly accidental, the result of tinkering narrated ex post and dressed up as design. The high rate of failure should be sufficiently convincing of the lack of effectiveness of design.”

Yes, we still fly ‘Ol Glory down at the courthouse. We still invent things. We still celebrate our heroes…we still long for glory on the battlefield…we still send our troops to the Middle East. We are only a middle-aged society…not a geriatric one. We still have time to make fools of ourselves.

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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