Survival

The trouble with paradise is that it is too appealing. And too relaxing.

That is an observation based on my experience with nature this weekend…and my experience with the investment markets over the last few years.

Mother Nature encourages, and then punishes, complacency.

I set out from the new clubhouse before 6 a.m. My goal was to explore the southern coast of Rancho Santana – a 1,600- acre parcel located along the Pacific.

But long walks are also a good time for cogitation, and I had set aside a substantial subject. Along with a group of investors, I bought the ranch several years ago. Now I was considering investing something more important – time. Unlike money, when you invest time, the principal is never returned.

None of us had ever seen the southernmost part of the property. It is separated from the rest of the ranch by high cliffs along the shore – so you cannot follow the water’s edge to explore it – and protected from easy access by thick brush on the land side too.

But on the previous day’s outing I noticed that a path had been worn through the brush by the 200 head of cattle that roam the hills, and I was determined to follow it in the morning.

So, I was up before 5:30 – and set out.

The sun was not yet up, but there was already a dusting of pink on the eastern, featheredge of the few clouds above. Taking the high road, I was soon at the top of the hill, where I turned to look back over the new clubhouse and the 5 miles of beach to the north. It was a beautiful scene…made even more beautiful by the fact that I was the only one to see it. It was all mine, for that moment.

I passed a couple of the houses that have been built in the last couple of years – white stucco with barrel tile and palm roofs. Also there is a temporary shack of rough wood and tin – where the workers sling their hammocks during the week. There were no signs of life anywhere. Just the sound of the waves hitting the beach…and the wind.

After about 20 minutes I reached the end of the road and took a path down to Escondido beach. It is a beach about 500 yards long in an open crescent shape, surrounded by a steep escarpment.

I walked over to a clump of trees with whitish trunks and stripped off my clothes. You will forgive me, I hope, dear reader, for passing along such an intimate detail…but it alone will make sense of the cheer that arose from the fishing boat a few minutes later.

There was no sign of life either on the shore or on the ocean when I entered the water. The waves swelled up onto the beach like the gentle breathing of an NFL lineman asleep in a bathtub.

The water was delightfully cool. You might think the sea would be tepid at this latitude. But the Humboldt Current, which runs down the coast, seems to keep it fresh.

The beach fell off sharply, so I was able to swim parallel to the shore and only a few yards from it. I marveled at how calm the water was…and how idyllic the whole scene appeared…swimming in the Pacific au naturel, at our private, hidden beach.

Thus preoccupied with my thoughts and studying the cliffs onshore, suddenly the water level dropped. It was as if the footballer had risen from the tub. A strong current swept me away from the shore. I turned my head just in time to see a huge mountain of seawater, capped with a curling white foam, headed straight towards me. In less than a second it washed over me…and sent me crashing onto the beach.

In another moment I was flushed up and began to recover my bearings. But the relative calm lasted for only a second…soon the sea dropped again and swept me even more violently away from the shore. This time, I suspected what was next.

Trouble rarely visits alone. In another moment, a second peak of water struck…and again, I was tossed against the beach and hammered against the sand…and then swept back toward the sea.

For a moment, I was afraid I might end up like the prime minister of Australia, who went in for a swim one day and never came back. But then, just as suddenly, the ocean was tranquil again.

Taking advantage of this lull in the punishment, I made my retreat from the waves, not noticing the little fishing boat that had pulled into the little cove.

It must have been the sight of the white, stark-naked gringo staggering up on the beach that drew loud, cackling huzzahs from the fishermen….

Nature is full of surprises.

After I got my clothes back on…and recovered my breath…I felt curiously invigorated. My destination remained the south end of the property, which could not be reached from the beach. I would either have to return up the path from which I came and then make my way around the back of the hill to the top of the cliffs – or climb up the escarpment directly.

I chose the latter path…or lack of one…partly because it would be much faster, but mostly because I wanted to see if I could do it. It was the riskier investment of time…but the payoff would be higher.

The sides were very steep, but the climb looked manageable. At least, from the bottom. It must have been at least 300 feet from the bottom of the escarpment to its top. But when you take it step by step, it is amazing how quickly you can get into real trouble.

I grabbed clumps of grass, dug my boots into the dirt and scrambled up the first few hundred feet. Then I arrived at the rock face – which was another 100 or so feet straight up. But it looked as though there were enough nooks and crannies to climb up. And my progress for the first few yards was encouraging – like the initial return on an IPO that is about to crash.

Thoughts of a crash came to mind as I reached the middle of the rock face. I had begun to feel like Tom Cruise in the opening scenes of the pathetic movie, Mission Impossible 2. Without intending to do so, little by little, I had gotten myself in a dangerously untenable situation – as though I were dollar- cost averaging myself into a preposterously overpriced speculation.

I was only about 50 feet from the crest of the cliff. The wall of rock was straight up and down with fewer and fewer footholds. Any slip would be fatal at this point. Worse, I realized that the rock itself, upon which this installment and future issues of the Daily Reckoning depended, was defective. I had grabbed a miniature promontory above me in order to pull myself up to the next foothold. But as I put weight on it, the rock broke off. I was barely able to dodge the rock and grab another, less-appealing projection.

Isn’t that just like Mother Nature – with her droll wit – to put crumbling dry fudge at the very point where a climber desperately needs rocks with integrity! I noticed that my foothold, too, was loose and in danger of breaking away. If it did, I would be finished, for I had nothing really to hang onto…and nothing to stop my fall except the rocks and a few scraggly trees hundreds of feet below.

“Don’t panic,” I told myself. And yet, panic seemed the only appropriate emotion. Anything else would be as lame and dishonest as a zoning board.

But this was no time for high principle. This was a time for action. I was already high enough and could go no higher. There was nothing left to grab. But I couldn’t figure out how to get down, either. The buyers had disappeared from the market…and there seemed to be no chance of a soft landing.

I appeared to be stuck in a fatal position, with my foothold slowly crumbling and nothing to replace it. There was nothing to get a purchase on.

Obviously, since you are receiving this message, dear reader, this story must have a satisfactory, if not happy, ending. I will not try to draw it out any further or leave you in suspense.

Growing out of the crevices of the rock were two small trees, just below me to the right. I had avoided them on the way up. One had thorns so long and lethal you’d be arrested if you tried to take them on an airplane. The other was covered with ants. If I leaned over carefully, stretched out and fell towards them, I might be able to reach them.

In the event, I managed to grab the one with ants on it…swing down and then bump and scratch my way to firmer stone. Another 15 minutes of this, including beating ants out of my shirt, and I was back on the beach. My climb had been fully and completely corrected.

Nevermore…dear reader…Nevermore!

Until tomorrow…

Bill Bonner Baltimore, Maryland January 29, 2001

*** I arrived back in Baltimore late last night. The streets were full of whooping, cheering crowds. When we stopped at a light, a group of friendly drunks came over and started pounding on the roof of the cab – looking for hands to slap. I didn’t realize I had become such a celebrity.

*** “Where’ve you been?” asked the cab driver, looking at me through the rearview mirror as if he suspected I was a creature from space posing as a human being, “The Ravens just won the Super Bowl.”

*** This news is confirmed by the headline of today’s Baltimore Sun. Even the announcement of WWIII would be proclaimed in a smaller type.

*** Baltimore’s football team is named after the most well- known poem of the town’s most famous drunk – Edgar Allen Poe. In fact, it was on this very day that the poem, The Raven, was first published. It was an immediate hit in America, and in France – where Poe’s poems were translated by Charles Baudelaire – it was an ever bigger hit.

*** But to return to the cabbie’s question, where I’ve been is Latin America – where I spent the weekend…more about that below…

*** Friday produced little cause for excitement on Wall Street. Nothing much happened…just as nothing much happened during the week.

*** The Dow fell 69 points on Friday. The Nasdaq rose 27 points. That left both indexes unchanged for the week. In fact, so far, both the Dow and the S&P have barely moved.

*** GE fell another 3%.

*** The Nasdaq, of course, got a big boost on Jan. 3, after Alan Greenspan cut the Fed Funds rate by half a percent. That was enough to convince most investors that the Big Bottom in the Nasdaq had come and gone.

*** Investors expect more rate cuts from Greenspan & Co. – including one of another 50 basis points this week. They are sure that these rate cuts have already set stocks back on an upward course…and that the Big Bottom in the economy is only a few months in the future. In their minds, there is no reason to worry about bad economic news or bad earnings – because it is just a matter of time until the rate cuts work their magic.

*** “No rate cut [this week] will be a disaster for the market,” said one analyst quoted by Reuters. Greenspan does not like market disasters and will probably provide the desired fix. More cuts are all it will take, in the bulls’ view. “We’ll be off to the races in the 2nd half,” predicted the same analyst. Rukeyser’s elves are now 9-1 bullish.

*** But there is an alternative view, held by a few cranks, curmudgeons and topographers. It holds that mountain ranges are usually about as high on one side as the other…and that sooner or later…in whatever direction you go, you reach sea level.

*** The present plateau is, in this latter view, likely to end in a steep drop…

*** So far, the Nasdaq has recovered 22% of its bear market decline. The S&P has bounced 38%. These numbers are on the low side of typical bear market rallies.

*** The Advance/Decline ratio turned negative on Friday, after a long positive spell. The A/D ratio topped out nearly two years ago – in April ’98. Since then it fell from a plus 13 to a negative 8. It is now minus 4.26…meaning that it, too, has recovered only 18.37% of its bear market losses.

*** Between 1991 and 2001, the Prudent Bear reminds us, the U.S. nearly doubled its total credit market debt, from $14 trillion to $27 trillion. This excess credit, the true source of the Nasdaq bubble and the trade deficit, will have to be corrected somehow. And it will take a lot more bankruptcies and falling prices to do so.

*** “From 1997 to 2000,” reports Justin Ford, originator of the Seeds of Wealth program, “U.S. households increased their borrowing by 51%…but only increased their income by 17%. In that same time, total household assets grew by 47%, but liabilities grew even faster…by 54%. The ‘negative’ U.S. savings rate – the first since the Great Depression – is no mystery. U.S. consumers are loading up on ‘bad’ debt and spending far more than they earn. And if current trends continue, it’s only going to get worse: Consumer debt is growing at a double-digit rate – versus a 4.8% rise for income.”

*** “There are enough eerie similarities between America today and Japan in 1989-90 to be worrying,” says The Economist. “The biggest is excessive debt…By borrowing against paper gains in share values, households have been able to shop until they dropped, not bothering to save.”

“At the market’s peak,” continues The Economist, “American households owned shares worth 175% of their disposable income, much higher than Japanese households’ shareholdings at the Tokyo market’s 1989 peak of only 90% of their income. Just as Japan’s crash led Japanese consumers to raise their savings and cut spending, so the risk is that the same could occur in America.”

*** Gold fell nearly $2 on Friday. “The first shot in the battle to wrest gold from grips of central banks and a few powerful investment houses has been fired,” Harry Schultz tells me. Harry, godfather to the financial newsletter business, has been following the “conspiracy to suppress the gold price” for some time. Now, he believes, members of a small non-profit organization known as Gold Anti-Trust Action may have found “the smoking gun.” Could this be the beginning of the end for price fixing in the gold market? Do we care?