Death Chants, Breakdowns, and Forecasts for 2006

Bill Bonner
The Daily Reckoning
January 6, 2006

The Daily Reckoning PRESENTS: In yesterday's issue, Bill promised to give his predictions for the year ahead in today's essay - but we must warn you: What follows is more of a churlish lament than a real forecast. Read on...

Mercy Otis Warren on the ratification of the Constitution in 1788:

"When fortune throw[s] her gifts into the lap of fools, let the sublimer characters, the philosophic lovers of freedom who have wept over her exit, retire to the calm shades of contemplation, there they may look down with pity on the inconsistency of human nature, the revolutions of states; the rise of kingdoms, and the fall of empires."

We warn our dear readers. What follows is more of a churlish lament than a real forecast. As we have confessed more than once, and proven more often, we get the news no sooner than anyone else. Still, we have two advantages over most forecasters: We know our limitations, and we don't watch television.

So, today, we begin by describing the world, not as it will be, but as we think it is. It is a world where individuals who mind their own business can live better than at any time in history. Painless dentistry, air-conditioning, automobiles, the Internet - we are humbled by the majesty of our own creations. Year after year there are more of them. Now we can eat pineapple in London in the wintertime. We can read books written by dead Chinese scholars in our native languages. We can chat with a friend on the other side of the globe, at almost no expense. And we can have an erection where and when we want one (so we are told), thanks to the wonders of modern biochemistry, rather than the mysteries of old-fashioned hoochie coochie. The thought of it is almost too much for us. We swoon, and ask the gods: what next?

While the progress of the world swells up before our eyes, we turn our eyes to the newspaper and wonder what has gone wrong, for there is the story of 100 dead in Iraq. Reading more carefully, we find that the news from Iraq could have been written 100 years ago, when the British Empire was fighting insurgents in the area. It could have been written nearly 1000 years ago, when Baghdad was under assault from the Great Khan. We also might have read it 2,000 years ago, when similar battles were fought with the Romans.

Has nothing changed? Why is our own Texas Tiberius repeating the errors made by virtually every empire that ever was: pushing beyond the limits of its resources, until it finally falls apart? And he does so at the very moment when life seems so sweet in so many ways. We Americans can barely brush our teeth often enough.

Alas, dear reader, while we enjoy real progress in matters of technology, in matters of psychology we remain the same as we always were: prone to panic, backsliding and humbug.

Which is why we expect little from 2006. Technology improves with the passage of time; psychology oscillates like the seasons. While we are sure that the year will bring marvelous new gadgets, we doubt that it will bring marvelous improvements in our mental state. We have enjoyed a long season of calm, comfort and conceit. Bitter weather must follow, as it always does.

Returning to the occupation of Iraq, what should we expect? More bad news is our guess. Psychologically, the nation is sliding down from the peak of "bring 'em on" optimism. It is becoming obvious that the war benefits only two groups: Osama bin Laden and his gang, who were happy to see the posse head off in another direction... and certain well-placed defense contractors. The former, bin Laden's bunch, are presumably holed up in a cave somewhere. But the latter are living it up in New York. The International Herald Tribune ratted out David Brooks, of DHB Industries, maker of bulletproof vests for the military. The vests are worn by the poor grunts sent on Mr. Bush's fool's errand. Mr. Brooks wears silk. The IHT describes a private party for the vest-maker's daughter, held at the Rainbow Room at Rockefeller Center:

"The bash was headlined by a list of performers that could easily have carried the Super Bowl halftime extravaganza. The superstar rapper 50 Cent and the front men from the rock group Aerosmith were among the night's many performers. According to the The Daily News in New York, the party [cost] $10 million... "

Brooks can afford it. Prior to the Bush administration's war to make the world safe for democracy, the man made $525,000 a year. In 2004, thanks to fat government contracts, he made $256 million, in compensation and stock sales.

Good for him. But we suspect that fewer Americans will want to sacrifice their sons and daughters in 2006 so that Mr. Brooks can get rich. In fact, we expect the average working stiff to go a little sour in the year ahead. He's been losing ground for the last three decades. His wife went to work to help pay the bills, and then he borrowed money to keep spending. But this is the year when the bills begin to pinch.

Home sales will be down 6% to 8% in 2006, says Fannie Mae. Wal-Mart just reported its smallest December sales gain in five years. Auto sales for the Big Three were all off in December. And even, "truck sales stumble in '05," says AFP.

It may be true that the new, globalized economy helps everyone get richer. The trouble is that the riches do not fall on all voters equally. The rich - those who own financial assets, and those whose labor is protected from Asian competition - are getting richer. The poor are getting poorer. When the poor finally realize it, they aren't going to like it, and 2006 may be the year they begin to wise up:

"Millions brace for credit card crunch," says a CBS headline.

But the lower and middle classes can do nothing about it. They are the ones who have borrowed too much - often taking out interest-only mortgages, with no income verification. They cannot work their way out of the hole; their wages are under constant pressure from Asia. They will have to suffer, along with those who hold their mortgages.

Technology inches forward, but changes in mass psychology can happen by leaps and bounds. That is why the financial markets are prone to panics. Of course, they do not happen frequently. That is why forecasters are usually right when they predict that next year will be like the last. Extraordinary events, like panics, happen rarely. Otherwise, they would be common events. And since they do not happen very often, people generally think they never happen. People build their houses on low ground... knowing that a flood is possible. But they rate the odds so low as not being worth worrying about. Likewise, who worries about a panic out of the dollar? Who worries about a stock market crash? Who tosses and turns at night, sweating the risk of a real estate collapse? After so many years of stability, investors come to think these things can't happen. They imagine that the monetary authorities have made some fundamental progress - like the progress in microcomputers or gene therapy - that makes these extraordinary events obsolete. They think they will never happen again.

Imagine what they would think... imagine what they would do if the dollar sinks by 5% every day for a week. Imagine how hysterical they would become if their neighbors house stays on the market, even after they cut the price by 50%. Imagine how panic-stricken they would be if interest rates shot up 2%... or 4%... or even to 18% as they were in 1981. All of these things are possible. All are likely, maybe not in 2006, but certainly before the end of time. All are human, psychological reactions... completely foreseeable and completely unpredictable at the same time.

We have no opinion on sectors, markets, or individual stocks. But our opinion of our fellow man is that he is given to fits of desperate sanity. And our instinct is that he is getting close to one now. He will look at his dollars and realize that they are nothing more than pieces of paper. He will look at his stocks and wonder why he ever thought they were worth 20 times earnings. He will look at his house and won't be able to believe that someone would have willingly paid him so much for it... and that he, damned fool, didn't take it!

All of that is in the future. How far in the future, we don't know, but we are happy to own gold while waiting for it. Gold, any broker or financial planner will tell you, is nothing but a "risky speculation." In our opinion, it is one of the few places you can put your money that is not a speculation. It is there when your neighbors are happy. It will still be there when they sad. It there when the empire is riding high. It is still there when it doth lie so low.

We hold onto it now, because we expect an extraordinary change... as the U.S. empire sinks, and your neighbors start to growl. Gold should not merely stay there, but go up.

Regards,

-Bill Bonner
email: DR@dailyreckoning.com
website: The Daily Reckoning

Copyright © 2000-2008 Agora Financial LLC.

321gold Inc