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By Gary North - Reality Check
The rotting corpses of several large corporations are attracting the vultures. The vultures are circling. From time to time, one of them flies down, lands next to a body, and begins picking away at its flesh.
Vultures need a steady supply of corpses. That old poster is accurate: one vulture saying to another, "If things don't change, we may have to kill something."
The crucial investment question today is this: "What caused these companies to die?" The answer is not greed. Greed is present in all societies at all times. These companies died in 2002. Why? K-Mart went bankrupt because it offered lousy service, a poor selection of products, run-down stores, and was aimed at people without much money. It died because Wal-Mart is a better company. Its only big-name hope was Martha Stewart. It was an enterprise aimed at just barely middle-class women. I dreamed for years of hearing this: "Attention K-Mart shoppers: Wal-Mart has a better selection." Global Crossing and Enron and WorldCom died for very different reasons.
What, specifically, has created demand by naive stock market investors and fund managers to buy overinflated, stocks for 40 times reported earnings -- almost three times the historic average Warning: I keep seeing reported P/E ratios for the S&P 500 ranging anywhere from 23 to 40. I use the S&P 500's own statistic.
The public's willingness to buy stocks at inflated prices has in turn made possible the ability of America's corporate CEO's to gain incomes that were on average 531 times more than the average worker's income in 2000, up from 85 in 1990 and 42 in 1980.
CEO's pull this off mainly with stock options, which are taxed favorably for the companies that issue them. Stock options create potential future corporate liabilities that are not treated as present liabilities by accounting laws. The liabilities hit after common investors have bid up the price of the shares. Congress has created this monster by structuring corporate tax laws to favor senior executives rather than common investors. It is just one more example of government promising to "help the little guy," and then creating arcane tax laws that help the big boys, who donate big bucks to incumbent politicians. It is the same old deception.
If there were a flat sales tax instead of an envy-driven graduated income tax, there would be less of this cream-skimming by the rich. If capital gains were not taxed at all until investors sold their investments and took the money as income, there would be more economic growth and fewer scams. If corporate tax law allowed corporations to deduct dividends as expenses -- single taxation of dividends -- and if recipients could legally reinvest dividends on an income-tax-deferred basis, there would be more interest in income than creative accounting. But this would mean that the politics of envy no longer got people elected. That's not our world.
TOM BROKAW: NOW HE TELLS US!
On Sunday evening, July 28, NBC television broadcast a memorable piece of hatchet journalism, "Take the Money and Run." It was hosted by Tom Brokaw, the NBC anchorman.
The show dealt with the evils of the Chief Executive Officers of now failed corporations, though its main poster child was Global Crossing. The show reported on things that are bad about American corporate capitalism, with these notable exceptions:
1. The envy-driven tax structure that promises to "soak the rich"
2. Federal regulatory agencies, especially the Securities & Exchange Commission, that create barriers to entry against new, innovative firms - barriers based mainly on hiring lawyers and filling out forms
3. The politically untouchable government-created monopoly, the Federal Reserve System, which initially provides the fiat money that fuels every market mania
4. The major media, such as CNBC, that make their money by attracting audiences with lots of money for advertisers to skim off, audiences that can only be attracted by selling greed
In other words, NBC was attacking the results of anti-capitalist interference into the free market. The media today are attacking the results of the media's own marketing strategy to bring in suckers by the millions and deliver them to advertisers. The networks and newsstand money magazines lure in the masses with stories of dreams of wealth -- stories that statistically cannot come true for more than a tiny handful of investors. The winners are those investors who, unlike the media's dupes, see a bear market coming and sell out at the top to the naive victims of the media's own hype. The media create insatiable demand for get-rich-easily stocks, and the viewers respond by buying stocks from wiser souls, who see a stock market bubble for what it is and unload their shares on the rubes. Nobody on Tout TV told the rubes to sell Global Crossing or Enron. As Brokaw's report said, less than 1% of all stocks mentioned by brokerage firms are ever in the "sell" category. Tout TV followed the lead of the brokerage firms.
The script writers of the prime-time specials, hostile to the free market, now blame the free market for the failures of what is best described as monopoly capitalism. Then they call for more of the same.
The NBC show told a human interest story -- a real-life soap opera with an unhappy ending. It focused on some naive schnook who believed all the nonsense about the technology sector. He read and believed George Gilder's technobabble. He went to Websites and watched the hypesters on Tout TV. Then he bought Global Crossing at $60 a share, from which it steadily dropped. He used his retirement money. He kept buying more Global Crossing shares as the price fell. He had heard and absorbed all the brokerage house nonsense about "averaging down," i.e., buying more shares in a falling market. He applied this eminently false and potentially suicidal investment strategy in a way that even the experts (so-called) say is wrong: by buying more of a losing proposition, rather than diversifying his portfolio.
Now he goes on national TV and says that he feels betrayed. It was his own bad judgment that did him in. It was his desire to "get even with the market," to prove to himself that his bad judgment had in fact been good judgment, by buying more and more of a losing company. He thought that investment experts knew what was happening, which prime-time experts rarely do in mania markets. He violated the rules of sound investing all the way down, and then he consented to become a guest star on Tom Brokaw's prime-time soap opera. He consented to become the seasoning for Brokaw's feast on the rotting corpse. The show was a feast of fools.
Brokaw interviewed other victims. I have never seen such blatantly leading questions. He asked one group that had lost their retirement funds: "How do you feel about all this?" Would this man ask a victim of the 9-11 disaster, "How do you feel about losing your husband?" Everyone knows how she would feel. Why ask? What's the hidden agenda here? Then he asked: "Do you think these executives should go to jail?" One respondent was wiser than the questioner. The woman did not go that far. But other participants did.
Would he have asked the 9-11 victim, "What do you think about Al Qaeda?" Why would anyone ask such questions? In the case of 9-11, for this reason: to create broad public support for the creation of a Department of Homeland Security. But even the newscasters did not go that far. Such questions would have been seen as exploitative and cruel last September. But when capitalism is in a network's prime-time dock, no question is too blatantly leading for a network's multimillionaire anchorman.
These TV news anchors have been carefully screened and promoted by the nation's best public opinion experts to play their roles as neutral reporters of the news, who narrate what viewers are supposed to believe is the unvarnished truth, interspersed with 12 minutes of ads, five nights a week. Or, in this case, a one-hour special on Sunday evening.
Interview by interview, Brokaw was playing the prosecuting attorney, establishing a case against senior executives who in fact seem to have broken no laws. When we something like this, we should recognize the presence of a hidden agenda: laying the ground work for another round of statist intervention into the capital markets.
Global Crossing was a classic example of an empty shell, a multi-billion product of media hype and central bank monetary inflation. George Gilder was the main hypester here. This poor soul actually believes his own technobabble. He invested most of his own money in this turkey. It was madness to the nth degree. Gilder kept writing in the 1990's about the falling price of bandwidth, i.e., the wonders of what he called the telecosm. (I saw his book, TELECOSM, in the $3.98 remaindered books bin at Hastings recently.) I accepted his theory about the falling price of bandwidth. I was not equally impressed by his claim that this would in some way revolutionize the lives of Americans. One of my doubts about the incomparable benefits of cheap bandwidth is the speed of modems, which has peaked for years at 56k. The vast majority of Internet users still use 56k modems, and seem vaguely contented, including me.
Gilder then drew an economically insane conclusion from his theory of ever-cheaper bandwidth: the greatest company in the world was a company that spent billions of dollars on buying or laying fiber cable to supply bandwidth. I read his reports on Global Crossing at the time and thought, "This man has lost his ability to think economically. If the price of something is heading relentlessly toward zero, then the last thing you want to invest in is a company that sells this product. You may want to invest in companies that add value for consumers by converting this depreciating asset into usable services or goods, but not the seller of the asset." My suspicion was correct. Global Crossing went bust.
The man who ran it, Gary Winnich, sold 30% of his shares in three separate unloadings, took in $735 million, and bought a $90 million estate in Bel Air, California. (Why any home is worth $90 million in the smog-filled Los Angeles basin, I cannot imagine.) This, of course, is supermoney in action, as described a generation ago by "Adam Smith," and praised ever since as capitalism's ninth wonder of the world. (The eighth wonder is compound interest.) NBC got finally it right. Supermoney is indeed a system based on the principle of "take the money and run." Supermoney is based on a premise: "A fool and his money are soon parted." CNBC and other Tout TV channels created a huge market of these fools, and, sure enough, they and their money were soon parted.
Of course, all of this is peanuts compared to the level of the deliberate deception by the West's welfare states with respect to their pay-as-you-go compulsory retirement programs and compulsory health insurance programs. Nothing that Global Crossing or Enron did can compare with what Social Security/Medicare has done to, and will continue to do to the masses who got in on this compulsory Ponzi scheme late (after 1955). Nothing that Arthur Andersen did can compare to what Congress has done, namely, to count $25 trillion of unfunded liabilities as off-budget liabilities, and therefore not reported in the budget statistics, and not limited by the automatic annual increase in the Federal budget ceiling. If you doubt me, order my report on the bankruptcy of these systems. Click on the link, and then click "SEND."
But NBC, CBS, and ABC never air a program called "Account Overdrawn: The Social Security Trust Fund." That would undermine trust in the government. Their shows are designed to undermine trust in the free market, not trust in the welfare state.
It amuses me to see the prime time big brother of CNBC wring its hands in horror. "Blame the CEO's!" No, blame the politics of envy. Once again, those fools who believed the pied piper's story of wealth for all through government-regulated, central bank-funded intervention into the free market have had their money removed from them by sharpies.
The NBC show was about poorly invested pension fund money. Well, this disaster has only just begun. It will play out for the next forty years, getting ever worse. The model of self-conscious deception of the public is the Social Security system, the most untouchable of all government programs of compulsory wealth extraction. Those who still vote for politicians who promise to continue this theft will find themselves ruined. I cannot resist citing Karl Marx: "The expropriators are expropriated." He was speaking of capitalists. I am speaking of voters who vote to provide old age security for themselves at the expense of workers still in the labor force, and who will find, as Pogo Possum found, that "We have met the victims, and they are us."
MAKING THINGS WORSE
Economist Thomas Sowell recently hit the nail on the head. The great threat to our prosperity is not the popping of Greenspan's stock market bubble. The threat is what the government is likely to do to fix things. He wrote:
What can be even worse than a stock market crash -- including the great crash of 1929 -- are politicians rushing in to fix things. At one time, it was widely assumed that the 1929 crash led directly to the Great Depression that lasted throughout the decade of the 1930s. Now, more and more people who have studied that era have come to see what the government itself did to help as being the biggest reason why the depression went so deep and lasted so long.
The economist who first proved this was Murray Rothbard, in his book, AMERICA'S GREAT DEPRESSION (1963). I read it the year it was published. It convinced me. It is the best book ever written on the topic. It was savagely attacked in academic journals at the time and then ignored by the academic community. Rothbard blamed Hoover's interventionist policies, thereby alienating Republican apologists, and he blamed the Federal Reserve System's monetary policies in the 1920's, thereby alienating the bankers, the FED, and conventional free market economists. Not until the master historian, Paul Johnson, wrote MODERN TIMES (1983), and made Rothbard's book the basis of his analysis of the Great Depression, did Rothbard receive even grudging credit. Sowell quotes Rothbard's conclusion, but not the source:
Neither Republican President Herbert Hoover or his Democratic successor Franklin D. Roosevelt had a clue about economics or a policy that made any sense.
Both sought to keep prices -- including wages -- up, despite the fact that the money supply had declined by one third. How was the country supposed to buy all the output at existing prices, and employ all the workers at existing wages, when there was so much less money? ...
In reality, it was Hoover -- not FDR -- who became the first president to throw the power of the federal government into the effort to get the country out of a depression. In recent years, it has become more widely acknowledged that Roosevelt's New Deal was essentially Hoover's policies raised to the next exponent, spending on a more lavish scale and saddling the country with counterproductive programs that have lasted into the next century.
This was Rothbard's thesis in 1963, and it was ridiculed. His thesis has yet to work its way into the history textbooks. The textbooks, bought by government-funded schools to promote faith in the government's funding of everything, do not deviate from the original propaganda campaign of the New Deal: "Roosevelt saved capitalism from itself."
We are now seeing the latest application of this false claim. The Democrats are going to ride into control of Congress this fall with a campaign based on this claim: "We need to save capitalism from itself." They will not show the film clips of Global Crossing's Gary Winnich playing golf with Bill Clinton. They will tar and feather the Republicans, as if this corrupt stock market were not a bipartisan disaster that has been funded by the supposedly independent, supposedly non-political Federal Reserve System.
You may not believe me. OK, test me. Click through on this link. It will take you to a graph. The graph reveals the expansion of MZM (money of zero maturity). With this graph, things will become clearer as to why the mania of 1995-March of 2000 took place.
This chart is from EconoMagic, a marvelous statistical site. You can play around with the chart. Use the options box. It starts in 1990. Insert 1975. You can see why the dollar has fallen in value. You should set the chart to show recessions. But before you have fun with this chart, look at what happened in 1993-94. There was a slight decline in MZM. But, beginning in 1995, the graph shoots up rapidly. This is when the stock market boom turned into a stock market mania. This is what turned the NASDAQ into a bubble. Look at what happened to the NASDAQ, beginning in 1995.
Note: Click on "Major Market Indexes" at the top of the two charts of the DJIA and NASDAQ. Then click "Nasdaq Composite Index." Then choose "1-decade" from the options box with the downward-pointing arrowhead at the top of the screen.)
What is ahead for us? Maybe a replay of the 1929 stock market. Again, quoting Dr. Sowell:
Not only the Federal Reserve and two presidents managed to make the Great Depression worse, so did Congress. When it passed the Hawley-Smoot tariff of 1930, it contributed to a worldwide contraction in international trade, as country after country tried to "save jobs" by protectionism.
Bush has already raised tariffs on imported steel. He has shown, once again, that the Republicans have learned nothing since Hoover. Bush has yet to veto any bill. He signed the agriculture subsidy, a gigantic subsidy to large-scale corporate farming, which of course was passed in the name of helping the family farm.
This year's scandals and stock market collapse could not have come at a worse time, with an election coming up and no other big issues around for politicians to use. It is also worth noting that there are only two economists in Congress and hundreds of lawyers, ready to say and do whatever will look good and feel good at the moment.
One of these two economists, House Majority leader Dick Armey, has announced that he will not run again. It is clear what is coming: a bipartisan extension of government control over the capital markets, which will match the extension of government control over the communications system through the Homeland Security system. NBC needs to do a one-hour special, "Take the Constitution and Run." Somehow, I don't expect to see this.
The vultures are circling. They appear to be feasting on corpses, but they will soon produce an assembly line of corpses: the picking away of our liberties. The voters will go along with this.
This is not the pathway to Dow 36000.