Family Business, Part II

Family Business, Part II
by Bill Bonner
The Daily Reckoning
Ouzilly, France
Friday, September 1, 2006

---------------------

• The sound of the real estate's inexorable slide down…last of the sunny days…

• Imperial cycle is too long and uncertain to be tradeable…wondering about China's strange present - and even stranger future…

• The more we age, the more we think, and the less we know for sure…the Chinese may have the upper hand - but we have Medicare and Britney Spears…and more!

---------------------

"Listen hard and watch out," cautions the Wall Street Journal.

But listen and watch not the financial markets; nothing much has happened for a long time. Stocks are about where they've been for the last eight years - except for the tech stocks, which haven't come back from the crash of 2000. The dollar is still at 1.28 per euro - where it has been for many, many months. And gold has been in a correction without much movement for the last several weeks. Mssrs. Case and Shiller, writing in the Journal, are listening, instead, to the sound of real estate beginning its inexorable slide down.

"As always, the future is uncertain. Many of the underpinnings of the boom are still strong, and the soft-landing scenario so widely promoted by economists and industry leaders is a possibility if the U.S. can avoid a generalized inflation, if long rates don't rise a lot, and if the rest of the economy stays strong. But that possibility is not enough to give great comfort to all those who worry today about the housing market.

"Unfortunately, there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected. Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today. Listen hard and watch out."

But listening hard is not easy to do when the sun is out, as it is today, the last real day of summer at Ouzilly. Tomorrow, the family heads back to Paris to take up its normal schedule: school, work and worse yet, dinner parties. We will stay behind here until Monday to close up the house, and then we too return to our routine - flying to London to take our place is the great maze of offices, desks, computer terminals and suits that make up the workaday world of a modern city, for Monday may be Labor Day in the United States, but it is a regular laboring day in the rest of the world. Painters paint. Bakers bake. Cartwrights wright carts. Politicians lie and swindle. Celebrities make spectacles of themselves. And the financial industry peddles its dreams and illusions.

One of the big illusions it peddled to us was the idea that you can't go wrong with real estate - an illusion that seemed real during the boom, when the sun was out and prices were high. After all, viewed from almost any time in the past, prices are higher than they have ever been, which gives the impression that housing always goes up.

But it doesn't always go up. In real terms - once you take out the padding of inflation - property prices can go down and stay down for many decades. From a grand historical perspective, in fact, prices can go down for many centuries, tagging behind the ebb and flow of imperial and economic power. Residential property in Rome, for instance, reached its zenith under the Emperor Trajan…and then declined for the next 1700 years, recovering, perhaps, only under Mussolini or Berlusconi, although we don't really know.

For investors, we doubt this is a useful insight. The imperial cycle is too long and too uncertain to be tradable. But it is not so uncertain that we can't guess that the boom is unsustainable. And we can also guess that housing has begun the long slide down hill. When it reaches the bottom, the economy will be in recession and millions of families bankrupt.

But it's really too sunny a day to worry about it…

More news:

--------------

Chuck Butler, reporting from the EverBank world-currency trading desk in St. Louis…

"ECB President Trichet stressed 'strong vigilance' at the press conference, which opened the gates to the next rate hike coming in October. Second, the ECB raised the mid-point of their growth forecasts to 2.5%"

For the rest of this story, and for more insights to the world currency markets, see today's issue of

The Daily Pfennig

--------------

And more of what happens to pop into our mind:

*** An article in Le Monde made us wonder again about China's strange present…and possibly even stranger future. The country is still run by communists, we remind readers. How can a nation run by people who do not believe in markets actually function? How can it be the fastest-growing economy on Earth? How can a place where the proletariat supposedly runs the show turn out to be the very same place where capitalists are making the most money?

It just goes to show how futile and worthless most of our ideas really are. Whatever we think, the reality is infinitely more complicated, subtle, and unknowable. That is why we are so humble, here at The Daily Reckoning. As we get older, the more we think…the less we know for sure. If we live long enough, we will surely know nothing at all. Still, that will put us ahead of most people, who know less than nothing. Thinking they know something, they misperceive, misapprehend, and mistake everything. Then, with confidence equal to their own ignorance, they run for public office. The next thing you know, they are passing laws and starting wars…and that is how we get the world we live in.

The Le Monde article tells us that Chinese strategy "doesn't put things in terms of means and ends, based on an advance plan, but more in terms of conditions and consequences." The Chinese are forever trying to turn a situation, whatever it is, to their advantage. Their ideal is to profit in any way possible, without ever really having to fight. Or, as Sun Tzu explained, to turn things around so that by the time you face your enemy, he is already beaten.

A shiver went down our spine. What better strategy could the Chinese follow, we wondered, than what they now pursue? What better game could they play than to treat the U.S. like a pig being fattened for slaughter?

The hog slaughter works thus: the Chinese work around the clock making things for American consumers, who are too broke to pay for them. So much the better - the wily Chinese take bonds, cash, and IOUs. They unload their junk while taking and holding our capital. They may be atheists, but they've figured out at least one part of the Bible: "borrower who is slave to the lender." They may be communists, but they know that it is capital that rules the modern world, not political theory and socialist claptrap.

As time goes by, American consumers and their government come to rely on suckling goods and money from the Chinese. Without it, the U.S. economy would collapse, and the feds would have to scrap for dough to arm its forces. American bureaucrats still talk tough; they still tell the Chinese what they should do with their currency; they still send U.S. fleets to maneuver off the Chinese coast. The bureaucrats still give the Chinese leaders the cold shoulder when they visit. But little by little, it is the Chinese who have gained the upper hand. They have the money, the manpower, the manufacturing base, the technology. We have Britney Spears…and Medicare.

*** Yesterday, we spent the entire day checking on one of our bad investments. The project looked nice enough on paper…and on dry land. It is a majestic chateau in Normandy that we have fitted out for seminars. But the project sank into the soft mud of French regulations, almost from the beginning.

Driving home, with Pierre, we tried to understand what went wrong:

"Pierre," we began, "the real problem is that the Anglo-Saxon businessman doesn't really understand how to do business in Latin countries. When the law tells you you've got to do something in England or America, you know you've got to do it. But it doesn't work that way here."

"Well, it does and it doesn't," Pierre explained. "We also like to do things right here. We like to use the word 'correct' to describe how you should do things…in a proper way. But it's true that you can do things correctly without actually paying much attention to the law."

"But Pierre, you see how we are trapped in Normandy," we continued. "One set of bureaucrats says one thing. Another says another. The historians say that if we change the windows, they'll put us in jail. The public safety officials tell us that if we don't put bars across the windows we'll go to jail. The mayor tells us that if we don't get the approval of the two agencies, we won't be allowed to use it. Obviously, you can't respect all these laws and still do business."

"No," Pierre agreed, "but you have to do what is 'correct.' That's the important thing."

"But how do you know what the correct thing is, when there are so many things being corrected?" we asked.

Pierre replied, "You just have to have a feeling for it."

But the problem of conflicting regulations?

Pierre had this suggestion:

"It is very simple," he explained. "You invite the historians to do an inspection. They look at the windows. They see no bars. They approve it. Then you put in the bars and invite the public safety regulator to come and inspect. He's happy, too. Then, you've got your approvals. You go to the mayor…and you get the final approval."

"But what happens if the historians come back…and see the bars?" we wondered.

"Don't worry about it," said Pierre. "They know you have to put the bars in…otherwise the building wouldn't be safe. Someone would fall out and hurt himself. These people are not unreasonable."

Our response: "Oh…We hadn't noticed."

*** We are taking the afternoon off to work on our gypsy wagon. It was the subject of last night's dinner conversation:

"Let's get it all painted up next summer," Elizabeth proposed. "We'll have a big party to inaugurate it…and invite our friends to come in gypsy outfits."

"Good idea," Henry added. "We can get someone to play the violin. And Grandmother can read palms. We'll have the party down by the pond and build campfires around it for light. And Edward and Gabriel will dress up as gypsy children and sneak around stealing peoples' wallets."

--- Advertisement ---

Sign Up For The Daily Reckoning Written by the authors of the New York Times business #1 best seller Empire of Debt, The Daily Reckoning has the most innovative way of weaving valuable information about investing and living into a format that is not only educational but also entertaining.  To sign up for this FREE service enter your e-mail address below To share or not to share? That is not the question. We don't. -- Craig Collins-Young, assistant editor

The Daily Reckoning PRESENTS: Money, sex, and hair loss are taboo subjects in our household. They are all things about which a middle-aged man thinks often, but rarely speaks. Last week, you recall, Bill decided it was time to talk to his children about money. You may have been wondering how it turned out. So, today we give you this verbatim report about Bill's first family business meeting. Enjoy.

FAMILY BUSINESS, PART II
by Bill Bonner

While the children sat awkwardly in their seats, their father began, also awkwardly.

"When your mother and I started out in life we had no money…nor any property."

"Wait, Dad," Jules interrupted. "You're not going to tell us again about how you didn't have running water, are you? And how you were so poor you had to wear shoes with holes in the soles…and how we should feel grateful because we have shoes without holes? We've heard it before. Besides, what difference does it make? It doesn't make you superior just because you were born poor. And we can't help it if we weren't born poor. You can't really expect us to be grateful for something that means nothing to us…how do we know what it is like to be poor? You often tell us that you were no less happy when you didn't have any money, so maybe it's actually better."

"Yeah," Henry picked up the line of talk, "when Jules was little, you liked to go to the dump to find things you could recycle. Other people went to the dump to throw things away. You went to get things. And then, when I was little, we already had moved to Europe. And now, you can't go to the dump anymore, because you don't need to. And besides, you don't need to recycle anything. So, are we supposed to feel sorry for you because you aren't poor anymore?"

It was true. There is no obvious connection between money and happiness. We were never happier than when we started out in life, when we didn't have a dime.

But your editor didn't particularly appreciate it when this truth was used against him by a couple of sharp adolescents.

"Well, OK…you're both right," we conceded. "We're not saying that money makes you happier, but it does give you more opportunity. You can do things when you have money that you can't do without it."

"Yeah, but if it doesn't make you any happier, why bother?" asked Jules, with a gloomy teenage slouch.

"Well, OK," we said. "Let's move on…"

The children were ready to move on, too, but to where? We wanted them to understand something, but we weren't quite sure what it was. We stumbled on, feeling a bit like Napoleon advancing on Moscow through the November mud. We were pretty sure we would get there, but we weren't too sure we'd like the place.

"All I am trying to tell you is that I have had the good fortune to have known both wealth and poverty. It has given me a wide perspective on money and I'm trying to pass on to you some of what I've learned. I also want to tell you about the business that I am in and invite you to participate in it, too," we continued.

"I don't want to go into business," said Edward, with the sang-froid of a 12 year old, "I just want to do something where I can make a lot of money."

"Well," we replied, "usually you make money…in business. You can earn a good living as a doctor or a computer repairman, but if you really want to make money, you generally do it in a business of some kind."

"But then you have to be a businessman," said Jules, interrupting. "You have to wear a suit and act like a jerk."

"Wait a minute, Jules, you know that's not true. I'm a businessman. So, are all those movie producers you admire so much," we noted. "But, let's move on…"

A brief pause.

"When you grow up," we continued, "all of you will have to do something, too."

Here, the ground began to sink beneath our feet. That they would choose to do nothing was part of the reason for our family meeting. But now we had just dismissed that possibility, even though we knew damned well that it was just what we were worried about.

Others seem to worry about it, too. Warren Buffett says he is leaving his children "enough so they can do anything, but not enough so they can do nothing."

He hasn't met our cousin, Bob. With very nearly the same blood gushing through his veins as through ours, Bob has reached the age of 50 and done nothing at all…quite well. He has had a few jobs here and there…mostly part time…often itinerant. The rest of the time, he collects unemployment compensation, welfare, or he is supported by the family in one way or another. He hardly lives well. He has no money, but he still does almost nothing, which makes us wonder how little moolah Warren intends to bestow on his children. No amount is too small, we conclude, to overcome sloth and indolence in some people.

Behind Buffett's idea is an ideology…a theory…an idea that everyone should start out in life at about the same level. It is as if life were nothing more than a game of baseball, where kids all pick up gloves and bats at the age of five or six…and then the best players rise to the starter positions. You wouldn't put a kid in the Yankee's starting line up just because he was Mickey Mantle's son. Nor should you make another kid rich just because his father got lucky. Everyone has to compete. Everyone has to start out even - just to make the game fair.

But even baseball isn't all that fair. What about the kids with gimpy legs or crossed eyes? Some kids are better prepared than others, by nature or by their parents. Why should it be any different for the game of money? Why shouldn't a parent give his children everything he can…every bit of capital and batting practice…every insight…every advantage from experience, age, and bank account?

Nobody, after all, really starts out with a blank slate. Why not give your children a slate that will be useful to them?

But at least, on the "you have to do something" point, we took it as a good omen that none of the children challenged us; maybe they all will do something after all. So, we kept going.

"It's up to you to decide what it is you'd like to do. Naturally, I'd like for you to join me in the family business. What's that? Well, you know…we write, we edit, we sell information, ideas, opinions and recommendations. It's just like any other publisher."

Here again, we knew we were sliding over thin ice and in danger of sinking down to our knees. First, the children really didn't know much about the business, so there was no point in trying to describe it in theory; it wouldn't mean anything to them. But, they also sensed that it was not "just like any other publisher," by which they mean Harper & Collins, Harry Potter, and the New York Times. Some explaining seemed in order:

"We are publishers," we started, "but we don't generally publish things for a mainstream audience. We focus on the things that are not yet in the mainstream. We focus on the ideas and opinions that most people don't have. Why? Because that's the only way investors can really make any money. They have to get on trends before others get onto them. Otherwise, they are fully priced."

We didn't want to get into a long discussion of the theory of contrarian investing since Edward's attention span lasts no longer than the time it takes a baseball to break a window. We had to come to the point.

"It's a special kind of publishing that requires a special kind of personality," we said.

"Yeah," Jules offered an insight. "Someone who's not afraid of embarrassment."

"Well," we replied, "I don't know about that, but you can't be afraid to say what you think even if it is very different…or especially if it is very different…from what everyone else thinks. You can't make any money by buying Wall Street's stock-du-jour, for example. And so, when you tell people what you are buying or what your are thinking, it always sounds a little far-fetched, kooky or 'out there.'

"But we're getting off the subject. The point is, this is a business that you could take up. And of course, we'd be proud and happy if you did. On the other hand, your mother and I would be just as happy and proud if you decided to do something entirely different, provided it was something that you really wanted to do.

"Now, of course, if you go into the business with us, you won't get any special treatment in the business. You won't be made vice president of the company next week, just because you're the owner's son. It is like a baseball game. We can get you a tryout for the team, but it's up to you to hit the ball."

Even here too, we had our silent doubts. So much of what happens in life is the result of expectations, and the boss's son has a huge advantage since people expect him to move up quickly and eventually take over. If he is not suited to it, he may never do so, but expectations alone can carry him a long way.

Expectations work on everyone. On one side of our family, children are expected to go to college and then into a profession. They all do. On the other, children are expected to find a place working as a clerk at the Department of Motor Vehicles…or stocking the shelves of Wal-Mart. They usually do that too, though they occasionally get tired of it and stay home to watch TV all day. There again, who can say the playing field is flat, when so much depends on which side of the family you come into?

When you make an investment, the last thing you want is a level playing field. Assuming, as the SEC does, that everyone actually has the same information to go on, an investor's results would be completely random. He'd win sometimes. He'd lose sometimes. Just as if he were playing a slot machine at Las Vegas, where everyone faces the same odds. And since it costs money to play - the House has to make money somehow - over time he'll lose money. Eventually, he'll lose all his money, which is just what happens to most investors.

That's why you don't want to make an investment on a level playing field. You want to play the game with the field tilted in your favor. You want better-than-even odds. You need an advantage over other investors - the kind of advantage that comes from knowing something they don't know or understanding the facts better - or just differently. That's why the insiders, the rich, and the experts make money, while the lumpen investoriat usually loses it.

Likewise, you want to try to tilt the playing field in favor your children. Eventually, what they are will determine how they turn out, and naturally, you want to make them the best people they can be. But no matter what they are, you still want to give them a good push as they start out in life. You just don't want to have to be pushing forever.

"You children can do whatever you want and we will help you," we continued. "But we don't want to help too much. So, if you don't want to go into business with us, that's fine. But you have to find something else to do. We'll support you. We won't cut you off on the day you get out of college, even if you want to be an actor or a singer…for example.

"That's the advantage of having a little money…you can afford to take the time to try to develop your talents and interests, even if they aren't immediately profitable. That was something I couldn't do when I was starting out, but I'm happy for you to do it. You don't have to go to work right away just to support yourself. But if you decide to do something like that, you can't stall and lie around, either. You can't expect us to support you all your life. For one thing, we don't think that would be good for you. For another, we don't have that kind of money.

"Oh…and I should tell you, you shouldn't count on inheriting any money from us either."

"Why not?" Henry wanted to know.

"Because money you don't earn can have a corrupting effect," we said. "We'll help support you…and help you get started in something you really want to do. We'll even try to leave you with a business that you can develop and use to make money. But we won't leave you a pile of cash. Besides, all our wealth is tied up in property and the business. You know how I like fooling around with these old houses. Well, when I go, I'm leaving them to you. That is, I'm leaving you a lot of work to do…not a lot of money to spend."

"Are you kidding, Dad?" Jules chimed in. "As soon as you're gone, we'll have this place up for sale and we'll take the money and buy a condo at the beach…where there are no shutters to paint…"

"And no stone walls to put up, " added Henry gleefully, "and no gypsy wagons to build."

"And a TV in every room," Edward added, getting into the spirit of it.

"We'll sell the business, too," Jules went on. "You have to work all the time…I don't want to work like that."

"But don't worry, Dad," said Henry, generously. "We won't sell the gypsy wagon; we need somewhere to store our video games."

Regards,

Bill Bonner
The Daily Reckoning

Editor's Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

In Bonner and Wiggin's follow-up book, Empire of Debt: The Rise of an Epic Financial Crisis, they wield their sardonic brand of humor to expose the nation for what it really is - an empire built on delusions. Daily Reckoning readers can buy their copy of Empire of Debt at a discount - just click on the link below:

The Most Feared Book in Washington!

--- Advertisement ---

---------------------

Pictures from Squanderville…the capital of the Empire of Debt!

Empire of Debt Slideshow

--------------------------

Become an Internet pamphleteer of sorts. Tell your friends what they are missing:

Refer a friend to The Daily Reckoning

--------------------------

Have you entered the Blogosphere? Join us:

Daily Reckoning's Desidooru Saloon

The Daily Reckoning is FREE!
Click below…

The Daily Reckoning is FREE! Click below…