An Air Of Fin De Bubble

You can measure centuries literally…by the pages of the Gregorian calendar. If that is your yardstick, the 20th century will end on the last day of December in the year 2000.

Of course, almost everyone is prepared to celebrate the end of this century on the last day of December of in 1999. By the following December, the new millennium will seem old hat. (…already does… Addison)

But you can also look at centuries in terms of the “spirit of the age,” or zeitgeist.

In that sense, the 19th century really ended, and the 20th century began, one day in August, 85 years ago. On that day, The Archduke Ferdinand of Austria, on an imperial visit to Sarajevo, was shot by an anarchist. This set in motion a whole series of events and mistakes that ended the “fin de siecle” spirit of the Edwardian age. No one really intended for the war to begin as it did. Nor could anyone scarcely imagine the horrors that it would unveil. But bad things happen, without anyone, good or bad, intending them. Now we are coming to another end…and another beginning. The 20th century is coming to a close. But it will really end when the Fin de Bubble zeitgeist gives way to something new.

People at the end of the 19th century were very optimistic. Apart from brief “panics” on Wall Street, which affected few people, the economy had been growing rapidly since the close of the war between the states. There were only two back-to-back recession years since 1869. Plus, people had seen the awesome power and payoff of the industrial era. Printing technology had become so cheap that even the lower classes had learned to read and were reading newspapers. Trains and telegraph lines had connected the East and West coasts. Subways were constructed. The Eiffel Tower in Paris proclaimed the almost infinite possibilities of engineering and the machine process. It looked as though it would be onward and upward forever.

This fin de siecle attitude lasted for many years… throughout the “Gay `90s” and into the next century…until that August day 85 years ago. Then, it was all over. The can-do spirit of progress, based on faith in bourgeois ideals and machine-age engineering disappeared, perhaps forever.

On our recent visit to Le Dorat, we discovered a little of the town’s history. During the long warfare between England and France that dominated this part of Aquitaine in the middle ages, Le Dorat was often on the front lines. In one instance, the town was betrayed by an English sympathizer, whom raised the gates so the enemy could invade. Later, the traitor was drawn and quartered, with a quarter stuck on a pike at each of the town’s four entrances. Whether this was done as a warning, or as revenge, we don’t know.

“Fortunately,” said my mother, “things like that don’t happen any more.”

This, too, must be a sign of Fin de Bubble thinking, in which the historical tableau of my mother’s own time has been airbrushed to remove the unpleasant episodes. My mother served in the army during WWII. While she looked after German prisoners of war in Texas, other German prisoners were sent to labor camps in Russia, where they invariably died of starvation and over-work. Of the 700,000 German soldiers taken prisoner at Stalingrad, only a few hundred lived to return to their homeland after the war. While my mother and her Jewish friends in the WACs showed propaganda films to GIs on their way to Europe – Kill or Be Killed was a popular show – the Nazis rounded up Jews wherever they went. The population of Eastern Europe’s Jewish Pale was almost completely wiped out, a victim of machine-era efficiency.

Fin de Bubble thinking ignores unpleasant history. Just as barbarism is thought to be a thing of the past, so are economic cycles, panics, inflation, real war with real casualties, recession, gold and unemployment thought to be barbaric relics. Fin de Bubble is a period in which the nastiness of markets and life itself are airbrushed out. We see only the good side…the possibility that Amazon.com may become a huge, profitable business that grows at 70% per year indefinitely and produces a 10% profit margin – rather than the more likely reality…that the company never produces a profit, its shares decline by 95% and it is eventually abandoned by investors and taken over by creditors.

Fin de Bubble thinkers believe that people can borrow more and more and thereby increase economic activity and wealth. They think a huge Internet revolution can sweep the globe… and produce only favorable effects on existing institutions. They think savings are unnecessary and leaving money in the bank is almost criminal negligence. They think corporate profits can go down…and still corporate share prices should go up. They forget the fact that the dollar has lost 94% of its value during my mother’s lifetime and now believe it will remain stable forever.

The Fin de Bubble world is one in which paper assets of almost all sorts are priced for perfection. Trouble is, we live in an imperfect world.

Your correspondent,

Bill Bonner

Paris, France July 28, 2000

(A work in progress, the Contrarian Glossary was begun on August 26th, 1999)

FIN DE BUBBLE – This is the term I use to describe the spirit of our age. We live in a world, which is waiting for something to happen. In the meantime, people are all very optimistic about the future – especially the financial future. Like people during the “fin de siecle” period of the Gay ’90s and pre-WWI, they are impressed by technological progress and see few clouds on the horizon. WWI ended the “fin de siecle” sentiment. What Archduke waits to be assassinated so our fin de Bubble can be entered in the history books?

BED & BREAKFAST STAGE – This is a new phase in the life cycle of humans…wedged in between the career phase and traditional retirement. It usually kicks in when children have left home, careers have run their courses and a man’s balance sheet begins to look better than he does.

BONNER’S LAW – This one is eponymous. It describes the interaction of Moore, Metcalfe and the process of creative destruction. Moore and Metcalfe are used by Internet investors to justify high prices. Why not pay a lot, they say, when the whole industry is evolving at an exponential rate? Bonner’s Law predicts that the revved up speeds of creative evolution in the Internet marketplace will produce revved up rates of destruction too. Moore + Metcalfe = Creative Destruction squared. Investors may want to gamble on Internet companies. But they should pay very low prices, not high ones. Low prices recognize the truth – that the company is most likely to fail.

BUFFETT VS. GATES – This is shorthand for the conflict between the older, Graham and Dodd investment approach…and the younger, Bill Gates/Jeff Bezos wealth creation formula. The eminent Graham and Dodd investor, Warren Buffett, for example, won’t buy Internet stocks or even Microsoft…though he knows the company and plays bridge with Bill Gates. Internet investors, on the other hand, who tend to be younger, believe that Moore and Metcalfe trump Graham and Dodd. This technology is exploding so fast, they say, the old standards no longer apply. The old guys just don’t get it. Who will “get it” in the end remains to be seen.

America’s Last Great CAPITALIST – New Era advocates maintain that the end of communism and the rise of the Internet have ushered in a golden age of capitalism. Not so. Instead, capitalism is dying. Marx defined capitalism as the system in which investors put up the money to build factories…and workers were then exploited by them. This is no longer the case. The new workers don’t need capitalists to provide the machinery of wealth building. They own their own laptop computers. They’ve seized the factories. This is bad news for capitalists. Money no longer counts. It’s human capital that is important. This is the capital that workers carry around in their capitas. Microsoft’s main competitor, the Linux operating system, was built as freeware…an “open source” product that relied on voluntary efforts from programmers all over the world, cooperating without the benefit of payrolls or health insurance. No capitalists were involved. And no investors could profit from it. Linux is also made available free over the Internet to anyone who wants it. The pros say it is better than MS-DOS.

CHATEAU – This French word might be translated as “money pit” or “place for people who don’t like Internet stocks to lose their money.” By way of introduction, I am the publisher of a group of investment services, called Agora Financial Publishing. We have offices in Paris, London and Baltimore. I had a choice. I shuttle back and forth between these offices. But I chose to live in France and bought a chateau not far from the late David Ogilvie’s much larger pile. Chateaux are the only investments that have lasted – in a single family – for the very long run…a period of 1,000 years or more.

CREATIVE DESTRUCTION – The economist Josef Schumpeter came up with this expression. It describes the natural process of open markets: old companies and old technologies are destroyed by new ones. Dirigisme tries to block the forces of creative destruction. By contrast, laissez-faire, another French term, lets the chips fall where they may. Bill Gates, America’s Last Great Capitalist, built his company on the dirigiste model. Linux is an example of the laissez-faire approach. Gates created vast wealth. Linux, and/or the process of Creative Destruction, will destroy it. (…if not, the government will… Addison)

DIRIGISME – This is also a French term. It is the modern French version of Plato’s ideal form of government – where you get smart people together and they tell everyone else what to do.

DOLLAR – more valuable than gold…the dollar has nevertheless been going down in value since the Federal Reserve system was set up more than eight decades ago to protect it.

ESPERANTO MONEY – this is the term I apply to the euro. Esperanto was a made-up language designed to make it easier for people to communicate. It flopped. The euro will flop too. Gold – Gold is a heavy, yellow metal, rarely seen or spoken of. It is a barbaric relic that has been going down in dollar terms for the last 20 years. It is about the only thing you can leave on the seat of your car in Baltimore without worrying about the windows being smashed.

GAMBLING – what you do with your excess money when you are too lazy to invest the way Buffett does.

GRAHAM AND DODD – These are the guys who wrote the book on investing. Warren Buffett – their most brilliant student.

HEAD AND SHOULDERS PATTERN – Not to be confused with the dandruff shampoo, a head and shoulders pattern on a chart vaguely resembles the head and shoulders of a man. A very strangely shaped man. It is thought to be a precursor of a decline. But if the market doesn’t go down…the technicians take another look and tell you that it didn’t look like a head and shoulders after all. It was really a horse’s rear end.

HEART OF DARKNESS – where Internet investors go…the horrors.

THE INFORMATION AGE – the handle given to today’s post- industrial, post-modern economy. The successor to the Age of Ignorance, the Age of Information is characterized by such an abundance of useless facts and senseless data that, now, everyone knows everything…and almost no one knows anything.

INTERNET INVESTING – This oxymoronic term describes what people who don’t speak French do with their unwanted money. For example, they buy Microsoft, or our “River of No Return” stock, Amazon. The convention among Internet stock buyers is that the company is worth a p/e equal to it’s rate of growth. Thus, MSFT, growing at 25% per year, should sell for 25 times earnings. It sells for twice that much now…50 times earnings. That’s a lot of money for a mature company that is bound to be the victim of creative destruction. AMZN is growing at 70% per year. But the trouble is, it has no earnings. So you can’t apply the formula. Most likely, AMZN will never make money. Most likely, it will disappear…just as the 400 radio publicly- traded radio companies of the `20s disappeared…and the 497 auto companies.

INVESTING – This the activity that many people say they do but few understand. It involves studying the likely stream of income from an investment, anticipating its growth or decline and adjusting for risk. Most of today’s “investors” wouldn’t know a balance sheet if it bit them on the derriere – which, I predict, it will.

METCALFE’S LAW – Metcalfe noticed that a system like the Internet becomes more valuable the more people use it. Like the telephone, the first phone is virtually useless. The millionth, by contrast, is exceptionally useful. Thus, the value of the system itself increases exponentially as its use becomes more widespread. Another curiosity, Metcalfe’s Law helps explain why the dollar has been such a hit all over the world. Investment Biker, Jim Rogers, driving around the world with his girlfriend, Paige Parker, reports that he can use dollars almost everywhere – and in many places where even the government won’t accept its own currency. Dollars have become a worldwide medium of exchange – made more valuable simply because they are so ubiquitous.

MOORE’S LAW – a key to understanding new tech investing. Moore said that computer power would double every 18 months. Interestingly, statisticians use this device to ramp up the GDP figures…arguing that a computer purchase today is worth more than the actual dollars exchanged. They never applied this logic to autos or any other sector, but some $300 billion of these fictitious “chained dollars” have been added to the nation’s GDP.

SPECULATING – This is what you call gambling when your wife asks what you doing.

SAND, SMALL TOWNS AND OLD TOWNS – Where people go to have their mid-life crises.

SIGNIFICANT BASE FORMATION – This is what you get when you sit around and eat too many donuts while reading the financial news.

TRIFFIN PARADOX – The trouble with making a currency the world’s leading brand is that do to so, you have to print a lot of them…. and export them vigorously. Each dollar is an IOU from the government. The more outstanding… the weaker the issuer’s balance sheet, and the less each one is worth. Eventually, Triffin and Metcalfe will have to come to terms.

UNIFIED THEORY OF GREED (UTG) – The insight that we’re all greedy SOBs, but the real SOB is the guy whose greed – whether for power, money or love – is not held in check by his wife, the market or the law.

*** Oh my… Wednesday’s earnings warnings came home to roost on Thursday – and tech investors on Nasdaq flew the coop. The index plummeted 3.6% – 145 pts. – to 3,842… just a skosch above it’s June 14th low of 3,797.

*** Worldcom was tech’s biggest loser – down almost 6 to close at 39. Nokia got beat up, too. “We saw an adjustment of the ‘P’ in the ‘P/E’ ratio,” an analysts observed in Reuters, speaking of the index as a whole. Wednesday’s warnings “…forced a lot of people to reassess high-tech valuations.” No kidding.

*** AMZN, too, continued to get punished – second day running – for naughty earnings per share behavior. The ‘river of no returns’ closed the day at 31 – its most dismal showing since December of 1998.

*** The Nasdaq’s troubles sent shivers down the spine of the Asian markets, too. Investors “in Tokyo dumped high tech shares on fears of a prolonged slump in ‘new economy’,” this also according to Reuter’s. The Nikkei was down 2.12 percent to its lowest close since March 31, 1999. Korean stocks were down almost 5%. European analysts are expecting the tremors to make their way all around the world. Raphael, who covers La Bourse – the French stock market – here in Gay Paris, appears unusually chipper this morning… and since he’s a bargain hunter, my guess is, he’s expecting the same.

*** By contrast, however, the Dow – despite a late-day selling spree – finished up 69 points to 10,586. Oil and energy were among the strong sectors showing tech who’s boss.

*** Still Mr. bear appeared to be lingering close by. Only 1392 advanced whiled 1448 declined on the NYSE.

*** The S&P slipped a mite.

*** Could slumping earnings be evidence that the Fed’s attempt to hit the brakes is working? Who knows. But, “if Greenspan achieves a soft landing,” reports USA today “the economy will grow only about 5.5% in coming quarters, down about 2 percentage points from the growth that contributed to this strong earnings season… [in which case] it would be enormously difficult for profits to continue to grow about 20% a year.” Marc Faber sees the situation in significantly more dire terms. Faber: “The recent spate of corporate profit disappointments and the poor performance of so many equities belies a period of very disappointing profits – dead ahead.”

*** But there are alternatives… Steve Sjuggerud, investment director at the Oxford Club: “Because 7-year Argentine government bonds are currently paying 16%… if interest rates come down to 10% over the next two years, your total return on this plain-old government bond will be over 70%.” In fact, he’s figured out a way you can make even more from the Argentinean fixed rate system and the movement towards dollarization there. Might be worth a look.

*** Nothing happened in history today… at least nothing interesting. But you’ll be happy to here this: I spoke to Bill on the phone this morning. He’s reached Donegal, family in tact. He says the weather is beautiful… alas, Compuserve – our erstwhile ISP – not so much.

*** So… the hit parade continues: “An Air of Fin de Bubble” was first aired August 23, 1999. But it remains fresh as an Irish breeze… I’ve attached the Contrarian Glossary too. Mostly because I think it’s cool.

Thanks again for staying tuned…

Addison