A DR Classique, written three years ago today.
"Like a wet, furry ball they plucked me up…"
— Rupert Brooke
In August 1914, millions of young men began putting on uniforms. These wet, furry balls were plucked from towns all over Europe…put on trains and sent towards the fighting. Back home, mothers, fathers and bar owners unrolled maps so they could follow the progress of the men and boys they loved…and trace, with their fingers, the glory and gravity of war.
I found one of those maps…with the front lines as they were in 1916 still indicated…rolled up in the attic of our house in France. I looked at it and wondered what people must have thought…and how horrified they must have been at what happened.
It was a war unlike any other the world had seen. Aging generals…looked to the lessons of the American war between the states…or the Franco-Prussian war of 1870…for clues as to how the war might proceed. But there were no precedents for what was to happen. It was a new era in warfare.
People were already familiar with the promise of the machine age. They had seen it coming, developing, building for a long time. They had even changed the language they used to reflect this new understanding of how things worked. In his book, "Devil Take the Hindmost," Edward Chancellor recalls how the railway investment mania had caused people to talk about "getting up steam" or "heading down the track" or "being on the right track". All of these new metaphors would have been mysteriously nonsensical prior to the Industrial Age. The new technology had changed the way people thought…and the way they spoke.
World War I showed the world that the new paradigm had a deadly power beyond what anyone expected.
At the outbreak of the war, German forces followed von Schlieffen’s plan. They wheeled from the north and drove the French army before them. Soon the French were retreating down the Marne Valley near Paris. And it looked as though the Germans would soon be victorious.
The German generals believed the French were broken. Encouraged, General von Kluck departed from the plain; instead of taking Paris, he decided to chase the French army, retreating adjacent to the city, in hopes of destroying it completely.
But there was something odd…there were relatively few prisoners. An army that is breaking up usually throws off lots of prisoners.
As it turned out, the French army had not been beaten. It was retreating in good order. And when the old French general, Galieni, saw what was happening…the German troops moving down the Marne only a few miles from Paris…he uttered the famous remark, "Gentlemen, they offer us their flank."
Galieni attacked. The Germans were beaten back and the war became a trench-war nightmare of machine guns, mustard gas, barbed wire and artillery. Every day, "The Times" (of London) printed a list of casualties. When the generals in London issued their orders for an advance…the list grew. During the battle of the Somme, for example, there were pages and pages of names.
By the time the United States entered the war, the poet Rupert Brooke was already dead, and the life expectancy for a soldier on the front lines was just 21 days.
One by one, the people back at home got the news…the telegrams…the letters. The church bells rang. The black cloth came out. And, one by one, the maps were rolled up. Fingers forgot the maps and clutched nervously at crosses and cigarettes. There was no glory left…just tears.
In the small villages of France hardly a family was spared. The names on the monument in the center of town…to "Nos Heros…Mort Pour La France" record almost every family name we know – Bremeau, Brule, Lardeau, Moreau, Moliere, Demazeau, Thollet…the list goes on and on. There was a bull market in death that did not end until November 11, 1918…at 11 A.M.
For years after…at 11 A.M., the bells tolled, and even in America, people stood silently…recalling the terrible toll of four years of war. Now it is almost forgotten.
We have a new paradigm now. And a new war. The new technology has already changed the language we use… and is changing, like the railroads, the world we live in. We think differently…using the metaphor of free- wheeling, fast-moving, networked technology to understand how the world works.
We are fascinated by the new technology…We believe it will help us win wars with few casualties, as well as create vast new wealth…and a quality of life never before possible.
And yet, we are still wet, furry balls, too.
I will observe a moment of silence at 11 A.M.
November 11, 2002
P.S. The effects of WWI lasted a long, long time. In the 1980s, my father got a small inheritance from his Uncle Albert. "Uncle Albert?" I remember my father saying. "Who’s Uncle Albert?" The man in question was indeed an uncle…but he had been forgotten for many years. A soldier in WWI, Albert had suffered a brain injury from an exploding bomb… and never recovered. He spent his entire adult life in a military hospital.
"Is history repeating itself?" asked a headline at CNNMONEY.
The mainstream financial press is beginning to notice the similarities between Japan and the U.S.
Your editor laid a few of them before the crowd at the New Orleans Investment Conference where he was a speaker:
Between ’71 and ’85 Japanese stocks rose 500%. Then in the next 5 years, they went up at an even faster rate – tripling again by the end of the decade.
Ten years later, Wall Street followed, with stocks up about 500% from ’81 to ’95, and then tripling in the 5 years, ’95-’00.
In January of ’90, the Japanese stock market headed down and had lost 30% of its value 18 months later. In January (depending on what measure you use) ’00, U.S. stocks entered a bear market. They were down about 30% 18 months later.
Japanese householders never went so deeply into debt as their American counterparts, but the trend lines headed in the same direction. Savings rates in Japan fell 10 points during the boom, from about 20% down to 10%. In America, they fell 10 points too, but from near 10% down to near zero. In both countries, businesses and individuals borrowed more than ever before.
"There is no mystery to what is happening today," explained Doug Casey in his New Orleans speech. "The president and the Fed have urged Americans to spend, spend, spend in order to keep the economy going. This advice is so bad it’s almost criminal.
"Here is how it works. You get rich by saving, not by spending. You produce something in order to get revenue. And you spend money in order to live and do your work. The difference is what makes you rich.
"I can go out and borrow a million dollars. And if I spend it, my standard of living will go way up. But when I have to pay it back, my standard of living will go way down…
"Americans are now at the stage where they’re going to have to pay it back."
In both Japan and America, the bubbles were accompanied by all the usual rational explanations and folderol. The Japanese were all business geniuses in 1989. Ten years later, Jack Welch, Ken Lay, Jeff Bezos, Robert (?) Kozlowski and Michael Saylor were the geniuses and people who had bought their stocks thought they were better investors than Warren Buffett.
And in both instances, neither the public nor the experts were prepared for what happened next. ‘It is just a temporary slowdown,’ said the experts on Japan in 1991. ‘It will all be over by summer,’ said the experts on America in 2001.
But stocks did not go straight down and stay there. Instead, the two stock markets staged a series of alluring rallies – each one helping to convince investors to stay in stocks a while longer.
"If you look at the charts of almost any of these post- bubble price movements, you find the same pattern," warned Ian McAvity in his talk. "You see a powerful rally developing at this stage that should last for the next 6 to 9 months. That is what we’re seeing on Wall Street now, the beginning of this rally.
"But remember, it’s a rally in a bear market. The high hit in the next 6 to 9 months will probably be the high for the next 10 years."
Eric Fry was down in New Orleans with me. But he’s back on the job in New York this morning, with more stock market news:
Eric Fry, reporting from the Big Apple…
– Last week, the stock market showed once again that "it is better to travel hopefully than to arrive." Hopeful investors bid share prices higher early in the week as they eagerly awaited both the midterm election and the first interest rate cut of the year from the Fed. Once these events actually arrived however, the stock market headed lower.
– Despite the Republican’s surprising landslide-victory and the Fed’s surprisingly aggressive half-percent rate cut, stocks ended the week almost exactly where they started. The Dow gained 20 points to 8,537, while the Nasdaq added one point to 1,359.
– The U.S. dollar, meanwhile, did not even enjoy the transitory pleasure of traveling hopefully. It tumbled below parity, with the euro to 101.3 cents per euro. Gold responded to the greenback’s weakness by climbing $2.50 to $321.70 per ounce.
– "This is the bottom for gold," Doug Casey declared from the podium yesterday at the New Orleans Investment Conference. "It’s not just going through the roof; it’s going to the moon! This is the big one."
– Casey bases his prediction on what he considers the inevitable demise of the U.S. dollar – the currency he calls "a floating abstraction." Bearish predictions for the dollar are par for the course from folks like Casey and Robert Prechter. But now, even an incorrigible optimist like Sir John Templeton, who rarely neglects to praise America’s economic prowess, is joining the ranks of dollar skeptics. Speaking to the conference attendees live via satellite from his home in the Bahamas, Templeton called the prospect of a rapidly weakening dollar the "single greatest threat" to U.S. economic prosperity.
– "The biggest risk to the U.S. economy is its unfavorable balance of trade," Templeton warned. "No country has ever had such an unfavorable balance of trade. If foreigners get nervous, they could start to sell the dollar aggressively, and the results could be catastrophic."
– The entire U.S. Daily Reckoning brain trust – Bill, Addison and myself – convened in New Orleans last week for the annual New Orleans Investment Conference. During the four-day blitzkrieg of investment presentations, the various speakers fired off a broad range of ideas and insights. But no matter the speaker, one recurring theme emerged: the dollar is in trouble.
– On the very first morning of the conference, the Daily Reckoning’s own Bill Bonner took the podium to explain the "bright side" of the dollar’s demise – gold will go up! Bill prefaced his remarks by adamantly refuting his "sourpuss" reputation. He encouraged all the attendees to "look on the bright side of things…like we do at the Daily Reckoning."
– "I think it’s likely," Bill cautioned, "that the U.S. over the next ten years will follow in Japan’s economic footsteps. Our economy will struggle to grow and our stock market will probably continue sliding. But let’s look on the bright side," he said. "A severe economic contraction isn’t all bad. After all, during the great Depression of the 1930s you could walk into any one of the finest restaurants in New York City and get a table without a reservation."
– Bill also suspects that the dollar’s value will drop dramatically over the coming decade. "But again," he pleaded with the attendees, "Let’s look on the bright side. A falling dollar would be a great thing for gold!"
Back in Baltimore…
*** GE fell 4% on Friday, while the price of gold rose $2.90 last week (gold mining shares rose 5.4%). The dollar dropped sharply too, as Alan Greenspan and the Fed continued their march to zero. In fits and starts, the trends that we thought had to happen ‘sooner or later,’ are happening…later than we expected.
*** Remember the days when GE would announce earnings of ‘a penny more than forecast’ almost every quarter. Jack Welch was a hero. Money was all-too wonderful during the boom years; even an extra penny was enough to send GE shares up.
But busts follow booms, geniuses become morons and money isn’t everything, we remind ourselves. It is a little late to offer advice, but Welch might have done better to retire a little earlier, with a little less of it…and give it a little more readily to the wife he was trying to get rid of. If he had, he might still be a hero, rather than a greedy cad.
*** Today, at the 11th hour of the 11th day of the 11th month, Britain will observe 2 minutes of silence in commemoration of the armistice in Europe at the end of WWI. The war was a disaster from nearly every perspective. Neither the Allies nor the Central Powers had anything to gain. Still, the soldiers pounded away at each other for years – in the most costly and lethal conflict in history. No one knew why the war began. No one knew why it continued. And when it was over, no one knew what had been gained. More below…
*** "You’re full of sh**," said a dim fellow in a white leisure shirt to your editor at the New Orleans conference. What had set him off was not money, but politics.
Among the speakers at the conference was General Hugh Shelton, retired head of the Joint Chiefs of Staff. The old soldier seemed like an intelligent and decent man. But like all good soldiers, he is almost as big a blockhead as the man in the white shirt.
We do not say that to criticize. Far from it; blockheadedness is what we admire in a military man. It is all very well to kibbitz and canoodle, the way we do here at the Daily Reckoning, but in a shooting war, the last thing we want is a man who asks sticky questions. Instead, we want a real blockhead doing the shooting for us.
A real fighter goes about his work the way a fat man devours a cream puff. He doesn’t stop to wonder if it would be a good idea…or if there might be some better way to do it. He just stuffs it in his mouth and goes on to the next one with no thought of sparing himself.
"Fighting terrorism is not a matter of black or white," I had said to the man in the white shirt before he raged off. "There is a lot of gray in it."
Of course, there is so much gray in our lives, who can blame a man for wishing it were otherwise? How much simpler it would be if it really were ‘us’ against ‘them,’ boom or bust, black vs. white, good vs. evil, bear vs. bull? And how much better it would be if we could tell the difference?
A good soldier doesn’t worry about it; he goes straight at the enemy without an arrière pensée in his brain. But the trouble with many is not that they don’t have second thoughts, but they often don’t have the first one either.
"Indirection," wrote the great military strategist, Liddell Hart, is the key to success. The direct approach rarely works, he points out. Instead, what works is the same thing that works with investing – hitting ’em where they ain’t, where they least expect it. But this requires a supple, innovative mind and a contrarian attitude. The great generals – Napoleon, Guderian, MacArthur, and Stonewall Jackson – were capable of it. But most military men are not. They are good at fighting wars, but bad at winning them.
*** "Well, what do you think?" Sophia, my 20-year-old daughter, has a new boyfriend. Maria and I met him on our trip to West Virginia.
Your editor didn’t know what to say. He felt as though he had been asked to make an important market call and was not sure how long he have to live with it.
He was tempted to give a frank assessment, but decided to hedge.
"Well, he seems nice enough."