Investing in the Bubbles of Tomorrow - Today

Investors are always looking for the next big thing to make them rich…but how can you be sure that your "sound investment" doesn’t turn out like the tech bubble of the 90’s – just a flash in the pan? Chris Mayer explores…

"Mass delusions are not rare. They salt the human story."

– Garet Garrett, A Bubble That Broke the World (1932)

Every generation has its "New Age" or "New Era." They are catchphrases that liberally salt financial history. Even in the 1930s, during the Great Depression, one can make a case that a New Era of innovation was afoot. Social historian Frederick Lewis Allen, in his retrospective book on the 1930s, Since Yesterday (originally published in 1939), gives us ample evidence of exactly that.

"There were visible promises," Allen writes, "if one looked about one, of what might prove to be a new industrial age." He writes about sleek new trains made of duralumin and stainless steel. By 1936, there were some 358 cars in operation or in construction, and they attracted crowds that marveled at this "symbol of the new America" wherever they went. Moreover, these cars were air conditioned – as were an increasing number of restaurants, shops and movie theatres.

The automobile manufacturers were turning out cars with sweeping curves and stunning bulges. They were streamlined, more efficient, more comfortable and faster than any cars before them. They drove on new highways with cloverleaf intersections and overpasses, zipping about to different towns, when before it would have taken far longer.

Ocean liners were setting new speed records and also topping previous marks for size. And what about airplanes? "The great silvery Douglas DC-3 of June 1936," Allen tells us, "had a cruising speed of 200 mph [compared with] the 100 mph transport planes of 1932."

People would take tours of Rockefeller Center in New York, one of the impressive skyscrapers to rise in the United States during the 1930s, and wonder at the gleaming new materials and dreamily imagine the skyline of a new metropolis.

The innovators then were not software developers or computer manufacturers. They were chemists and metallurgists producing new and lighter materials, including steels; mixing nickel, chromium, tungsten and other metals; and creating plastics and new fibers.

New Eras of Innovation: Technology and the World of Tomorrow

People fell in love with technology and the world of tomorrow, as they had in years past and as they still do today. The hunt for the next big thing and the never-quenchable thirst to get rich quick propelled investors to spin out great theories of what the future would look like. But unlike armchair philosophers and hobby futurologists, they backed these visions with their money.

"Was there, perhaps, some new machine, some new gadget, the furious demand for which would set in motion the boom," Allen wondered, "something like the automobile or the radio?" In the 1930s, investors thought they had found it in, of all things, prefabricated housing.

According to Allen, a bacteriologist named Arthur Sherman built a house on wheels that could be pulled behind his car when his family went on vacations. It attracted a lot of attention, and he built more and displayed them at the Detroit Auto Show in 1930. Before long, he was making them on a larger scale, and hundreds of other manufacturers jumped in. People started living in them year round.

By 1936, the number of these trailers surged to 160,000 by some estimates. Perhaps the peak was reached when, on New Year’s Day, Florida observers counted them entering the state at the rate of 25 per hour. Economist Roger Babson declared that half of the population would be living in trailers within the next 20 years.

What a vision, Allen notes, "provided one did not focus one’s attention on real estate values, taxes, steady jobs, schooling for the children, sanitation problems and other such prosy details."

By 1937, the boom collapsed under the weight of a saturated market and misplaced optimism. It was caught, too, in the context of a larger economic crisis. There was also a big break in the stock market, cutting the Dow Jones Industrial Average in half, from a high of 195 in March 1937 to sickening low of 97.46 by March 1938 – so much for the Next New Thing.

"The history of the stock market is the history of forgetting," wrote that market sage F.J. Chu in his book, The Mind of the Market. Anecdotal evidence is seen in how soon the 1937-38 collapse followed on the heels of its more famous cousin, the 1929-32 debacle. How quickly investors forget; how wicked is the bear market at work.

Financial survivors of the 1937-38 meltdown were like the survivors of other panics – they had cash; were not overburdened with debts; were patient; and stuck with the tried-and-true, having shunned the latest investment fads.

Many of the investments in the new technology of the 1930s failed to deliver profits to investors, at least immediately, just as the billions poured into technology in the late 1990s never saw much of a return, if any.

New Eras of Innovation: The Parallels With Today

One would think that the slash-and-burn market of 2000-02 would have quenched the speculative fires of the investing public a bit. Not so, says Fred Hickey, editor of the Hi-Tech Strategist and recently featured in Barron’s annual roundtable. "I’ve been following tech stocks since the late 1970s," Hickey began. "I’ve seen valuations this high only one other time, 1999 and 2000." Well, we know how that party ended.

Valuations! Here Hickey introduces the nub of it all. Technology is not always a poor investment, of course. It is poor at a price – today’s prices, specifically. But it’s not just tech stocks that are expensive. Much of the market is pricey. After all, for the last 20 years, the total return on stocks, as measured by the S&P 500, has averaged 18.5%. The longer-term historical average is about half that. With valuations on the high end compared to historical levels, it is not unreasonable to expect lower-than-average returns going forward.

In this environment, those verities of investing become even more important – cash, low debt levels, patience and the tried-and-true – because they will see you through any meltdown and sow the seeds of the next successes. In the ashes of past prosperity, the future’s fortunes tend to grow.

Regards,

Chris Mayer
for The Daily Reckoning
February 23, 2005 —
Nicaragua, Central America

Being a conservative investor is important to Mr. Mayer…he says that as 2005 goes on, there will be some surprising opportunities for profit – and those who invest in the right places will make out like bandits.

Chris Mayer is a veteran of the banking industry, specifically in the area of corporate lending. A financial writer since 1998, Mr. Mayer’s essays have appeared in a wide variety of publications, from the Mises.org Daily Article series to here in The Daily Reckoning. He is also the editor of the Fleet Street Letter.

Here we are. It is 4:30 AM in paradise…and yet we think about how much George Soros’ back must be hurting…

We read in Malcolm Gladwell’s new book, Blink, that George Soros relies neither on charts or graphs, nor on fundamental analysis for his market timing. Instead, his sell signal is a pain in the back.

"My father will sit down and give you theories to explain why he does this or that," Gladwell quoted Soros’ son in saying, "but I remember seeing it as a did and thinking, ‘At least half of this is bull.’ I mean, you know the reason he changes his position on the market or whatever is because his back starts killing him. He literally goes into a spasm, and it’s this early warning sign."

Somehow, Soros has transmuted his instinct into direct physical pain. Here at The Daily Reckoning, we claim no such indicator. But yesterday’s news gave us a feeling that something was up.

And here we must pause to remind readers: "past performance is no guarantee of future performance." Thank God. We think we see a turnaround coming. We have seen it coming before – on several occasions. It never came. Until, perhaps, now.

On Monday, the dollar was sold off. Traders said they didn’t like this or didn’t like that. Often, traders have no idea why they do what they do, as Gladwell points out in Blink. They do it out of some kind of instinct – which is probably some form of distilled experience. He says that giving traders more information doesn’t help them. In fact, it can cause them to make worse decisions. (Similarly, Nicholas Taleb, in Fooled by Randomness, explained that old traders were generally better than young ones; they have proved that their instincts were good.)

And today comes news that South Korea’s central bank has decided it has plenty of dollars already, thank you very much, and doesn’t particularly want any more. On European exchanges, the dollar is falling this morning. And George Soros remarked that it will fall further.

While the dollar goes down, naturally, the things that it buys on the world market go up. Copper is at a 14-year high. Gold rose seven dollars yesterday – to $436, far beyond our most recent buying target. Oil shot up to $51. And the Dow was hit for a 174-point loss.

While we have no real idea when an event will happen, we are full of ideas about why it will happen. So often have we stated them in these letters that readers are getting tired of hearing about them. Since we are on vacation this morning, we will spare you the arguments. Instead, we give you a number: 305%. According to a chart in Barron’s that’s the total amount of credit market debt in the United States compared to GDP. Well, okay…we give you a few more numbers: Not only is there three dollars in debt for every one dollar of output…that number approaches two times the level reached in ’29 – when debt rose to 176% of GDP.

And, okay…we’ll give you another guess: it could be that the sell-off of the dollar has moved into its second stage. The first stage took the dollar from 88 cents per euro down to $1.35 per euro. Anyone – notably central banks – holding dollars rather than euros during that period lost a lot of money. But then, the bear market in dollars was widely considered to have come to an end. Now, it appears that the bear market continues. We believe the dollar will go to $1.50 per euro in this next stage. But we are nervous about it. Against all the fundamentals in favor of a further dollar decline is one big fundamental in favor of a dollar relatively strong dollar – American debtors desperately need them. Eventually, we have little doubt that the dollar will go to zero. But we are admittedly weak on timing. For the moment, we will trust George Soro’s back spasms.

More news, from our team at The Rude Awakening:

————–

Chris Mayer, reporting from Baltimore…

"In today’s market, investors are reaching for high-yield debt… Sometimes called ‘junk bonds,’ they have also been dubbed ‘equities in drag’ for the high returns they can deliver."

————–

Bill Bonner, back in Nicaragua…

*** For the first time in three months, crude oil closed at $51 a barrel on Tuesday…the price of heating oil and gasoline rose, as well. CBS Marketwatch quoted our commodities expert, Kevin Kerr on the subject…

"The cold snap and snowstorm in the Northeast has reminded traders that winter is far from over and there are still a number of ‘degree heating days’ left in 2005."

On the rising price of gasoline, Kevin Kerr commented:

"Gasoline prices continue to climb on the back of record demand, [and there are] fears that gasoline production may be severely curtailed if we don’t get refineries working at full capacity right now. That just isn’t going to happen as long as distillate demand remains high."

*** We woke up this morning and wandered out to the swimming pool. At 4AM, it was bright outside, lit by a full moon reflected on a broad, shiny ocean. Two thoughts struck us: what a beautiful place…and what morons we are.

As to the first, we hardly need to describe it. The Pacific Coast is stunning. Under a full moon, with few lights on the ground, the place must take the gods’ breath away.

By contrast, the thought that practically collapsed our lungs was that we once owned this entire stretch of coastline – miles of it. It could have been our own, private, paradise. Instead of leaving it alone and enjoying it, however, we decided to improve it – and sell lots. The idea must have been to make money. But now we wonder what we were thinking. Why would we want to make money – if not to enjoy it? And how would we enjoy it? By being able to afford a place like this! And now we come to the realization that we have spent so much money trying to make the place attractive to buyers, we have made not a single dime on the project. And worst of all, we no longer own it! Now it is a community. We are homeowners, along with everyone else…and wondering if we should try to buy the lot next to us, for twice the price we sold it!