05/30/00 “Fortune is rightly indignant at those who break with the customs of the past.” Winston Churchill, named Man of the Century by “Historia” magazine
My calendar says that today is the day traditionally set aside to remember those who fought in America’s wars. Not one to trifle with tradition, I will do so.
The contrarian insight is a traditionalist’s one. Certain market relationships have endured for many years. The relationship of price to earnings, for example. There is no law that says P/Es can’t be higher…or lower…in the future. But the person who bets that they will be substantially different for a very long time is taking a big risk. He is betting that something fundamental has changed…maybe in the value of capital, or perhaps in the nature of man. Perhaps capital will be worth more in the future than it has been in the last 100 years. And maybe there really will be a New Man with different attitudes towards time and money.
But the odds of there being something really new are slim. Between phases of manic euphoria and manic depression, things tend to regress to the mean — that is, where they traditionally have been. And the mean does not change often or quickly.
I have compared the manic phases of market history to the manic phases of political history. Normally, people live with a bit of violence in their lives — murders, assault and battery, riots. And occasionally, full-scale wars break out. Even then, they are usually contained within “normal” bounds.
The Yanomamo Indians practice a form of institutionalized savagery in which they beat each other over the head with clubs until one dies or passes out.
The Greek city-states met one another periodically in an almost ritualized, and deadly, shoving match. If they had actually wanted to destroy the enemy town, they might have assaulted at night, burned the towns and slaughtered the inhabitants. Instead, they formed up neatly on a level field and marched towards each other.
On some occasions, armies would wait patiently for their enemies to form up — including a delay for a distant town to bring up its troops. It wasn’t proper to go after an enemy before he was ready. Even if you won, it would not be a victory you could enjoy. Dishonor was, after all, worse than defeat. “Come back with your shields,” said the Spartan mothers to their sons, “or upon them.” Don’t run away, in other words.
Today, we honor those who did not run away — those who faced the mania of war…who did the right thing and had the right stuff when it was needed.
Flamm Dee Harper had to struggle to raise the American flag in the little field near Montmorillon where he had crash-landed 56 years ago. The mechanism was stiff and difficult. He struggled, too, to make sense of it. The war, that is. He proved he could fly. He could fight. He was courageous.
But the “why” tripped him up. There, he couldn’t quite turn the crank. What was the point? When the mania is past — like a bubble that has popped — you look back…and it is a puzzle. Why would he have ever done such a thing? What was going on? What did it mean?
Russian soldiers at Stalingrad were urged to use their bodies as “concrete and stone” — to sacrifice themselves to stop the Germans. Many did. But for what? So they could be ruled by Russian-speaking tyrants rather than German-speaking ones?
Col. Harper did not dwell on the subject. He merely said the war was “stupid.” And then he fell back on the familiar cliches that seem to work for generations of Americans. It was a fight, said the old soldier, for freedom.
“We are,” said Adolph Hitler addressing Reichstag just before the Luftwaffe began dropping bombs on London, “in the middle of the tremendous struggle for the freedom and the future of the German nation…”
Everyone fights for freedom. While the Russians died in the millions to save Stalin’s slave regime, Harper and millions of Americans, it turned out, fought for the freedom of Roosevelt and subsequent administrations to impose even greater restrictions and higher taxes.
The American mainland has never really been seriously threatened by invasion. But every war for freedom has led to less liberty for Americans. Not necessarily immediately or even by consequence — but that has been the drift of things.
No one wants to think that their dead relatives were on a fool’s errand. And it is impossible to know what would have happened had not history unrolled as it did. But there is an element of stupidity in all America’s wars — maybe in all wars.
Reading the histories of World War I, it is not at all clear that some useful purpose was served by sending American troops. “Lafayette, we are here,” announced Pershing on his arrival. But one could almost hear Lafayette replying from his grave: “Why?”
The combatants were nearly exhausted when the United States entered the war. Like a fresh flood of money into a tired bull market, American troops turned the tide…forced Germany to accept defeat…and helped create such an awkward peace that another war was almost inevitable.
When that inevitable war began, WWII, it began awkwardly, too. After the British had been routed from Europe and the French had surrendered, the British went on the attack. But they didn’t attack the Germans; they attacked the French! In order to avoid letting the ships fall into German hands, the British fired on the French fleet in Oran, North Africa, and sent 1,200 French sailors to their deaths.
And then there was Korea and Vietnam. In each event, freedom was once again at issue. The soldiers did their duty. They avoided the “why.” But they fought when they were asked…and died when it was required of them. Even in the stupid wars.
Pascal said, “we understand more than we know.” The soldiers must have understood something we will never know. And they can’t tell us.
Your ever more humble correspondent,
Bill Bonner
Paris, France May 30, 2000
*** Wall Street was closed yesterday for Memorial Day. It was not actually Memorial Day yesterday, but our memories of the dead are not so inflexible that they can’t be brought forward 24 hours for the convenience of the quick. That way, the masters of the universe got to spend an extra day at their beach homes in the Hamptons.
*** We got no such holiday here in France. It was work as usual for me and my new assistant, Addison. But we will have the last two days of this week off — in observance of Ascension Day. But not even the ascension of Christ will stop the “Daily Reckoning.” It will appear as usual.
*** Beach houses are getting more expensive, according to “Barron’s.” Sales jumped 9.3% from two years earlier. Prices paid for luxury second homes — say, those on Long Island or Lake Tahoe — have made “mind-boggling” increases. GM’s Jack Smith has a summer home in Osterville, Mass., where an oceanfront house that sold for $3.5 million in 1998 changed hands for $5.5 million in March 2000.
*** Floyd Norris reports in the “NY Times” on the progress of the Class of ’99 IPOs. Representative of the group, he says, is a company called FreeMarkets Inc. The company provides a business-to-business auction site. It went public in December, at the height of Internet speculation, and its shares leaped 483% before the first day of trading was over. But by Friday, the same shares could be purchased at an 89% discount. “Anyone who bought on the first day of trading,” says Norris, “is down 87%.”
*** Meanwhile, the celebrated Internet Capital Group — which rose an astounding 2,733% in ’99 — has fallen 85% this year. Is it now a value stock? Well, it’s still trading at twice the price that it ended its first day of trading and more than four times the offer price.
*** “Amazon is history” proclaims a “Cool Post” on the SiliconInvestor.com site. The teenaged dot-com company — awkward, self-absorbed, unprofitable, volatile, insufferable — may never grow up. “My honest opinion,” says the poster, “is that the most this stock can be valued at is $10/share and even that is generous. [It has an] absurd market cap…its Price-to-Sales…every ratio is obscene.”
*** Longtime “Daily Reckoning” sufferers will recall that I have been less than sympathetic towards Jeff Bezos’ creation. This River of No Returns stock would be expensive at half the price. But Amazon was drifting happily on the tides of fashion. Dot-coms were in style and Amazon was one of the biggest. But now the above post seems to signal a shift in current. Amazon.com is struggling against the tide.
*** Another sign of the shift in investment fashions was reported in “Barron’s.” “For the latest period reported last week ended May 25,” writes Alan Abelson “more money flowed out of [mutual] funds than flowed into them.” The imbalance totaled $7.6 billion, according to the eagle- eyed Bob Adler at AMG Data Services…What’s more, the exodus was across the board, encompassing every type of mutual fund, conspicuously including the heretofore sacrosanct growth funds.”
*** Also registered in “Barron’s” is an interview with a “tech-buying money manager,” who once managed money from the Clintons. What’s interesting about this is that the hero of the story — Joseph McNay of Essex Investment Management in Boston — sold off many of his tech holdings. He was once the second largest shareholder in Amazon.com, for example, after the Bezos family. Now he owns none of the stock.
*** I previously announced the end of the New Era — on the occasion of the release of productivity numbers earlier in May. No big increase in productivity, no New Era. Another thing the New Era theorists predicted was larger corporate profits. Well, put another nail in the coffin. Because corporate profits declined, not rose, in the first quarter. They rose 7.6% year over year — no more than profits have generally risen over the last century, and less than the fourth quarter of last year.
*** “A high-tech world is a metal-hungry world,” says Real Asset Investor Dan Ferris. “We just bought the largest zinc miner in the world and the largest publicly traded copper miner in the world.”
*** Seventeen of the 19 states in the suit against Microsoft have asked Judge Thomas Jackson to break the company up. In the one day of trading since the announcement, MSFT lost 6% of its value. Today it opens at $61.50, down from its Dec. 27 high of $119 and change.
*** “Not too long ago I asked [Alan Greenspan] about the tremendous growth of the money supply as measured by M- 3,” says Rep. Ron Paul in J Taylor’s Gold and Technology Stocks. “[H]e said that he had no control over M-3 and that it was becoming increasingly difficult to define money.” Then Dr. Paul asked, “if you can’t define the money supply, how can you control it?” Greenspan: “Not only is it difficult, but it is impossible, to control something you cannot define.”
*** Has OPEC put a ceiling on the price of oil? “We already have [had] 10 continuous days above $28,” said a Venezuelan oil official thought to be speaking for OPEC, “and if this is maintained…the market correction mechanism will be automatically triggered with an increase in production.” If the oil price stays high, in other words, they’ll pump more of it.
*** Is Wall Street biased? “One timely lesson,” we learn from Henry Kaufman’s new book, “On Money and Markets,” according to the “Financial Times” review, “is that there is a bias against gloomy forecasts. No one wants to be told that a market is overvalued; many have a vested interest in saying it is not.”
*** I reported that RJR was selling at a P/E of 1. I knew there had to be more to this story. The number was correct but, as Dan Denning reports, only because of a fluky, one-time “income from discontinued operations” in the second quarter. A more accurate P/E for the cigarette company is 12.
*** And Gary North wrote to give me more information on Oskar Lange, whose quotation seemed so self-evidently right, I have used it twice in the last few days. “Lange was a Communist,” writes Dr. North. “After WWII, he went back to Poland to serve as chief economist under the Communist government.
“It was Lange’s articles in 1936 and 1937 that persuaded two generations of economists that Mises was wrong in saying that socialist planning is irrational because there can be no capital markets with free pricing. Mises in 1920 argued that without competitive prices and private ownership, the central planners cannot know what anything is worth. Lange said a government planning board could set prices and then lower or raise them if supply and demand did not match. In short, he wanted bureaucrats to allocate scarce resources…Finally, in 1990, Robert Heilbroner announced in THE NEW YORKER, `Mises was right.’
“It is not that entrepreneurs are fooled,” Gary continued. “It is that all but the front-runners had been fooled. They had not seen the opportunity. Then they imitate the early comers. As this once-secret information spreads, its value falls because its pay-off to individual entrepreneurs falls. Returns approach the rate of interest on the lowest-risk debt certificate.
“Lange wanted salaried bureaucrats to perform this service. There is a Polish graduate school named after him.”
*** I have been traveling for the last couple of weeks. So yesterday was my first opportunity to walk home for a long time. The light has changed. During the winter months, I walked home in darkness — lit up by the streetlights and the light that streams from bistro doors and filters through the fogged up windows. But now, at 8:30 p.m., I walk home in full sunlight. What a delight. What a beautiful city. And with the dollar at a 10-year high against the French franc — it is actually reasonably inexpensive.
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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