Persistence Of Dreams
A few years ago, Hillary Clinton proposed a “politics of meaning.” She was hoping that politics could give meaning to your life and mine, as it has for her.
We, too, might be enlisted in the campaign to build a new and better world. And, with such weighty cares and high- minded visions before our eyes, we might be able to ignore a few cattle trades.
In the `30s and `40s, there were few politicians anywhere in the world who could resist the allure of the New Era. The only question was which strain of this new hokum — Nazi or communist — they would choose.
“Next to Hitler, Mussolini and Stalin,” wrote the Jesuit scientist and philosopher, Teilhard de Chardin, ecumenically, “don’t you see that Churchill…[is] grotesquely antiquated?…Personally, I stick to my idea that we are watching the birth, more than the death, of a World…”
It was hard to imagine an English victory over the Germans in May 1940. What’s more, to most intellectuals of the time, such a victory was not even desirable — because it would hold back the New Era for which they dreamed.
Believing in an English triumph, wrote Teilhard de Chardin, “is like someone who in 1900 had prophesied the victory of China, with its mandarins in pigtails and jade buttons, over the Europeans with their motors and cannons…”
“Peace,” he went on, “cannot mean anything but a HIGHER PROCESS OF CONQUEST…The world is bound to belong to its most active elements. Just now, the Germans deserve to win because, however bad or mixed is their spirit, they have more spirit than the rest of the world.”
Those dreams of a dynamic new world were hard to stop. They filled hollow lives with ersatz meaning. They changed behavior — thus, actually creating a new world.
But this new world was ghastly. Regimes in both the Soviet Union and Germany were abominations. A few intellectuals and contrarians resisted or fled. But the New Era dreams persisted until they were utterly exhausted. Germany had to be pulverized and practically flattened — by the combined efforts of the largest and most heavily armed forces in history. And the Soviet Union put up with malign communism for a period of seven decades until the economy was so hollowed out, and the military so weak, that the entire system simply collapsed. Last week, by the way, marked the anniversary of a small event which helped to bring down the entire Soviet regime. Mathias Rust, a West German teenager, flew a small plane from Finland all the way to Moscow — landing on Red Square. His plane was never challenged by Soviet air defenses. Mathias, who had done the Soviets an immense service, spent nearly two years in jail.
Even today, as the book by Revel, “La Grande Parade,” reveals — apologists for Bolshevism try to keep the dream alive — arguing that a “pure form” of communism could succeed, even though every attempt to apply it, anywhere in the world, has been an appalling failure.
It is not logic, reason nor even observation that brings a mania to a close — it is exhaustion. A mania has to run its course. It has to be obliterated, annihilated, crushed and completely destroyed. People do not give up on their dreams easily.
So how will the dream of the New Economy finally end? Marc Faber takes up the question in a recent issue of his “Gloom, Boom and Doom Report.” There are two schools of thought, he says, one “believes that it is only a matter of time before money shifts back into the “Old Economy” stocks, which could lead simultaneously to a decline of the Nasdaq and a rise in the Dow.”
“Another…holds a less sanguine view. A sharp break in the Nasdaq would lead to widespread losses and have very negative financial and economic ramifications. This school holds that a Nasdaq crash would not only bring down all high-tech stocks, but lead to lower stock prices altogether.”
Faber points out that “rising interest rates alone hardly ever deflate bubbles.” In fact, he argues that rising rates can actually “fuel the bubble,” as investors shift money from low performing sectors to more promising ones.
“…[S]peculators will jump,” he writes, “nervously, from one group of stocks to another in the hope of maximizing their gains…Furthermore, at the end of the bubble, additional buying power is increasingly financed with credit. (Margin debt in the United States increased by $83 billion, or at an annual rate of over 130%, between November 1999 and February 2000.)”
“What eventually pricks the bubble is not so much the price of money as its availability,” says Faber.
Until the money disappears — that is, until the fuel is exhausted, the mania continues. “Like a virus,” Faber suggests, a bubble is “extremely resilient…Frequently they also mutate rapidly.”
“Bubbles don’t occur at the beginning of an economic cycle,” Faber explains, “but rather, at the end. In other words, bubbles mark the climactic end of an expansion or a trend that has been in place for a very long time. Therefore, it takes much more than just moderately rising interest rates to reverse people’s expectations. Since the boom or the trend has lasted for so long, it is perceived as a permanent one. Confidence becomes very hard to shake.”
After the price of gold fell 50% in January 1980, faith in the yellow metal remained so strong that investors continued to see every subsequent drop as a buying opportunity — up until the late `90s!
Faith in gold, however, reached almost messianic levels in the late `70s. But is faith in technology any less strong?
(I noted with amusement that J. Taylor’s newsletter – “Gold and Technology Stocks” — mentioned here yesterday, used to be named “Gold and Gold Stocks.”)
“Similarly,” writes Faber, “the first decline in the Japanese stock market in 1990 was perceived as a correction and a great buying opportunity and accounted for a strong rally in the spring of 1990.”
Of course, the crash in 1929 was also seen by many as a buying opportunity. The most celebrated American economist of the time, Irving Fisher, wrote before the crash, with more alliteration than accuracy, that the U.S. economy had reached a “permanent plateau of prosperity.” After the crash, he still refused to give up on the dream, writing that the “panic was technical in its character and largely artificial.”
“For the immediate future,” wrote Fisher in the last sentence in his book, “The Stock Market Crash — and After,” which was written in November ’29, “the outlook is bright.”
Dreams persist. But not forever. “In my opinion,” Faber concludes, “there is only one [thing]…that permanently reverses investors’ excessively optimistic expectations…and that is `a meaningful and enduring loss of capital for the majority of investors with no hope of recovery.'”
Exhaustion. That is what we have to look forward to.
Paris, France May 31, 2000
P.S. We’re leaving for the country tonight. I found out that Addison is a finish carpenter…so I invited him for the holiday weekend. We’ll write.
*** It was a rollicking, frolicking day on Wall Street yesterday. Investors, brokers, fund managers and analysts arrived back at their desks bright-eyed and bushy-tailed after a three-day weekend spent in quiet contemplation of the poor grunts who died in trenches, foxholes and bombed out buildings.
*** Among those returning to work was Dan Niles, formerly with Robertson Stephens and now with Lehman Brothers, who announced that the average memory/box of business computer systems would increase from 90 megabytes to 128 megabytes before the end of the year. What’s more, he predicted a shortage in the DRAM industry.
*** I love this tech talk. It makes me feel so modern, so with it…so in-tune with all that is new and exciting.
*** Investors must have loved it, too. For they came into the market yesterday with bulging wallets determined to buy something…anything.
*** The Dow rose 227 points…or 2.2%. The Nasdaq posted its biggest single-day increase in history — rising 254 points or 8%.
*** More than twice as many stocks rose as fell on the NYSE – 2,018 to 920.
*** The S&P lost 6.2% so far this year; its worst performance for this period since 1984. And after four straight weeks of falling prices — on the Nasdaq and S&P 500 — investors were ready for a little relief.
*** “People are over the shock of the Nasdaq’s correction and are ready to roll up their sleeves and put some money to work,” said a Warburg analyst.
*** Is the correction over? Or is it just beginning? Only time will tell. But a rising market only increases the odds of further rate hikes by the Fed. Bonds went down last week — probably in expectation. But rate hikes alone probably won’t deflate a bubble. What will? See below…or check out “When Do Investment Bubbles Burst?”
*** Most likely, we’ve just witnessed another rally in a major bear market. But there were so many hopes attached to the bull market dream — they won’t be given up easily…again, see the “Persistence of Dreams,” below…
*** Ominously, a headline on a Reuters report tells us that the “Dollar on Defensive Despite Wall St. Rally.” The euro has risen to 93 cents. Foreign money — and perhaps quite a bit of domestic money, too — is suspicious of America’s financial future. A crash on Wall Street will cause the dollar to collapse. A collapse of the dollar will cause Wall Street to crash. Or is it the other way around?
*** Volume remained fairly low — despite the soaring prices. This low volume is killing the e-brokers. Ameritrade has fallen 82% in the last six weeks.
*** Yesterday’s rally couldn’t have come at a better time for the eight companies scheduled for IPOs this week. Red Herring reports: “…the smallest, Urban Cool Networks, …still plans to raise $20 million by selling 2 million shares at $10. The planned offering…would give Urban Cool a cool $62 million market value. Urban Cool’s Web site calls itself `a leading Internet technology and new media company.’ So much for the hyperbole; now the reality: the nine-person company’s filing with the Securities and Exchange Commission shows $12.6 million in losses and no revenues during Urban Cool’s two-year operating history. At the end of March, the company was down to its last $165,000 in cash and had negative $1.1 million in working capital, which includes such things as accounts receivable, inventory and other current assets. The last time a company with the word `cool’ in its name went public was May 19. Coolsavings.com (Nasdaq :CSAV) priced at $7, hit a high of $7.12, and headed south, settling at $4.50 on Friday.”
*** Meanwhile, “Karl Marx championed the graduated income tax,” writes Bill King, “U.S. comrades perfected it. Friday’s “FT” reports the Russian cabinet approved a 13% flat tax for Russians!!! The cabinet believes this will increase tax collection, as tax evasion is a huge problem there.”
*** According to the BBC, people who run e-businesses in England are being paid 40% more than their peers in the “Old Economy.” They are also “67% more likely to receive general loans at low interest rates, 50% more likely to receive car loans, 33% more likely to receive mortgage subsidies and 20% more likely to get flexible benefits.”
*** Mike Palmer of International Living tells me the Schiphol Airport in Amsterdam is going to get a great deal friendlier soon. “One of Amsterdam’s most popular bordellos, the Yab Yum, is suing the Schiphol Airport for the right to open up in the airport. Yab Yum wants to provide hors d’oeuvres and ‘massages’ for travelers with long layovers.”
*** The Real France? Interested in knowing what it’s really like living, working and raising children in France? Elizabeth, my wife, is jumping headlong into the Internet age, and hosting a live forum this Saturday, June 3rd a 1pm EST. By the way, there are still spots available on the IL tour group that is staying at my house the last week in June…