Under The Big Top, Part I

Yesterday brought news that a “single sheet study” by Michelangelo sold for $12.3 million at Christie’s auction house in London. A new record.

And a DR reader, catching up on his email after slopping the hogs out behind the trailer, reports that even in the Ozarks property prices are rising smartly. Y2K escapists may find they’ve made a shrewd move after all.

Doodles by great masters…backwoods property…what isn’t rising in price? Fact is, practically everything and anything you might have bought in the last 20 years has turned out to be a good investment.

“Let’s say that for some reason you decided back in 1980 that you wanted to lose money on your investments over the next twenty years,” writes James Collins in the July 17 edition of the New Yorker magazine. “Succeeding in this would have been a very difficult thing to do.”

Collins set himself too easy a task – making fun of ‘goldbugs.’ Aficionados of the heartbreaker metal have performed like circus clowns. Every year for the past two decades has brought new pratfalls and punch lines. It has been yucks aplenty as the world’s ultimate money has declined against almost everything else the world has to offer – even the ersatz money printed at negligible cost with the negligible backing of negligible governments in negligible backwaters of the planet.

The Dow was at 800 in 1980. It’s now near 11,000. Value stocks, growth stocks, stocks with neither value nor growth – all have gone up. High tech. Low tech. No tech – you name it, virtually every scam and pipe dream has been a big winner.

Bonds soared too. And real estate almost everywhere. Old masters like Michelangelo and no-talents like Jackson Pollack – all rose nicely. Antiques. Comic books. Motorcycles. Kitsch. Manuscripts. The efficient market hypothesis seemed to apply – not just to the stock market – but to the entire world. If you’d launched a dart from Cape Canaveral in 1980 and bought whatever it fell upon – you probably would have made money.

Unless, that is, if it landed on a gold mine.

Yesterday, you could have purchased an ounce of gold for $284. On January 21, 1980 – that is to say, two decades ago…about the same time Mark Hulbert began tracking the performance of investment advisors…you could have bought that very same ounce of gold for $825. You would have lost about 70% of your money over the period if you’d been holding gold.

If that were the scope of the loss – gold bugs would be delighted. Unfortunately, when the market gods decide to destroy you – they don’t do it by half measures. Two hundred and eighty four dollars ain’t what it used to be. The suit that you might have bought with that money in 1980 now costs at least twice as much. The monthly rent you might have paid during the Carter Administration is now probably three times as much. For while the dollars put out by the Bureau of Printing and Engraving rose against the heartbreak metal…they fell against everything else.

An ounce of gold would have bought one unit of the Dow when the year began in 1980 – both were at about 800. Today, you will need about 33 ounces of gold to buy a single unit of the Dow.

“Goldbugs tend to be more intellectual than other investors,” writes Mr. Collins, graciously, “more interested in ideas and in history, and once they get a theory in their heads they are incapable of letting it go.”

The theory to which the author refers holds that, over time, all paper currencies will be rendered worthless by the people who produce them…but gold will retain its value. The theory turned out to be perhaps the most spectacularly imbecilic investment tool of all time. But that doesn’t mean it is wrong. And if there is any justice in the world, those who were so thoroughly infected with the goldbug for so long…and who suffered such terrible losses for the last 20 years…might now have built up a little immunity from further ailment. They might have realized that trends are usually cyclical – not permanent. And the very moment when something appears as though it will go up forever is precisely the moment that it is most likely to fall.

Twenty years ago, gold bugs were on the top of the world. They are a laughingstock today. But they are by no means the only clowns under the Big Top.

Andy Smith, a commodities analyst in London is quoted in the New Yorker article: “We’re going on a fifty-five or sixty-year aboveground supply. Gold has been marginalized because the world has changed. We have the most robust financial system we’ve ever had. The thing undermining the many-thousand-year myth of gold is progress!”

“Sure,” the voice of progress continued, “gold is on the periodic table. Why not choose boron? It’s over. Of course, it’s over.”

Is it really over? Have the lessons of thousands of years been made irrelevant by the central bankers and f****** bond traders of the year 2,000? Have goldbugs been betrayed forever by their own vestigial instincts? Is today’s robust financial system a major revolutionary innovation – equal, say, to the introduction of the internal combustion engine? Or just a cyclical top?

Tune in tomorrow for the exciting sequel to today’s episode of the Daily Reckoning.

Your unreconstructed goldbug in Baltimore,

Bill Bonner

Baltimore, Maryland July 18, 2000

*** The summer rally in the Dow seemed to stall yesterday – 11 points below the peak of the last rally on June 5th. Richard Russell notes the following pattern:

The June 15 peak was 119 points below the May 16 peak

Which was 210 points below the April 25 peak.

Which was 163 points below the April 14 peak.

Which was 435 point below the highest point ever achieved by the Dow – on January 14, 2000.

*** These descending peaks are typical, he believes, of a bear market.

*** Also, yesterday, the trend in the advance/decline ratio turned around. Three were only 1314 stocks advancing, while 1517 declined.

*** So, even in the middle of this ‘Summer of Love,’ it’s important to remember what is really going on. We appear to be working our way down from the biggest bull market top of all time. Every major index has topped out. And the most absurdly priced bubble stocks – those dot.coms I wrote about yesterday – have crashed.

*** Wall Street and na?ve investors seem to think the worst is over. Even though some of the foam has been blown off the top, stocks are still preposterously overpriced. Which is not to say they couldn’t become even more preposterously priced. But buying them now is speculating on the future – not serious investing.

*** The Dow and S&P are at nearly twice their normal P/Es. And the Nasdaq 100, though lower than it was 6 months ago, is still trading at 144 times earnings.

*** “History shows,” writes Lynn Carpenter, “that when the S&P is selling as high as 22 times earnings (it’s now selling at an unheard of 29.6 times earnings) over a ten year period you will make only about 5% a year by holding stocks. But this was calculated on an historically average dividend return of around 4%. Today the yield on the S&P is only 1.07%. This means that over the next ten years you would probably earn less than 5% per annum on your money by holding stocks.”

*** “Against this,” she continues, “a ten-year Treasury note (as of today) yields 6% free of state taxes. Thus, the odds say that if you assume and hold a position in stocks over the next ten years, you will probably NOT do as well as if you had simply purchased 10-year T-notes.”

*** Perhaps the most important top was the one that went unreported. On May 19th, the Dollar Index hit 112.07. It declined to 105.50 on June 15th. Since then, it’s come back to 108. The dollar rose again yesterday, for example. If it continues, it may surpass the May 19th high. I’m watching, because the whole shebang rests on the dollar – stocks, bonds, the economy…inflation – everything that doesn’t really matter.

*** Gold rose $2.30 to bring it to $284. At this rate, the heartbreak metal will return to its high of two decades ago sometime before the next millenium. Platinum rose $14.80. Is gold finished? See below.

*** The Wall Street Journal confirms the death of the Internet mania. May it rest in peace. In a supplement section entitled, “Bricks Fight Back,” it records a rather predictable trend: “Today, established companies are starting to recapture customers who had threatened to leave them forever.” How? By entering cyberspace and competing with the “pure play” Internets. And guess who’s winning?

*** According to the WSJ – the “multi-channel” firms are already bringing in 59% of the e-business…and gaining.

*** Another piece in the WSJ tells the story of the $145 billion judgement against the tobacco companies. Though likely to be overturned on appeal, the judgement can only be understood as another step towards turning the tobacco companies into a regulated state industry, run for the benefit of the lawyers in and out of government. The tobacco companies are slated to pay out $6 billion this year…and more the next…with most of the loot going to shyster lawyers.

*** “There’s no question,” said a spokesman for Value Line Investment Survey, “our methodology refutes the efficient market theory.” The Efficient Market Hypothesis, you may recall, is the notion that the market as a whole is always better informed than any individual investor. Thus, the prices set by the collective wisdom of the marketplace will be superior to the guesses you might make about what the prices should be. This being the case, you will do as well throwing darts at the stock pages as you will by laboriously poring over charts and quarterly reports.

*** But the results of Mark Hulbert’s 20 years of study show that the market is not as efficient as academics might think. Most people will do as well throwing darts. But some will do better by actually studying the facts and figures – such as Value Line. The stock picking service sticks to a tight discipline based on known, quantifiable information, “with no emotionalism in it,” and is the only service Hulbert followed which managed to beat the Wilshire 5000 over the two decade period.