When The Chips Are Up

“President George W. Bush urges all patriotic Americans to fight terrorism by going shopping.”

I quoted this passage from economist Ed Yardeni on Friday. According to many of the most prominent economists of the Federal Reserve and our president, George Bush the younger, patriotism is as easy as waving a flag and buying on credit. Of course, economists and presidents say a lot of absurd things. But this remark wandered back into my mind as I listened to PereMarchand’s sermon on Sunday.

We had taken our seats in a left hand pew. On the wall beside us was a list of 36 names of young men, “our heroes fallen on the field of honor” in WWI. How could such a small town have lost so many men, I wondered? But when the chips were down for France…as the Huns approached Paris in 1914, these men did their duty. They answered the call to arms and beat the Germans back. Six million of them died.

“If you want to see the face of God,” said the quavering voice from the front of the church, “just look in the mirror. Because God made man in his own image.”

And then the gray-haired priest gave his little laugh, pleased with himself.

“But remember, you are made in the image of God. But you are not God. If you were God, life would be easy. God doesn’t make mistakes. But man makes them all the time. That’s why we come to church every Sunday, to remind ourselves that we have to work hard, and discipline ourselves, in order to do God’s work. We have to learn from the example God gave us in his son, Jesus Christ, and try to be like him. Oh…but it’s hard…Heh, heh…oui…”

Back in Ouzilly, I found our gardener working in the wine shed. He was pouring more grape juice into a wooden barrel.

“Wine making is an art. You really have to pay attention and know what you’re doing…or you’ll get nothing worth drinking,” he said. “You can’t allow any air in the barrel.”

Whatever skill he may lack as a winemaker he more than compensates with in intimate knowledge of drinking. So, I take him as an expert.

“Look, it has a deep, rich color,” he continued. Then, noticing that I was still in my church clothes, he offered a confession:

“I don’t go to mass anymore. I went as a child. But now I find my religious inspiration in nature.”

Neither in nature nor in religion is there a quick and easy path to honor, dear reader. Could patriotism and prosperity be any different?

A widely circulated internet message tells us “what happened to the 56 signers of the Declaration of Independence.”

“Twelve had their homes ransacked and burned. Two lost their sons serving in the revolutionary army, another had two sons captured.

“Nine of the 56 fought and died from wounds or hardships of the Revolutionary War…Carter Braxton of Virginia, a wealthy planter and trader, saw his ships swept from the seas by the British Navy. He sold his home and properties to pay his debts and died in rags. Thomas McKean was so hounded by the British that he was forced to move his family almost constantly. He served in Congress without pay, and his family was kept in hiding. His possessions were taken from him, and poverty was his reward.

“At the battle of Yorktown, Thomas Nelson, Jr. noted that the British General Cornwallis had taken over the Nelson home for his headquarters. Thomas Nelson quietly urged General George Washington to open fire. His own home was destroyed and Nelson died bankrupt.

“Francis Lewis had his home and properties destroyed. The enemy jailed his wife, and she died within a few months. John Hart was driven from his wife’s bedside as she was dying. Their 13 children fled for their lives. His fields and his gristmill were laid to waste. For more than a year he lived in forests and caves, returning home to find his wife dead and his children vanished. A few weeks later he died from exhaustion and a broken heart. Norris and Livingston suffered similar fates.”

When the chips are down, brave men do their duty, even at the expense of their own lives and property. But even on a clear day, dear reader, it can be hard to tell a patriot from a damned fool. For every patriot who dies honorably to good purpose, there must be dozens who might just as well have stepped in front of a bus.

Today we are told that patriotism is no longer a matter of self-sacrifice, but self-indulgence. Serving your country is as easy as buying a luxury new car or putting an expensive bedroom in your house. Or, if you’re feeling especially patriotic, you can max out all your credit cards, refinance your home at 100% of equity… and blow yourself up with debt.

“Hope, wishing and prayer are extremely poor investment strategies,” writes Ray de Voe, “and so is patriotism, particularly in a stock market that is still historically high, and an economy in a recession.”

“We know of no precedent,” adds Prechter’s Elliot Wave Financial Forecast, ” but the peddling of stocks as a call to arms certainly strikes us as a late-cyclical phenomenon. Its blatant emotional tone signals that beneath the surface, the public’s grim determination to own stocks is breaking down.”

So far, there is little evidence that the public’s determination to own stocks is waning. The chips are not down, they are still up…and rose higher last week. Sooner or later, of course, the chips will be down. Then, when the Dow hits 5,000…how many die-hard, flag- waving patriots will still be putting their money in stocks?

More tomorrow…”When the Chips are Down”.

Bill Bonner
November 26, 2001

P.S. Even the best displays of patriotism can have pernicious or puerile results.

The bones of French soldiers are still being pulled from the mud in the northeast of the country. Six million of them died. But for what? France might have been better off losing the war quickly as it did the last war against the Germans in 1870, argues Francis Fukayama. A few big bankers, like the Rothschilds in 1870, would have put up the money to pay fines to the Germans…and France might have lost a few more hectares of the Rhineland. But so what? It could then have gone back to enjoying life as it did in the decades following its last defeat. No long, disastrous war, says Fukayama; no collapse of the Russian, Austro-Hungarian and German monarchies. No millions of deaths; no loss of faith in western, bourgeois society. With faith and monarchs still in place, no rise of Bolsheviks and Nazis. No Bolsheviks and Nazis; no WWII, no Pearl Harbor, no Holocaust…No WWII, no Cold War…and so on.

And the American Revolution? The website from which the history of the signers is drawn urges readers to “take a couple of minutes to remember their sacrifice so we could all live in a free country!” Yet, I have lived in England and in America. If there is a difference in the level of freedom it is not noticeable.

“The 20-year slide in interest rates is just about over,” announces Barron’s cover page this morning. “Lock in those low mortgage rates, lighten up on bonds. It’s time to wait for tax cuts and Greenspan’s actions to revive the economy.”

Hardly a soul disputes the view: after 10 rate cuts and more than 10 months, “the bottom” has been found. We might even believe it ourselves, if it weren’t so easy to believe.

But that is the problem. “Quick and easy” works for TV dinners, but not for Thanksgiving…or national prosperity. Or patriotism. More below…

If the bottom came in September, it was a freak bottom, worthy of Monty Python’s “man with three buttocks” skit. S&P stocks sell for 30 times earnings – with earnings dropping. And all over the world, prices are falling. In Canada, for example, consumer prices are falling at a 6% annual rate. In Europe, economic growth is barely positive and consumers are cutting back.

Now China, recently admitted to the World Trade Organization, is competing with manufacturers everywhere. China doesn’t compete on quality, it competes on price. So, look for more price cuts as China drops prices on everything from TVs to toaster ovens in order to gain market share.

And what of the baby boomers? Are they going to spend more as their hair turns gray and their incomes begin to fall?

It is a strange time for a bottom. But then, strange things happen on Wall Street, don’t they Eric?

*****

Eric Fry, reporting from the Big Apple:

– Remember back in September, when the U.S. economy was falling into a recession and stocks were falling into an abyss?…but then the stock market rallied!

– Until stocks started to bounce in late September, almost nobody believed that the economy was poised to recover. But now that the NASDAQ has jumped more than 35%, there is almost no one left who doubts it.

– Most investors assume that Mr. Market “smells” a recovery. If, therefore, the economy is on the mend, shouldn’t we be buying stocks? And if stocks are going up, doesn’t that mean that the economy is strengthening? And if the economy is recovering so nicely, shouldn’t we be buying more stocks? It’s all so obvious.

– “The slightest piece of positive news on the economy leads to a massive piling on into global equities and out of global bonds,” Bridgewater Associates observes. “The recent move was triggered by a few minor stats in the U.S. that were not quite as bad as expected.” Bridgewater dismisses the current bounce on Wall Street as a “head fake” – also known as a “bear market rally.”

– Call it what you will, this thing keeps adding on points. In a week shortened by the Thanksgiving holiday, stocks chalked up their third winning week in a row, and seventh out of the last nine.

– But just maybe, this latest rally has absolutely nothing to do with economic growth prospects and has everything to do with wishful thinking, propelled by explosive money supply growth.

– “Real M3 money supply growth has reached 10.5%, the highest year-over-year growth in almost 28 years,” observes Christine Callies of Merrill Lynch. Whenever the money supply expands this rapidly, stocks tend to perform very well…for a time. (Who could forget how stocks soared during the first three months of 2000, immediately after the Greenspan Fed had boosted the money supply to avert the feared Y2K disaster?)

– Meanwhile, the money supply among the chief executives of public companies may be shrinking somewhat.

– “David Wetherell, CEO of the once-high-flying Internet incubator CMGI (Nasdaq: CMGI), will take a salary of a mere buck in 2002,” says siliconalleyreporter.com.

– Wetherell might still be overpaid. For perspective, he earned more than half a million dollars last year – a 12-month span during which the “Internet incubator” that he oversees reported a $5.4 billion loss. The CMGI share price utterly imploded from a high near $138 in early 2000 to a recent low of 64 cents.

– “High-profile salary and bonus cuts seem to have suddenly come into fashion,” siliconalleyreporter.com continues. “Hewlett Packard CEO Carly Fiorina and Compaq Computer CEO Michael Capellas excused themselves earlier this month from a bonus totaling $22.4 million…Also this month, Enron CEO Ken Lay decided to forego $60.6 million in compensation over the next three years.”

– Notice a pattern here? Four catastrophically managed companies headed by four multi-millionaires. Investors can spare themselves a lot of grief, simply by avoiding companies that pay stratospheric compensation to their CEOs. It’s funny how well this filter works.

– Forgoing an obscenely large bonus might seem like a noble gesture, but these folks made millions for themselves while they were busy losing billions fortheir shareholders.

-Isn’t it curious that they all still retain their positions? The fact that we still find these CEOs (and numerous others like them) in boardrooms – rather than in courtrooms – suggests that the bear market has not yet run its course. In a bear market, the executives of poorly performing companies receive pink slips from the board of directors or subpoenas from class-action attorneys, not $20 million bonuses.

– Morgan Stanley strategist Barton Biggs offers up additional evidence that the bear market has some unfinished business. At a recent investment symposium, he asked the 800 individual investors in attendance whether the world one year from now would be better, the same, or worse than the pre-September 11th world. “About 60% said better, 30% the same, and only 10% worse,” Biggs reports. “Surveys show that the average American investor still believes in equities and expects 18% from stocks next year. Wall Street strategists also are close to record levels of bullishness…After the biggest boom and bubble of all-time I would prefer to see more disillusionment and capitulation, but then I’m old- fashioned.”

*****

Back in France…

*** Americans are the most generous people in the world – with themselves as well as others. They give more money and more time than anyone. But here in France, our little church near Ouzilly struggles to get people to participate.

*** These thoughts in mind, I decided to bring the American spirit of volunteerism to the church choir. Maria now sings with the sopranos. Henry is an alto. I hit and miss the low notes, along with the rest of the bass voices. I tried to get Jules, 13, to sing too. But he likes music too much.

*** So there we were on Saturday night, revving up for Christmas. Neither French, nor Catholic, nor even musically inclined – it would be immodest to say that we now form the backbone of the choir, unless you heard the choir in action. But at least we make up a couple of lumbar vertebrae. The 12th century stone church was so cold, every time we lifted our voices in song, we looked like a troupe of fire-eaters belching smoke.