A Day At The Races

I will soon be on a first name basis with the Queen. I saw heragain yesterday…and she waived to me. Or perhaps she justgestured to the crowd of thousands who doffed their top hatsas she passed.

Economists have an expression: Everything happens at the margin. But in this crowd of thousands, I doubt her majesty noticed me.

“Everything happens at the margin” refers to the way that change occurs in economic systems. People don’t all decide to suddenly do something different. Instead, only a few changetheir behavior – often with stunning consequences for everyone.

Most stockholders, for example, rarely look at their portfolios and rarely make changes. But the value of the portfolio is determined by the active buyers and sellers. More specifically,the price of every share is set by the last two people to trade it.

I couldn’t help notice that it also applies to almost everything else in life. The winning horse in the third race at Ascot was only a few feet ahead of his rivals. Yet, this small margin made all the difference. He was a winner. The rest were also-rans. I was a winner too – for I had bet on the horse.

At least one historian believes the crucial battle of the Civil War,Gettysburg, turned on the actions of a single soldier. A Union officer,who later became governor of the state of Maine, was in a critical place at a critical time…and in a critical situation too. His menwere out of ammunition and about to be overrun by the advancing Confederates. But rather than retreat, as a sensible soldier shouldhave, he ordered his men to fix bayonets and charge. They did andthe Southerners retreated. The line held and the battle was won.

A few people, at the margin, have enormous impact.

The price for houses in an area may be fairly stable; there may be about as many buyers as sellers. But an influx of new buyers,at the margin, can drive prices up rapidly. They have to live somewhere…so they will raise their bids until housing is available to them.

That is what has happened in London. The whole Southeast of England is booming. London is rich and lively; despite appalling weather, new residents seep in from all over the world, like waterleaking into a basement. The London Times yesterday recorded the grim evidence – 58 people died trying to smuggle themselves into Britain in a cargo container. They suffocated.

Property prices have soared. The hotels are so full, I overheard a man on the train say he was forced to go back to Paris for the night,because he could find no lodgings in London.

And nowhere was prosperity more in evidence than at the Ascot races yesterday. If you, dear reader, have not yet “done” the Ascot races, let me encourage you. It is a rare combination of tradition and modern hustle. It is another example of Britain’s clever marketing of itself.

Moss Bros. has outlets all over London. They were as busy asthe proverbial one-armed paper hanger on Tuesday. Media moguls from Dubai and dot.com entrepreneurs from Chelsea jockeyed with Baltimore newsletter publishers to rent the appropriate costume for Ascot — a morning suit, with black or grey tails and a top hat. For about $100 you can wear this get-up for an entire day.For another $600 you can spend the night at Claridges. And for about $1,000 more you can rent a box at Ascot, from which you and a group of a half-dozen friends can once again (following Garter Day)gawk at the Royals who parade by in open carriages, wearingoutfits similar to yours. Add the expense of cab fares, restaurants,drinks and shopping; it is no wonder London’s economy is booming!

Our party assembled in the lobby of Claridges yesterday morning. We were all enjoying looking at ourselves in the mirror. I had been in such a rush to get yesterday’s letter to you…and then get myself ready to go out…that I had not even noticed my wife’s new suit and new hat.

“How do I look?” I heard her voice ask. But I had a hard time connecting the words to the lips that spoke them. All I saw was a hat. I had to stoop down and peer under the brim in order to see her pretty face, lit by the pink light of the hat.

Anyway, if you were standing in Waterloo station yesterday, and you saw three swells in top hat and tails walking buy, one of whomwas talking to a large, pinkish hat, it was probably us.

Of course, Elizabeth is always the most beautiful woman in any group.But she had some stiff competition yesterday. Our small band included a young woman from Australia with a stunning face…and the woman I mentioned to you yesterday… The latter woman, a delightful and intelligent companion, had on such a revealingly low cut leather suit that I was afraid she would be stopped at the gate and arrested for indecency. In my mind, I rehearsed how I would gallantly volunteer to accompany her into captivity, to help her call her lawyer.

Later in the day I found out something about this woman that seemedto answer a prayer…but perhaps I should keep you in suspense about that.

My subject today is margins, and how important things seem tohappen at them. A quarter inch less fabric, that is to say a very marginal amount of cowhide, either on the top or the bottom ofmy friend’s little suit, would have been sensational.

So would a little teeny bit of selling in the stock market…or perhaps a tiny increase in interest rates…or maybe an itty-bitty decline in thedollar. Except in the case of women’s clothes, you never know wherethe critical points are.

Everyone dresses up for Ascot. Men in their morning suits, oftenwith cellphones clamped to their ears…and women in bright, exciting dresses and the kind of hats you only see at fancy weddings or in movies. It is a little like My Fair Lady’s famous Ascot scene. Audrey Hepburn’s day at the races improved upon the real thing.Now, Ascot revelers try to live up to the standards set by the movie.

They did a pretty good job of it this year. The stands were packed with people — many of whom were stunning.

If you saw these people in everyday dress, you might find them attractive, but not stunning. The costumes helped. At the margin, theyimproved almost everyone.

I studied the people I passed. Rarely was a man so hopeless or a woman so homely that a marginal improvement couldn’t produce nearlysensational results. I thought I should offer some advice: one womanmerely needed to stand up straight. Another needed to smile. Still another needed a little exercise. But I kept my counsel to myself. Surely, I needed it, too.

Success in life happens at the margin too. “Ninety percent of genius,”said Aristotle, “is habit.” In the course of the ordinary day, the successfulman may not accomplish much more than the unsuccessful one.These were successful men and women here at Ascot. The event draws a crowd very different than, say, the Worldwide Wrestling Federation.

The wrestling fan, for example, may finish his work at 5:30…while theAscot aficionado continues for another hour or two. In any given day, the difference in results may not even be measurable. But over a lifetime, the small gains compound like the interest in a savings account. By the time the Ascot fan reaches my age, he typically has gained a lap or two on the WWF devotee. And so not only can he afford a night in an expensive hotel, he can also pay the credit card bill when his wife comes home with her hatbox. (For the benefit of those who have never attended, women do not wear fancy hats to heavy-weight wrestling events…they wear baseball caps with profound statements translated from the original Greek and Latin…such as “I’m with ***hole.”)

But even the Ascot fan, like the WWF one, operates at the margin.When he is feeling expansive and positive about the future, he lets his credit card get more use. When he is feeling fearful, he tends to keep it in his wallet. Maybe he decides that he does not need to go to Ascot this year. Lines at Moss Bros. become shorter. Taxis and hotel rooms become easier to get. Property prices in London may even fall – as the marginal buyer begins to believe that his money will be more fruitfully employed elsewhere – perhaps on the other side of the planet, where the sun is just starting to shine again.

Behavior changes at the margin – with often sensational results. We are now in what I believe will be the last summer of such positive,expansive sentiment for many years to come. The markets have already cracked. The dollar, the last holdout of the New Economy fantasy, seems to finally be in a bear trend. The turnaround in investor psychologythat I warned you about, perhaps far too soon and far too often, may to be coming at last. Sincerely yours,

Your starstruck, moonstruck, champagne-soaked And completely marginal correspondent,

Bill Bonner

Paris, France June 21, 2000

P.S. I did not forget. I promised to reveal what I discovered about myfriend in the leather dress – about her underwear, actually.

You remember those underwear ads in Paris that I told you about? They are so racy and so ubiquitous, that even a dull Episcopalianlike me cannot fail to notice. Ms. X, it turns out, was a model forthe La Perla underwear ads.

I spent some time talking to the Australian woman and the La Perlamannequin, both of whom were as charming as they were pretty. A married man has to appear to be interested in these young beauties – even if he really has eyes only for his wife.

*** The summer rally is a wretched one. News of a slowingeconomy is getting around. It is hitting the ‘old economy’companies that actually make and sell products.

*** The Dow, for example, fell 122 points yesterday. Autos,restaurants, lumber, office equipment – they’re all down nearly 20% in the last month.

*** But the Nasdaq rose back above the 4,000 mark yesterday.(Still, a long way from 5,000.) The logic of this “two-tiered market”is that an economic slowdown will depress earnings. But companies that have no earnings have nothing to worry about.

*** The idea is preposterous. It’s just money, after all. A dollarwill go wherever it can earn the highest rate of return. Companies without earnings are doomed. Either they get earnings– or they disappear. Unless they are charities.

*** “Whenever, following a powerful advance, the market’s dynamics become less favourable,” wrote Marc Faber in his Gloom, Boom, and Doom Letter, “it leads to ‘churning,’ with investors desperately jumping from one theme to another in the hope of achieving some short-term gains. This churning process is always characterized by high volume and extreme volatility.”

*** Almost every day a major company seems to get whackedafter an ‘earnings warning.’ Yesterday, it was Carnival Cruises,which lost about 20% of its stockmarket value. The day before it was Honeywell. Even these big, institutional blue chips rest on shaky ground. Marginal changes in the market’s perceptioncause them to crash suddenly.

*** ‘Easy Al’ Greenspan must notice how fragile stock values have become. For that reason alone he may not dare to raise rates again this month. What he most wants to avoid is the blame for a major crash and recession. Besides, he will reason that hecan always cure inflation with tighter rate policies later, whereasthe damage from a crash may be hard to correct. We’ll see…

*** There were 1264 stocks advancing on the NYSE yesterday, against 1613 declining. 77 hit new highs. 67 hit new lows.

*** Oil rose $1.36. There was little action in gold or gold shares.

*** Morgan Stanley says that half of the 377 Internet stocks it follows are below their IPO prices. The IPO party seems to be over.

*** The Elmer Gantry of the New Economy was in the news again yesterday. Michael Saylor, CEO of MicroStrategy, is well knownfor his bombastic statements about the future of the Internet. He believes his company has a mission – to make information flow like water…and thus make the desert bloom. But, taking no chances, he decided to divert the stream of information to water his own back yard. He reported a profit of $12.6 millionon revenues of $205 million at a time when the company actually lost $33.7 million on revenue of $151.3 million.

*** But what is really amazing is that investors still buy the stock. While companies with earnings get hit hard when their earnings decline, those with no earnings, and little hope of ever having any, rise. Even the pros seem to be suffering from sunstroke. A private venture capital firm – Promethean Asset Management decided to chain itself to the barren rock of MicroStrategy – putting up $125 millionof good money for a ridiculous 4% of the company. All of MicroStrategyis not worth $125 million. It may not be worth much of anything. Yet, investors have bid up the share price so high that Saylor’s personal stake in this losing operation is worth nearly $2 billion. May vultures gnaw on all their intestines!

*** Meanwhile, Professor Robert Gordon joins me in questioning the real economic value of the Internet. He believes the internal combustion engine, telecommunications and electrical power were “first order” innovations. They changed life radically. But they were all invented in the late 19th century – and had saturated the Western economies by the early 1960s. The Internet may not be a first order invention. Instead, it is merely another step in the telecommunications revolution that began with the invention of the telegraph and proceededthrough the telephone, radio and television.

*** What’s more, the Internet threatens to be a big waste of time – like television. The Economist reports that “web-surfers tend to access entertainment sites more frequently at work than they do at home.” The magazine cited a study showing that employees visit eBay and financial trading sites when they’re supposed to be working and traffic on consumer-oriented sites peaks during working hours, not in the evening.Of course, I’m sure this doesn’t happen in my business.

*** And finally, on this the longest day of the year, the Evening Standard reports that “one of Britain’s leading Druids…appealed for calm.”Stonehenge, off limits to Druids as well as Presbyterians andvegetarians for the last 16 years, opened up to the public at 11:30 last night.

*** I packed up my old grey suit, which was still as dumb as a Democrat and shapeless as a Republican, and Elizabeth and I leftLondon last night. We boarded the Eurostar for the trip back to Paris.I think I’ve drunk enough champagne in the last two days to lift the share price of LVMH…but they offered me a glass on the train.“Avec plaisir,” I replied. I will soon be on a first name basis with the Queen. I saw heragain yesterday…and she waived to me. Or perhaps she justgestured to the crowd of thousands who doffed their top hatsas she passed.

Economists have an expression: Everything happens at the margin. But in this crowd of thousands, I doubt her majesty noticed me.

“Everything happens at the margin” refers to the way that change occurs in economic systems. People don’t all decide to suddenly do something different. Instead, only a few changetheir behavior – often with stunning consequences for everyone.

Most stockholders, for example, rarely look at their portfolios and rarely make changes. But the value of the portfolio is determined by the active buyers and sellers. More specifically,the price of every share is set by the last two people to trade it.

I couldn’t help notice that it also applies to almost everything else in life. The winning horse in the third race at Ascot was only a few feet ahead of his rivals. Yet, this small margin made all the difference. He was a winner. The rest were also-rans. I was a winner too – for I had bet on the horse.

At least one historian believes the crucial battle of the Civil War,Gettysburg, turned on the actions of a single soldier. A Union officer,who later became governor of the state of Maine, was in a critical place at a critical time…and in a critical situation too. His menwere out of ammunition and about to be overrun by the advancing Confederates. But rather than retreat, as a sensible soldier shouldhave, he ordered his men to fix bayonets and charge. They did andthe Southerners retreated. The line held and the battle was won.

A few people, at the margin, have enormous impact.

The price for houses in an area may be fairly stable; there may be about as many buyers as sellers. But an influx of new buyers,at the margin, can drive prices up rapidly. They have to live somewhere…so they will raise their bids until housing is available to them.

That is what has happened in London. The whole Southeast of England is booming. London is rich and lively; despite appalling weather, new residents seep in from all over the world, like waterleaking into a basement. The London Times yesterday recorded the grim evidence – 58 people died trying to smuggle themselves into Britain in a cargo container. They suffocated.

Property prices have soared. The hotels are so full, I overheard a man on the train say he was forced to go back to Paris for the night,because he could find no lodgings in London.

And nowhere was prosperity more in evidence than at the Ascot races yesterday. If you, dear reader, have not yet “done” the Ascot races, let me encourage you. It is a rare combination of tradition and modern hustle. It is another example of Britain’s clever marketing of itself.

Moss Bros. has outlets all over London. They were as busy asthe proverbial one-armed paper hanger on Tuesday. Media moguls from Dubai and dot.com entrepreneurs from Chelsea jockeyed with Baltimore newsletter publishers to rent the appropriate costume for Ascot — a morning suit, with black or grey tails and a top hat. For about $100 you can wear this get-up for an entire day.For another $600 you can spend the night at Claridges. And for about $1,000 more you can rent a box at Ascot, from which you and a group of a half-dozen friends can once again (following Garter Day)gawk at the Royals who parade by in open carriages, wearingoutfits similar to yours. Add the expense of cab fares, restaurants,drinks and shopping; it is no wonder London’s economy is booming!

Our party assembled in the lobby of Claridges yesterday morning. We were all enjoying looking at ourselves in the mirror. I had been in such a rush to get yesterday’s letter to you…and then get myself ready to go out…that I had not even noticed my wife’s new suit and new hat.

“How do I look?” I heard her voice ask. But I had a hard time connecting the words to the lips that spoke them. All I saw was a hat. I had to stoop down and peer under the brim in order to see her pretty face, lit by the pink light of the hat.

Anyway, if you were standing in Waterloo station yesterday, and you saw three swells in top hat and tails walking buy, one of whomwas talking to a large, pinkish hat, it was probably us.

Of course, Elizabeth is always the most beautiful woman in any group.But she had some stiff competition yesterday. Our small band included a young woman from Australia with a stunning face…and the woman I mentioned to you yesterday… The latter woman, a delightful and intelligent companion, had on such a revealingly low cut leather suit that I was afraid she would be stopped at the gate and arrested for indecency. In my mind, I rehearsed how I would gallantly volunteer to accompany her into captivity, to help her call her lawyer.

Later in the day I found out something about this woman that seemedto answer a prayer…but perhaps I should keep you in suspense about that.

My subject today is margins, and how important things seem tohappen at them. A quarter inch less fabric, that is to say a very marginal amount of cowhide, either on the top or the bottom ofmy friend’s little suit, would have been sensational.

So would a little teeny bit of selling in the stock market…or perhaps a tiny increase in interest rates…or maybe an itty-bitty decline in thedollar. Except in the case of women’s clothes, you never know wherethe critical points are.

Everyone dresses up for Ascot. Men in their morning suits, oftenwith cellphones clamped to their ears…and women in bright, exciting dresses and the kind of hats you only see at fancy weddings or in movies. It is a little like My Fair Lady’s famous Ascot scene. Audrey Hepburn’s day at the races improved upon the real thing.Now, Ascot revelers try to live up to the standards set by the movie.

They did a pretty good job of it this year. The stands were packed with people — many of whom were stunning.

If you saw these people in everyday dress, you might find them attractive, but not stunning. The costumes helped. At the margin, theyimproved almost everyone.

I studied the people I passed. Rarely was a man so hopeless or a woman so homely that a marginal improvement couldn’t produce nearlysensational results. I thought I should offer some advice: one womanmerely needed to stand up straight. Another needed to smile. Still another needed a little exercise. But I kept my counsel to myself. Surely, I needed it, too.

Success in life happens at the margin too. “Ninety percent of genius,”said Aristotle, “is habit.” In the course of the ordinary day, the successfulman may not accomplish much more than the unsuccessful one.These were successful men and women here at Ascot. The event draws a crowd very different than, say, the Worldwide Wrestling Federation.

The wrestling fan, for example, may finish his work at 5:30…while theAscot aficionado continues for another hour or two. In any given day, the difference in results may not even be measurable. But over a lifetime, the small gains compound like the interest in a savings account. By the time the Ascot fan reaches my age, he typically has gained a lap or two on the WWF devotee. And so not only can he afford a night in an expensive hotel, he can also pay the credit card bill when his wife comes home with her hatbox. (For the benefit of those who have never attended, women do not wear fancy hats to heavy-weight wrestling events…they wear baseball caps with profound statements translated from the original Greek and Latin…such as “I’m with ***hole.”)

But even the Ascot fan, like the WWF one, operates at the margin.When he is feeling expansive and positive about the future, he lets his credit card get more use. When he is feeling fearful, he tends to keep it in his wallet. Maybe he decides that he does not need to go to Ascot this year. Lines at Moss Bros. become shorter. Taxis and hotel rooms become easier to get. Property prices in London may even fall – as the marginal buyer begins to believe that his money will be more fruitfully employed elsewhere – perhaps on the other side of the planet, where the sun is just starting to shine again.

Behavior changes at the margin – with often sensational results. We are now in what I believe will be the last summer of such positive,expansive sentiment for many years to come. The markets have already cracked. The dollar, the last holdout of the New Economy fantasy, seems to finally be in a bear trend. The turnaround in investor psychologythat I warned you about, perhaps far too soon and far too often, may to be coming at last. Sincerely yours,

Your starstruck, moonstruck, champagne-soaked And completely marginal correspondent,

Bill Bonner Paris, France June 21, 2000

P.S. I did not forget. I promised to reveal what I discovered about myfriend in the leather dress – about her underwear, actually.

You remember those underwear ads in Paris that I told you about? They are so racy and so ubiquitous, that even a dull Episcopalianlike me cannot fail to notice. Ms. X, it turns out, was a model forthe La Perla underwear ads.

I spent some time talking to the Australian woman and the La Perlamannequin, both of whom were as charming as they were pretty. A married man has to appear to be interested in these young beauties – even if he really has eyes only for his wife.

*** The summer rally is a wretched one. News of a slowingeconomy is getting around. It is hitting the ‘old economy’companies that actually make and sell products.

*** The Dow, for example, fell 122 points yesterday. Autos,restaurants, lumber, office equipment – they’re all down nearly 20% in the last month.

*** But the Nasdaq rose back above the 4,000 mark yesterday.(Still, a long way from 5,000.) The logic of this “two-tiered market”is that an economic slowdown will depress earnings. But companies that have no earnings have nothing to worry about.

*** The idea is preposterous. It’s just money, after all. A dollarwill go wherever it can earn the highest rate of return. Companies without earnings are doomed. Either they get earnings– or they disappear. Unless they are charities.

*** “Whenever, following a powerful advance, the market’s dynamics become less favourable,” wrote Marc Faber in his Gloom, Boom, and Doom Letter, “it leads to ‘churning,’ with investors desperately jumping from one theme to another in the hope of achieving some short-term gains. This churning process is always characterized by high volume and extreme volatility.”

*** Almost every day a major company seems to get whackedafter an ‘earnings warning.’ Yesterday, it was Carnival Cruises,which lost about 20% of its stockmarket value. The day before it was Honeywell. Even these big, institutional blue chips rest on shaky ground. Marginal changes in the market’s perceptioncause them to crash suddenly.

*** ‘Easy Al’ Greenspan must notice how fragile stock values have become. For that reason alone he may not dare to raise rates again this month. What he most wants to avoid is the blame for a major crash and recession. Besides, he will reason that hecan always cure inflation with tighter rate policies later, whereasthe damage from a crash may be hard to correct. We’ll see…

*** There were 1264 stocks advancing on the NYSE yesterday, against 1613 declining. 77 hit new highs. 67 hit new lows.

*** Oil rose $1.36. There was little action in gold or gold shares.

*** Morgan Stanley says that half of the 377 Internet stocks it follows are below their IPO prices. The IPO party seems to be over.

*** The Elmer Gantry of the New Economy was in the news again yesterday. Michael Saylor, CEO of MicroStrategy, is well knownfor his bombastic statements about the future of the Internet. He believes his company has a mission – to make information flow like water…and thus make the desert bloom. But, taking no chances, he decided to divert the stream of information to water his own back yard. He reported a profit of $12.6 millionon revenues of $205 million at a time when the company actually lost $33.7 million on revenue of $151.3 million.

*** But what is really amazing is that investors still buy the stock. While companies with earnings get hit hard when their earnings decline, those with no earnings, and little hope of ever having any, rise. Even the pros seem to be suffering from sunstroke. A private venture capital firm – Promethean Asset Management decided to chain itself to the barren rock of MicroStrategy – putting up $125 millionof good money for a ridiculous 4% of the company. All of MicroStrategyis not worth $125 million. It may not be worth much of anything. Yet, investors have bid up the share price so high that Saylor’s personal stake in this losing operation is worth nearly $2 billion. May vultures gnaw on all their intestines!

*** Meanwhile, Professor Robert Gordon joins me in questioning the real economic value of the Internet. He believes the internal combustion engine, telecommunications and electrical power were “first order” innovations. They changed life radically. But they were all invented in the late 19th century – and had saturated the Western economies by the early 1960s. The Internet may not be a first order invention. Instead, it is merely another step in the telecommunications revolution that began with the invention of the telegraph and proceededthrough the telephone, radio and television.

*** What’s more, the Internet threatens to be a big waste of time – like television. The Economist reports that “web-surfers tend to access entertainment sites more frequently at work than they do at home.” The magazine cited a study showing that employees visit eBay and financial trading sites when they’re supposed to be working and traffic on consumer-oriented sites peaks during working hours, not in the evening.Of course, I’m sure this doesn’t happen in my business.

*** And finally, on this the longest day of the year, the Evening Standard reports that “one of Britain’s leading Druids…appealed for calm.”Stonehenge, off limits to Druids as well as Presbyterians andvegetarians for the last 16 years, opened up to the public at 11:30 last night.

*** I packed up my old grey suit, which was still as dumb as a Democrat and shapeless as a Republican, and Elizabeth and I leftLondon last night. We boarded the Eurostar for the trip back to Paris.I think I’ve drunk enough champagne in the last two days to lift the share price of LVMH…but they offered me a glass on the train.“Avec plaisir,” I replied.