An Air of Fin De Bubble
A DR Classique, in which your prescient editor considers bubbles…and the human nature that sustains them…August 23, 1999.
You can measure centuries literally…by the pages of the Gregorian calendar. If that is your yardstick, the 20th century will end on the last day of December in the year 2000. Of course, almost everyone is prepared to celebrate the end of this century on the last day of December of this year. By the following December, the new millennium will seem old hat.
But you can also look at centuries in terms of the "spirit of the age," or zeitgeist. In that sense, the 19th century really ended, and the 20th century began, one day in August, 85 years ago. The Archduke Ferdinand of Austria, on an imperial visit to Sarajevo, was shot by an anarchist. This set in motion a whole series of events and mistakes that ended the "fin de siecle" spirit of the Edwardian age. No one really intended for the war to begin as it did. Nor could anyone imagine the horrors that it would unveil. But bad things happen, without anyone, good or bad, really intending them to.
Now we are coming to another end…and another beginning. The 20th century is coming to a close. But it will really end when the Fin de Bubble zeitgeist gives way to something new.
People at the end of the 19th century were very optimistic. Apart from brief "panics" on Wall Street, which affected few people, the economy had been growing rapidly since the close of the war between the states. There were only two back-to-back recession years since 1869. Plus, people had seen the awesome power and payoff of the industrial era. Printing technology had become so cheap that even the lower classes had learned to read and were reading newspapers. Trains and telegraph lines had connected the East and West coasts. Subways were constructed. The Eiffel Tower in Paris proclaimed the almost infinite possibilities of engineering and the machine process. It looked as though it would be onward and upward forever.
This fin de siecle attitude lasted for many years… throughout the "Gay `90s" and into the next century… until that August 85 years ago. Then, it was all over. The can-do spirit of progress, based on faith in bourgeois ideals and machine-age engineering, disappeared forever.
On a recent visit to Le Dorat, we discovered a bit of the town’s history. During the long warfare between England and France that dominated this part of Aquitaine in the middle ages, Le Dorat was often on the front lines. In one instance, it was betrayed by an English sympathizer who raised the gates so the enemy could invade. Later, the traitor was drawn and quartered, with a quarter stuck on a pike at each of the town’s four entrances. Whether this was done as a warning, or as revenge, we don’t know.
"Fortunately," said my mother, "things like that don’t happen any more." This, too, must be a sign of Fin de Bubble thinking, in which the historical tableau of my mother’s own time has been airbrushed to remove the unpleasant episodes. My mother served in the army during WWII. While she looked after German prisoners of war in Texas, other German prisoners were sent to labor camps in Russia, where they invariably died of starvation and over-work. Of the 700,000 German soldiers taken prisoner at Stalingrad, only a few hundred lived to return to their homeland after the war. While my mother and her Jewish friends in the WACs showed propaganda films to GIs on their way to Europe – "Kill or Be Killed" was a popular show – the Nazis rounded up Jews wherever they went. Eastern Europe’s Jewish population was almost completely wiped out, victims of machine-era efficiency.
Fin de Bubble thinking ignores unpleasant history. Just as barbarism is thought to be a thing of the past, so are economic cycles, panics, inflation, real war with real casualties, recession, gold and unemployment thought to be barbaric relics. Fin de Bubble is a period in which the nastiness of markets and life itself are airbrushed out. We see only the good side…the possibility that Amazon.com may become a huge, profitable business that grows at 70% per year indefinitely and produces a 10% profit margin – rather than the more likely reality…that the company never produces a profit, its shares decline by 95% and it is eventually abandoned by investors and taken over by creditors.
Fin de Bubble thinkers believe that people can borrow more and more and thereby increase economic activity and wealth. They think a huge Internet revolution can sweep the globe…and produce only favorable effects on existing institutions. They think savings are unnecessary and leaving money in the bank is almost criminal negligence. They think corporate profits can go down…and still corporate share prices should go up. They forget the fact that the dollar has lost 94% of its value during my mother’s lifetime and now believe it will remain stable forever.
The Fin de Bubble world is one in which paper assets of almost all sorts are priced for perfection. Trouble is, we live in an imperfect world.
Soon to come…what follows when the cannons of August or the electrons of September finally put an end to fin de Bubble thinking.
August 21, 2002
There it was…the lead story in yesterday’s International Herald Tribune:
"Market rebound looking likely," said the headline.
Sure, things looked bad a few weeks ago, but now we know:
"A surge in U.S. mutual fund redemptions in July, trading volume and key gauges of investor fear increasingly appear, in retrospect, to have been the ‘grand capitulation’ that analysts had been awaiting to signal that the long bear market had run its course."
Whew. Thank God it’s over.
"I think we’re going back to making money…" the IHT quotes a broker.
But readers are advised that when they find the IHT shares their opinions, they should think a little harder. For the editors of the International Herald Tribune never met a moronic idea they didn’t like.
The Dow fell 118 points yesterday. Is this the end of the rally…or just a pause in the new bull market? We don’t know. But we were glad to see the IHT took the rise on Wall Street for a bull market; it confirms our guess that that bear still has a lot of work to do.
Investors Business Daily’s Mutual Fund Index of the largest growth funds is down 22.7% for the year. That’s probably about what most people have lost in stocks this year.
"It’s probably not over," your editor advised his brother-in-law over breakfast this morning. "The economy is supposed to be in a cyclical expansion, following the barely-noticeable recession of last year. But stocks are still going down. That’s not supposed to happen. In fact, it has only happened twice in history – once in Japan in the early ’90s and once in the U.S. following the crash of ’29. Japan was a much healthier economy than the U.S. The Japanese always saved money…even at the peak of their spending spree they were saving 10% of their earnings. Still, stocks fell in 1990…it’s now 12 years later and they’re still down 70% below the peak."
"Don’t tell me that…"
Eric is spending a few days in New Hampshire…but left these thoughts before he decamped:
Eric Fry…on vacation:
– "A cycle of Greenspan revisionism is long overdue," writes James Grant in the latest issue of Grant’s Interest Rate Observer. "Many are the lapses of judgment for which the chairman will sooner or later be called to account.
"A bare-bones indictment of the Greenspan stewardship would number six counts. For the first three, we are indebted to Andrew Smithers and Stephen Wright, British economists (though not yet knights)…The six are: 1) He refused to intervene to prick a bubble that he knew, or should have known, would cost the United States dearly. 2) He believed that the stock market is efficient (if not perfectly efficient in the academic sense, then efficient enough to be bubble-proof). 3) Though he refused to intervene to cap the rise in stock prices, he repeatedly intervened to stop declines. 4) By suffering a bubble to be blown, he was party to the distortion of the structure of the U.S. economy, a distortion that has persisted to this day. Its symptoms include excessive productive capacity, excessive indebtedness, inadequate savings and immense current-account deficits. 5) In an attempt to revive the economy, revitalize the financial markets and/or to curry favor with the incumbent political party, the Fed must create more credit than it otherwise would have to do, in this way risking a new inflationary cycle. 6) Amid the crisis of confidence he did so much to bring about, the chairman, on July 16, passed a marble-mouthed remark about "infectious greed." "Our historical guardians of financial information were overwhelmed," he added, omitting reference to "our historical guardians of margin regulation" or "our historical guardians of credit growth," i.e., himself.
– "Central bankers are not supposed to be either optimistic or popular," writes William Greider in the Washington Post. "They are supposed to be the national scold – the economic regulators who worry constantly over what might go wrong and impose restraints before public opinion or the markets see any problem. In that sense, the Federal Reserve went off the rails in the bubbling ’90s. Though still celebrated for wise stewardship, the Fed failed its core function as the disinterested governor."
"Greenspan’s first pivotal error occurred back in 1996, when he and other Fed governors first recognized a price bubble forming ominously in stock markets. Then-governor Lawrence Lindsey (now the president’s economic adviser) urged the chairman to act promptly. Raising margin rates would tighten stock-market borrowing…and ring a loud warning bell for giddy investors. But Greenspan waved off Lindsey’s prescient plea. A few months later, the chairman did speak once of ‘irrational exuberance,’ but the markets reacted badly. He dropped the subject."
– Instead of restraining the excesses of the late 1990s, says Greider, Alan Greenspan became one of the stock market’s most conspicuous and enthusiastic cheerleaders. "By the summer of 1999," writes Mark Zandi of Barron’s, "Greenspan was forcefully arguing that policymakers should not directly respond to a potential bubble. Greenspan’s uncharacteristically clear views provided the intellectual cover investors needed for their frenzied stock buying. Told by the Fed Chairman that it was unclear whether or not there was a bubble, investors bought; told that if a bubble existed and it burst, they could be sure that the worst of their financial pain would be mitigated by aggressive monetary easing, investors bought at even higher prices."
– To be sure, investors believed what they wanted to believe. But the Fed Chairman was at least an accomplice to the national self-delusion that "Dow 36,000" was an inevitable near-term price target.
– "Taking decisive action [early on] would have required courage," Greider concludes. "[Greenspan] would have been compelled to take on the Fed’s foremost constituency – Wall Street banks and brokerages – where he is most loved. Instead, Greenspan’s popularity soared with the booming economy."
– Incredibly, says James Grant, the Fed Chairman’s bubble-era popularity persists, even though the bubble (which he nurtured) has already burst. "On July 26-28, Gallup/CNN/USA Today asked Americans what they thought of him," Grant writes. "Sixty-two percent had a favorable opinion, only 16% an unfavorable one; 12% had no opinion, and 10% had never heard of the gentleman…[Greenspan] personified the boom on the upside, yet now, on the downside, he appears to personify hope. He was a celebrity CEO in the good times, yet now, in a time of recrimination, he is still no villain. Truly, he lives a blessed existence.
"In addition to the previously cited opinion poll, there is evidence to support this claim in the daily polls conducted in the stock market and the gold market. If the public doubted that some greater intelligence were guiding the nation’s financial destiny, we believe, stock prices would be lower. And if the world were persuaded that the chairman has been bluffing, the gold price would be higher. The gold price, we think, is the reciprocal of the reputation of the world’s central bankers, Greenspan’s most of all."
– The US markets dove yesterday, with the chip, oil service and financial sectors the biggest losers. The Dow dropped 118.72 points to 8,872 while the Nasdaq slid 17.95 points to 1,376.
Back in the French countryside, where your editor is also taking a holiday…
*** I went into Paris yesterday for some much-needed rest and business meetings, but am back hard at leisure today…and on my way down to Bordeaux to test the local wines.
*** Yesterday’s news reports told us the terrorist Abu Nidal had died. There was wide agreement in the press that he had shuffled off his mortal coil, but how? One report said he had died of leukaemia. Another said he had committed suicide. Then, it was reported that his body was discovered "riddled with bullet holes." A man can usually get one or two bullets in his body when he wants to kill himself, but it takes a really tough hombre to leave himself "riddled with bullet holes."
*** The Figaro chose this incident to remind readers that many news stories are in error, quoting Georges Clemenceau:
"Error is the rule," he said. "Truth is an accident."
More on this as we think about it….