An Air of Fin De Bubble

In this DR Classique, that first ran in August of 1999, your prescient editor considers bubbles…and the human nature that sustains them…

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.

Fin de Bubble: A Sign of Fin de Bubble Thinking

"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 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.


Bill Bonner
for The Daily Reckoning

August 05, 2005

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of The Wall Street Journal best seller Financial Reckoning Day: Surviving the Soft Depression of the 21st Century (John Wiley & Sons).

When we began The Daily Reckoning, six years ago, the United States was in the throes of a stock market mania. "This can’t continue," we said. But it had already continued for longer than we thought it would. We still looked for the end of it, but after a while we got tired of craning our necks.

Now, the nation is caught up in an even bigger mania. It is not just investors who have taken leave of their senses…it is ordinary people with little sense to take leave of in the first place.

That is why we can set aside our old thoughts for a day or two…but we still need them.

What needs to happen still hasn’t happened. Until it does, we cling to our old thoughts like a bottle of vintage Bordeaux. We will drink it down and get rid of it; we’re just waiting for the right occasion.

Most people celebrate America’s property boom…it’s growing economy…its high priced stocks. We would too, if they weren’t all mountebanks, frauds and ponzi schemes.

A bear market in stocks began in January of 2000. Prices fell until the autumn of 2002. Since then, the Dow has rallied – led by the builders, who have been having a field day.

The dollar, meanwhile, hit a high almost four years ago. Then, it fell until December of 2004. Since then, it too has rallied.

The dollar is often thought of as the "stock" of the U.S.A. It goes up as perceptions of America’s economic health and financial stability improve. Of course, it’s never quite that simple. The dollar also goes and down based on how many dollars people overseas need for commercial, banking and investment purposes. But when Europe turned in a series of "no" votes on its new constitution, many people saw the dollar as a reliable old friend. Many American economists flattered themselves; their own Alan Greenspan managed the greenback so well that it was now in demand all over the world, and always would be. Europe was a nice place to visit, they said, but you can’t develop a stable currency out of such a hodge podge of countries, languages, cultures and economies.

Yet, Europe has a positive trade balance with the rest of the world. It pays its bills. It earns enough every day to pay the day’s expenses…and then some.

Not so, for the United States. It falls short – at a rate of about 6% annually. If the shortfall continues, an awkward and embarrassing situation will result. America will eventually owe the rest of the world more than the value of everything in America. The foreigners will come in and repossess cars…sofas…and shopping malls. They will take over U.S. companies – as China tried to do recently. Congress put the kibosh on the Unocal deal, but there must be thousands of other deals waiting to be done. What else can Americans expect? Foreigners already hold a quantity of U.S. assets almost equal to the GDP. Most of those assets are in the form of Treasury bonds. At some point, the foreigners are bound to want something more tangible…something inherently more valuable.

And so, the dollar is vulnerable. There are many, many dollars in many, many different hands. Many of those hands are going to want to clutch something else, sooner or later.

We expected the greenback to fall quickly after the bad news from Europe had hit the euro. It took longer than we thought, but the dollar is now falling…and the euro is back to where it was when the French said "non."

More news, from our team at The Rude Awakening:


Eric Fry, reporting from Wall Street…

"Why are the Toll brothers selling their stock? Are they selling to conduct ‘personal financial planning?’ Or because the housing market is topping out?"


Bill Bonner, with more views:

*** The countertrend in the dollar seems to be over. The buck is back on a downward slope. The countertrend in the Dow must be getting close to its end too. Corporate profits are up 13.6% over last year. But the trend is down. S&P earnings growth was cut six times in the last 12 months, says Richard Bernstein. "The fundamentals are eroding," says he.

That is the problem with the dollar, the Dow, and the American economy in general. The fundamentals are much worse than they were six years ago…and are still wearing down. On the world market, American companies can’t compete with European firms, because the Europeans make better products. They can’t compete with Asian companies because the Asians make cheaper products. And in the homeland, consumers are running out of money. Their debt-to-wealth (inflated house prices) ratio may be calm and collected, but their debt-to-real income ratio has become almost desperate.

We have gotten tired of waiting for the end of it. But that doesn’t mean the end will not come. Then, at least, we can celebrate. We will open up this bottle of old thoughts and drain it down…and be finally rid of it.

*** "It is a paradise for children," said a friend of our summer place. Yes, it is a paradise. Edward and his cousins found a dove with a broken wing. They have nursed it back to health. Now, it sits on his arm…and occasionally flies into trees.

"Let it go," says his father.

Instead, Edward climbs the tree to get it back.

The weather is perfect. The sun shines all day. It is cool at night…and warm in the daytime. The children build a fort in the woods, swim in the pond, ride horses, play tennis, chase lizards…and get pressed into work gangs from time to time.

When the bell rings, we all stop for lunch; then we return to our amusements.

*** A friend sends the following uplifting story:

One afternoon, a well-to-do lawyer was riding in his shiny limousine when he saw two men along the roadside eating grass.

Disturbed, he ordered his driver to stop and he got out to investigate the situation.

He asked one man, "Why are you eating grass?"

"We don’t have any money for food," the poor man replied. "We HAVE TO EAT GRASS!"

The lawyer then said, "Well, then, you can come with me to my house and I’ll feed you!"

"But sir, I have a wife and two children with me. They are over there, under that tree."

"Bring them along," the lawyer replied.

Turning to the other poor man he said, "You come with us, too."

The second man said, "But sir, I also have a wife and six children with me!"

"Bring them all!" the lawyer answered. They all jammed into the huge limo.

Once underway, one of the poor fellows turned to the lawyer and said, "Sir, you are too kind. Thank you for taking all of us with you."

Genuinely touched, the lawyer replied, "Glad to do it. You’ll really love my place; the grass is almost a foot high!"

The Daily Reckoning