At the Cafe De Flore

“It is not a stock market; it is a market of stocks.”

Old Wall Street adage

Your editor left work a little early yesterday. He wandered over to the Left Bank and settled into a comfy booth at the Cafe de Flore on rue St. Germain.

He had come to listen to a literary history of Paris given by a young American woman. She was dressed in a delicate, flowing Vietnamese cheongsam – which nicely accentuated the curve of her back. She faced away from your editor while speaking to the group. But he had no cause for complaint, because a pretty woman is like a spring flower – a pleasure to behold from any direction…even when she is trying to describe existentialism.

Here in the Cafe de Flore, she explained, many of the world’s best-known writers, artists and intellectuals had raised a glass. “In this very corner,” she explained, “Jean-Paul Sartre and Simone de Beauvoir worked every day – as if it was their own office. They would come in the early morning, work until noon and then go home for lunch. They did their writing in the morning, then in the afternoon, they would meet with other artists and intellectuals – talking, arguing, explaining their points of view to one another. They would stay until 8 in the evening…and then go to Montparnasse, to other hangouts, to have fun.”

Not a bad life, I thought to myself. If you’re going to spend your life scribbling pathetic gobbledygook, better to do it here than in a double-wide outside of Nashville. But the Cafundefined de Flore was only the beginning of Sartre and de Beauvoir’s good fortune. They tumbled into the right place at the right time with the right nonsense. Soon, they would be celebrities.

It was the post-War period. The Nazis had been beaten. Stalin was in power; Soviet economics were widely regarded as the wave of the future.

In Paris, the “Lost Generation” of Ezra Pound, F. Scott Fitzgerald, Gertrude Stein, James Joyce and Ernest Hemingway had given way to the Beats and Existentialists. Hemingway was already recalling his time in Paris in “A Moveable Feast” – the last book he wrote before blowing his brains out.

“Existentialism is the recognition that even though the world may be crazy, we still have to make choices,” the young woman explained. The Existentialists felt that they had found their purpose – in political engagement. They could not permit themselves to mind their own business…they had to take part in politics – make the world a better place! After all, hadn’t the French resistance used the Cafundefined de Flore as a virtual headquarters during the war?

Our beat is investments…but even here in the Cafundefined de Flore there is something to learn. For we face an existential problem too. The markets are not nearly as rational as the Efficient Market Hypothesis suggests. Nor are investors anywhere near as reasonable as they think they are. Still, we have to do something. But what?

“Life is meaningless,” say the Existentialists, “until one defines his or her life.”

Defining one’s own life isn’t easy. It is much easier to join some group, some creed, some mission…then, at least, you can let someone else do the thinking. And minding someone else’s business is a lot easier than paying attention to your own. That is why the papers are so full of advice. Today’s International Herald Tribune, for example, has Jimmy Carter giving advice to the Israeli, Palestinian and American governments. You’ll also find gratuitous advice for France, the Catholic church, Asians, Moslems – you name it. And in every cafundefined in Paris, people are ready to offer their own recipe’s for making the world a better place.

“They ought to take Le Pen off the ballot,” says one. “The left need to regroup,” says another.

By signing on to the right claptrap, you can believe yourself to be more rational, more open and free- thinking, and even more righteous than the rest of the world. You can look down indignantly at the way Moslems treat their women, priests treat their altar boys, and the Chinese treat their dogs. Everything is fair game.

Believing in nothing except their own ability to figure things out, existentialists liberated themselves from tradition and convention. Now they would believe anything.

So it was that Simone de Beauvoir made a reputation and an income for herself with her intellectual tour-de- force: “The Second Sex.”

“One is not born a woman,” wrote Sartre’s companion, “but becomes a woman…” Had Ms. Beauvoir had any children or opened her eyes she might have noticed that little boys and little girls seem hardwired for different roles – even at birth. You can put a dress on a little boy and pretend he is a girl all you want. He will still not grow up to be something you want to see in a cheongsam – even from the back. But not noticing things is a requirement for most free-thinking creeds.

A man, left to his own devices, will normally go about his life in a reasonable way. German householders in the ’30s, for example, usually said please and thank you to their neighbors – even Jewish ones. But give the same man an abstract idea…tell him he’s a member of a “master race,”…and put a mob at his back…and he’ll throw out the restraints of common decency like the dregs from a beer mug.

Likewise, a man will usually only invest in a private company after doing a fair amount of research and assuring himself that the investment is likely to produce a reasonable return. But turn the same investment into a stock…and put it in a stock market…and he is willing to overlook real earnings and the balance sheet. Suddenly the value of the stock seems independent of the company itself. Will Alan Greenspan cut rates, he asks himself? Will consumer confidence hold up? Will the “New Era” take stocks to 100 times earnings?

And thus the free-thinker – who has thrown off the old conventions of Wall Street as if they were bras in the ’60s – finds himself swept along by the biggest group- think fantasy of his era. He owns stocks priced at 45 times earnings (latest S&P reading)…he has more debt than ever…and owns less of his own home. He lives in an era of unparalleled confidence…and barely notices. What does he do? Does he remember the old rule – that you only make money by buying low and selling high? Does he recall that a bird in the hand is worth two in the bush? Does he recollect that “what goes up must come down” and that “trees don’t grow to the sky?”

Nah. His life has been given meaning by rising stock prices. “Over the long run, stocks always go up,” he believes. “Alan Greenspan would never allow an extended bear market…” he assures himself. Besides, what would Louis Rukeyser and the elves think of him if he were to lose courage now?

And yet, what should he do?

More tomorrow…

Bill Bonner,
reporting from the Cafe de Flore
April 25, 2002 — Paris, France

Poor Bernie Ebbers! The man gets no relief from bad news. The market downgraded his stock to as little as $3.22 yesterday. And then, rubbing salt in sore wounds, along comes Moody’s and downgrades his debt to Baa2 status – just a tad above junk. Of course, investors are already trading it as though it were junk – discounting it to yield more than 14%.

CNNMoney reports that durable goods orders – excluding defense spending – fell 1.2% in March. New house sales fell too – down 3.1% in March from the preceding month…and down 7.9% from March a year ago. Meanwhile, AOL Time Warner reported the biggest quarterly loss in history. In no previous quarter in no market anywhere on God’s green earth did any company manage to lose $54.2 billion. Instead of taking it into a new era of communications, AOL has turned out to be an albatross around Time Warner’s neck.

And now the Fed’s own researchers – in the Beige Book – tell us that the pace of recovery has “slowed considerably.”

The recovery is so fragile, it turns out, that the “Fed to take its time raising rates,” says a Reuters headline.

One thing upon which almost all analysts and economists agreed was that higher interest rates were coming soon. As recovery develops more fully, the argument goes, the market will raise long rates and the Fed will hoist up short ones. So nearly universal was this belief that we couldn’t help but disagree with it.

Maybe we were right. Maybe the recession-that-wasn’t is being followed by the recovery-that-ain’t. Maybe both real recession and real recovery still lie ahead.

Eric, what do you think?


Eric Fry, reporting from New York:

– Another day, another mournful episode in the telecom sector. This time, it was Ma Bell’s turn to “hang crepe.”

– AT&T warned its grief-stricken shareholders that its sales were likely to fall another 8% over the next three months. That’s on top of the 8% drop in revenues over the prior three months. Accordingly, the company warned that it might fall short of Wall Street’s second-quarter earnings estimates by…oh…about 75% or so. In other words, AT&T might earn no more than one copper penny per share this quarter.

– Of course, if recent experience has taught us anything, it is that AT&T shareholders cannot bank on even one cent falling to the bottom line. “Visibility,” as they say on Wall Street, is poor. AT&T shares fell 10 cents to $13.75.

– The rest of the stock market lost ground as well. Despite rallying modestly early in the day, the Dow sold off during the afternoon to finish the session just a hair above 10,000. The NASDAQ fell 1% to 1,713.

– Tyco International returned to the headlines yesterday on news that its planned sale of a plastics unit has stalled. Rumor has it that the operation may not be worth the $2.5 billion Tyco hopes to pocket on the deal. The GE-wannabe demonstrates once again why it remains a GE-not-gonna-be. It can be difficult unlocking shareholder value when there is little value to unlock.

– And now, we return to highlights from the Grant’s Spring Investment Conference, which I attended on Tuesday. As mentioned in yesterday’s Daily Reckoning, Pierre Lassonde, the president and co-CEO of Newmont Mining, laid out a compelling long-term investment case for gold. – Faithful Daily Reckoning readers will recall Bill’s recent three-part series entitled “The Revenge of Gold”, in which he presented the merits of investing in gold based upon a near-perfect ignorance of future macroeconomic events. “We’ve been urging you to buy some gold, too, dear reader,” Bill wrote. “Not because we know something…but because we don’t. There are so many things we don’t know, we hardly know where to begin to describe them…But in a world with so many unanswered questions, gold seems the perfect thing to own.”

– Lassonde presents the complimentary bull case – one based upon his comprehensive knowledge of the gold market. “Why is gold going up?” Lassonde asks rhetorically. He cites six reasons that, taken together, add up to the simple observation that demand is rising while supply is falling.

– He points out that annual newly mined supply of gold peaked last year and “is set to fall by 30% in the next eight years.” Furthermore, “forward-selling” of gold by gold-mining companies is starting to fall out of fashion – mostly because it has become much less profitable. In other words, the massive forward-selling of gold by companies like Barrick Gold, Anglogold and others is coming to an end.

– In total, the gold industry has been selling forward about 300 tonnes per year on average throughout the back-half of the 1990s. But the sellers are now becoming buyers. Lassonde predicts that gold producers, by simply closing out their hedges, will become net BUYERS of about 300 tonnes this year. That’s quite a change for an industry that has been a net seller since the early 1980s.

– On the demand side, the picture is also brightening. Last year, Japanese investment accounts “consumed” 65 tons of gold, mostly in the form of gold-backed savings accounts. So far this year, the Japanese are on track to take down about 200 tonnes.

– Meanwhile, over in the Old World, Lassonde notes anecdotal evidence of renewed interest in the yellow metal. European investors are adding gold to their portfolios for the first time in nearly two decades, he says.

– Lassonde then paraded out the tried and true (and woefully unprofitable) observation that the swelling U.S. current account deficit will cause the dollar to collapse and gold to rise. A large multi-decade current account deficit has not yet brought this long-predicted outcome to bear. But maybe – like the Boston Red Sox – this will be THE year that the U.S. current account deficit triggers a financial crisis that causes a U.S. dollar meltdown.

– As Jim Grant observed on Tuesday, the “U.S. dollar-current-account-facilitator-faith-based-monetary system” is destined to fail at some point.


Back in Paris…

*** Speaking of defense spending, C.A. Green thinks he knows how you can make a buck out of America’s latest fling with defense contractors. “An historic opportunity is developing to capitalize on the biggest increase in defense spending in over 20 years,” says Green.

*** We haven’t seen such magnificent weather in Paris since last autumn. The skies are clear this morning, the weather is cool, the women are beautiful and the liquor is plentiful. What more could a man ask for?

*** And yet, the French are not happy this morning. Politics are giving them a massive Le Pen in the derriere. They are “ashamed”, “shocked”, “insulted” by the success of what they call the “far right.” Only more outraged are the world’s columnists and tongue-wags who are sure that Le Pen crawled out from the Dark Side of the planet like the devil himself.

*** This is probably far more than you ever wanted to know about French politics, dear reader, but I will tell you anyway. For Le Pen is little different from the poltroons and scalawags that infest American politics. “In economic matters, I am a rightist,” Le Pen describes himself. “In social matters, I am a leftist. And in politics I am French…first, second…and to the end!” A little something to offend everyone, in other words.

*** Le Pen is a law and order man – little different from Ashcroft and Rumsfield…eager to sacrifice citizens’ freedom in the name of liberty.

*** But he is also an ardent nationalist who wants little to do with the European Union and NATO. And just as many Americans oppose public education in Spanish, Le Pen proposes to require students to pass a French test before proceeding to higher levels. He’s in favor of letting schools compete for students and wants the educational system to teach more of “our cultural heritage,” re-establishing the values of “French civilization…so as to resist Marxist indoctrination, the domination of money and materialism, and the imperialism of cosmopolitan culture…and preserve our national memory.”

*** “France flirts with Thatcherism,” says the leftist journal, Liberation, of Le Pen’s fiscal proposals. Le Pen waxes Reaganesque when he says “there are too many bureaucrats,” and when he says that “taxes…what the state takes from working Frenchmen…should not pass 35%.” [Your editor currently pays as much as 60% on his French-based earnings.] But when he gets to his economic proposals he stands with neither Reagan nor Thatcher…but in the dark shadow of Patrick Buchanan and the other protectionists, who imagine they can make people better off by limiting competition. Le Pen proposes to erect trade barriers – like Bush’s recent tariff on imported steel – and to give French workers, and industries, various “preferences.”

*** Yes, it is loony. And the world’s press is right to be appalled. It’s a pity they can’t muster a little outrage at their own loony politicians.

The Daily Reckoning