“God does not play dice.”
Einstein upset the world with his Relativity Theory. All of a sudden, there were no fixed positions; everything seemed unhinged…loose.
“It’s all relative,” people said. Nothing was absolutely this or that, right or wrong, here or there.
And then Heisenberg’s Indeterminacy Principle came along and even Einstein had had enough. Not only are there no absolutes, said Heisenberg, but you couldn’t know it even if there were. Everything was in motion, he pointed out; you could figure out where an object was…or its speed…but not both. And the process of trying to figure it out can’t help but change the readings!
After Einstein and Heisenberg the world had begun to look like a giant crap game. You throw the dice and hope for the best; what else can you do?
The idea of an uncertain, unknowable universe did not please Einstein; he spent the rest of his life trying to prove it was not so.
Bad Bets: The Rattle of Dice Everywhere
But today, we hear the rattle of dice everywhere. It is the end of one year and the beginning of another. People are regretting what they did last year…and warming up the dice in their right hands for another throw. What are the odds of this…or that…they wonder, as if they could know.
To give you a preview of our conclusions; we guess that this is a bad time to buy stocks.
The odds of a huge meteorite destroying lower Manhattan, we assume, are fairly low – as remote as the odds that Congress will pass a sensible law or that Jack Grubman will win a Nobel Prize for his investment research. Anything could happen, but some things are more likely than others. But, as Heisenberg warns us, as soon as we try to figure these things out, we distort the odds.
That is the strange perversity of the marketplace. As people come to believe that something will happen, the odds of it coming to pass go down. Likely as not, it has already happened. As people come to believe they can get rich by buying stocks, for example, they disturb the universe – they buy stocks and run up prices. Then, the higher stock prices go, the more people believe in them…and prices go still higher. At some point, because this cannot go on forever, stocks reach their peaks – at almost precisely the point when people are most sure they can get rich by buying them.
This point was reached in the U.S. somewhere between the fall of ’99 and March of 2000 – about 3 years ago. Since then, the Dow has fallen 37%. The Wilshire Index, a broader measure, has lost 43%. It is has been the worst bear market since ’29, with the leading mutual funds down an average of 27% in 2002 alone. In terms of money lost, it has been the worst bear market ever. The total loss so far has equaled 90% of GDP, compared to only 60% of GDP for the two years following the ’29 crash.
Almost all market forecasters were wrong during this period; they overwhelmingly thought stocks would go up, not down – especially in 2002, because stocks “almost never go down 3 years in a row.” Abby Cohen, Ed Yardeni, Louis Rukeyser, James Glassman, Jeremy Seigel – all the big names from the ’90s – still believe that stocks will go up, if not last year…certainly the next. They seem completely unaware that their own bullishness has tilted the odds – against them. Talking up the bull market year after year, they helped convinced Mom & Pop that stocks for the long run were an almost foolproof investment. Now, the fools are having their way – proving that nothing fails like success.
Bad Bets: Tides Do Not Run in One Direction
In the last quarter of the 20th century, nothing seemed to succeed better than American capitalism. Stocks began rising in 1975…and continued, more or less, until March of 2000. By then, all doubt had been removed. Americans had become believers in the stock market.
“To believe that stocks will be rotten again…,” wrote James Glassman early last year, “is to believe that they will buck a strong tide that has been running in the same direction for more than 60 years.”
Glassman doesn’t criticize our metaphors, but we can’t resist criticizing his. Tides do not run in a single direction forever. They ebb and flow in equal amounts and opposite directions.
Glassman seems to believe in tides and weather, but never looks out the window. “It rains, but the sun comes out again. Stocks fall, but they always recover to a higher ground,” he wrote. And then, he failed to mention, it rains again! And when the sun shines long enough, people stop noticing clouds on the horizon.
Who noticed, on those perfect days of early 2000, that odds had changed; the stock market had become very different from the stock market of ’75…and that the few investors who bought shares in ’75 were very different from the many Moms & Pops who put their money into stocks in 2000? Who noticed, as Buffett put it, that these people may have bought for the right reason in ’75…but they bought for the wrongs ones 2000? Warren Buffett has another helpful dictum: if you’re in a card game and you can’t figure out who the patsy is, you’re it. Millions of patsies had entered the stock market in the last 25 years…lured by Buffett’s example, Rukeyser’s spiel, and the appeal of getting something for nothing. Hardly a single one of them carried an umbrella.
It is now three years since it began raining on Wall Street. On paper, more money has been lost than ever before. And yet, the little guys still believe. They believe the ‘reasons’ why stocks are likely to rise …because they hardly ever go down 4 years in a row! On the little evidence available (since it so rarely happens) after stocks have fallen 3 years in a row, the odds are about 50/50 that they will fall again in the 4th year.
Bad Bets: Distorted Odds
This year, the odds may be distorted – but not in the way investors hope. Stocks rarely go down 4 years in a row because – usually – after 36 months, they have almost always hit bottom. But this year is different. The patsies are so confident that they have not been willing to sell their stocks and take their losses. At the beginning of 2003, stocks were still selling at prices more typical of a top than a bottom. Based on ‘core earnings,’ S&P stocks were priced at 40 times earnings. Or, as Barron’s calculates it, based on last year’s reported earnings, they sell at a P/E of 28. Either way they are expensive.
While earnings are subject to interpretation, dividend yields are not; stocks yielded only 1.82% in dividends at the end of 2002.
But maybe the patsies will get lucky in 2003. Maybe the U.S. army will catch Osama bin Laden…and maybe stocks will go up. Maybe it is just luck, after all.
Imagine the roar of laughter when Einstein arrived in heaven and God explained, “I don’t have any plan…I just roll the damned dice!”
God can do what he wants, of course. But made in His image, we will do the same. We don’t presume to know God’s plan or his method. We know that history is full of myths and lies, that the present is impossible to fully understand and that the future is unknowable.
But so what? As the existentialists tell us, we still have to get up in the morning and make decisions. Recognizing that we can’t know whether stocks will go up or down in the year ahead, what do we do?
We take a guess…we make a wish…and we say a prayer.
We guess that stocks are a bad investment, for very simple reasons:
“The place to find a safe and remunerative investment is unusually where others aren’t looking for it,” writes James Grant. Everybody is looking on Wall Street. So we will look elsewhere.
“Buy low, sell high;” the old chestnut practically pops out of the pan towards us. For the last 100 years or so, the average stock has sold for less than 15 times earnings (which used to be calculated more honestly). Almost any measure you take puts them about twice as expensive today.
“A bear market continues until it comes to its end – with real values,” says long-time observer Richard Russell. Stocks are real values when they sell for 8-10 times earnings, not 28-40 times. If stocks are destined to sell for 10 times earnings some time in the future, why would we want to buy them today?
Of course, stocks could go up. And maybe they will. But it is a bad bet. Not that we know the odds any better than anyone else. What we know that many others don’t is only that we don’t know them….
More to come….
January 3, 2008
P.S. Einstein and Heisenberg proved the latter’s point. Trying to describe the world – they changed it. “A kind of madness gained hold…” wrote Stefan Zweig of Germany in the ’20s. The whole nation seemed to come unhinged by the realization that nothing was quite what they thought it was…
Eric Fry in New York…
– Although bloodied by the savage campaigns of 2000, 2001 and 2002, bullish investors charged courageously into 2003, dragging their battle-weary portfolios behind them.
– On the first trading day of the New Year, IN-discretion proved to be the better part of valor, as the bulls fearlessly paid high prices for already-expensive stocks and pushed all the major averages to big gains. The Dow advanced 265 points to 8,607, while the Nasdaq charged ahead nearly 4% to 1384.
– Buttressing the courage of the investor-infantry was a surprisingly strong manufacturing report for December. The ISM Index of manufacturing activity rose to a fairly robust reading of 54.7 last month from November’s disappointing tally of 49.2. When news of the ISM’s report crossed the wires, the stock market and the dollar both soared. Bonds, however, headed in the opposite direction – surrendering a big chunk of their recent gains.
– In the manic-depressive world of Wall Street, one surprisingly robust economic report is sometimes enough to throw investors into a tizzy. Clearly, our struggling economy has not become suddenly buoyant. But don’t try to tell that to all the folks who frantically unloaded Government bonds yesterday. The steep sell-off in the 10- year Treasury note caused yields to soar to 4.05% from 3.81% late Tuesday.
– Gold retrenched yesterday on dollar strength, dropping $1.70 to $346.50…oil rose $.65 to $31 a barrel. Given all the recent publicity for gold and oil, you have to wonder – will these prices hold? Our resource man John Myers suspects not. While remaining bullish on both commodities for the balance of 2003, Myers suggested yesterday he thought the gold and oil markets are both due for “short, but sharp corrections.”
– “After taking a likely breather early in January, commodities will resume their strong rally,” Myers predicts. “This party is just getting started.” [Editor’s note: Myers just balanced his successes for commodities trades in 2002: 76% of RTA option plays saw profits. Average gain: 47%. Among his winners, Myers took 40% on a silver option…120% on sugar…125% in coffee and a soybean option that brought in 304%. Good stuff. If you’d like to learn more about trading the commodities market, please see: Resource Trader Alert http://www.agora-inc.com/reports/RTA/MassiveProfits/
– We’re as happy as the next bear to see the manufacturing sector showing signs of life. But we are not yet persuaded that our narcoleptic economy has truly revived. For one thing, the bear market in consumer confidence continues unabated. Tuesday’s disturbing report from the Conference Board revealed that consumer confidence in December plunged to 80.3 from 84.9 in November, just a hair above the nine- year low of 79.6 reached in October.
– “The major factor dampening consumers’ spirits has been the rising unemployment rate and the discouraging job outlook,” said Lynn Franco, head of the Conference Board’s consumer research center…Not that any “research” is required to determine that consumers who lack jobs might also lack the confidence to consume.
– Does it require any research to know that our economy runs better on the high-octane fuel of rising employment and rising share prices than it does on the grain-alcohol of Greenspan’s interest-rate cuts? Americans simply are not buying as many widgets from Wal-mart as they used to, and this trend is not great news for an economy that has been living on consumer spending alone…
Back in Paris…
*** A woman suddenly screamed as we were making our way home on the subway last night. She was going through the turnstiles…and had stopped midway through, turned around and was yelling at a young dark-skinned man who looked North African. The woman was of African origin herself….and for a moment, passers-by didn’t know what to make of the scene. But in a second or two we caught on – the man had just stolen the woman’s purse.
“Stop him…thief,” people began to yell as the man walked calmly, almost swaggeringly, away. A pale businessman tried to grab him, but he was completely unprepared for the task. A few moments later, they were picking him up off the floor.
We love a good fight, and felt sure we could succeed where the other middle-aged man had failed. We’ve been nursing the illusion of superiority for so long we’ve actually come to believe it. Give us a few minutes to prepare and we will beat the champions in anything…that is, we would have given even odds that we could beat Shaquille O’Neal at a game of monopoly and Warren Sapp at chess.
But there we were…on the wrong side of the turnstiles…!
In a few seconds, the whole thing was over; the miscreant had run off.
*** “We have a huge problem in France,” explained our New Year’s Eve guest, a political talk-show host. “We have about 10% of the population from Africa. They have a hard time getting work – because wage rates are too high for unskilled labor. They live in these public housing projects…and they hate the police and all of the rest of us.”
The French government is generous in its financial support for these people. It built whole towns outside major city centers and provides housing, health-care, education, and other services at great cost to taxpayers but little expense to recipients. They are like pampered slaves…with no work to do. And like slaves everywhere, they resent it.
These housing projects are known in France as “la zone.” They are crime-ridden areas in which firemen and medical workers are often attacked and into which even the police are reluctant to venture.
“Now, the crime is leaking out into the rest of the country,” Jean Louis continued. “In America, you had a similar problem in the ’60s, when your ghettos exploded. I’m afraid the same thing will happen here. But at least you had a couple of advantages. Your economy absorbed low- skill workers…because you have a lot of low-pay jobs. You don’t have all the social charges and protective labor legislation that we have…and you also have a history of taking in different people from all over the world and making Americans out of them.
“In France, we have had waves of immigration from, say, Germany, Poland and Russia. After a few generations, these people came to be accepted as French. But we don’t know if we can turn Africans into Frenchmen. It just doesn’t seem possible…so what’s the solution?”
We had one. “Stop supporting them…and throw out your labor laws,” we offered. “These people will either get jobs and integrate themselves into French society…or they’ll leave.”
“Impossible!” Jean Louis replied.
*** “What’s wrong with me?” Maria wanted to know.
“Am I not pretty enough?” wondered the girl who makes her U.S. modeling debut this week in the pages of YM magazine. “Maybe I just don’t say the right thing? Or maybe I’m too young…” she went on
“What’s the matter,” her father asked.
“He didn’t call me…”
“You know, he’s that young man that had been in an auto accident and his face was all cut up. Chantal…she must be his aunt said he was ‘barge,’ but he said he would call me and he didn’t. No one ever calls me…”
“What does ‘barge’ mean?”
“It means crazy…she said you can’t believe a word he says…”
“Isn’t he the one who said he was a spy?”
“Yes that’s the one.”
“And didn’t his father say the accident happened because he was drunk and driving 100 mph down one of those little, windy roads?’ “Well, yes…He was over right after Christmas with his stepfather, the general…and I guess he is barge. He said he would call and he didn’t. And maybe he’s not a spy. But I saw him in his uniform at church during the summer…and he looked very handsome…
“What’s wrong with me…why didn’t he call?”
“Don’t worry, Maria,” came the words of wisdom from Dad, “be grateful he didn’t call. They’ll be plenty of callers when you’re a little older. Most of them will be barge too…