Bastille Day

“One man has a skinny wife, and wants a fat one…another has a fat wife and wants a skinny one.”

– The Marquis de Sade explains why people join revolutions
Marat/Sade by Peter Weir

“They’ve gone mad.”

– George III

“Vive la revolution!”

Only an American would say such a thing at a Bastille Day celebration. Raising our glasses at yesterday’s picnic, the Frenchmen looked puzzled, then amused, at my toast. Everybody celebrates the 14th July in France. But no one would want to see a return of the revolution.

“Oh…there were some good things and some bad things that came out of it,” said a friend on Sunday. Asked what the good things were, he couldn’t think of any.

We wonder from time to time how it will all turn out – we mean the Great Bear Market and the long, soft, slow depression that America seems to be entering. What happens when a great people get themselves into a great mess?

Bastille Day: A Terrible Mess

The French Revolution was a terrible mess. By the 18th century, France had become the greatest power in Europe, the richest and most populous country in the western world, and the clear leader in art, science, philosophy, education, cuisine, fashion, architecture…and, of course, viticulture. It had the richest people in the world, the prettiest women, and the best booze.

It also had the most enlightened economists – the physiocrats – from whom Adam Smith was boosting some of his best ideas.

A poll taken in the early 1780s might have shown the French to be extremely optimistic and confident. And why shouldn’t they be? The last major financial crisis – caused by John Law’s Mississippi Bubble – blew up over 60 years before. And had the world ever seen anything approaching the splendor of Versailles?

But in 1789, Paris mobs came to the crossroads of history and veered left. They replaced an absolute monarch who had very limited power, with a people’s republic restrained neither by common sense nor common decency.

The uprising began on July 14th, 1789, at the old prison, the Bastille, which was seen as an emblem of the ancien regime. The prison was stormed by the Paris proles, who took the guards hostage (promising they could go unharmed if they laid down their guns) and released a handful of lunatics and hoodlums from their cells. Then, the crowd hacked the unarmed guards to pieces and paraded around the city with body parts on the end of pikes. Not long after, the “law of the lamppost” became the ruling order in Paris: aristocrats, CEOs, government officials and army officers were hung from streetlights. The Marquis de Lafayette, the liberator of the American colonies, tried to maintain order at the command of the National Guard. Lafayette was supposed to be guarding Louis XVI when a mob attacked the palace at Versailles on the 4th of October, 1789. A few raggedy women broke into the palace trying to kill Marie-Antoinette, who fled to her husband’s bedchamber. There, the attackers backed off. They may have doubted that Louis was put in his place by God himself…maybe God wouldn’t mind if they cut up the Bourbon king; but the femmes decided not to take a chance. Lafayette intervened, telling the crowd that he would make sure Louis returned to Paris – where the king would be at the mercy of the radical new government. A few years later, Louis and his family went to the scaffold…along with thousands of others. France was soon at war with nearly all its neighbors, and with the Vendee, a region in west of the country that refused to go along with the revolution. Church property was confiscated, a new paper currency – the assignat – was created, and then destroyed, by inflation. Outrages to the clergy, the aristocracy, the language, and even the calendar were perpetrated.

Bastille Day: The Alan Greenspan of the 18th Century

None of this might have happened, however, except for the efforts of the Alan Greenspan of the late 18th century – Jacques Necker. It was Necker who replaced laissez-faire economist, Jacques Turgot, as French finance minister in 1776.

Turgot’s free-trade policies had the fatal flaw of all sensible rules – they benefited everybody to the advantage of nobody in particular. Turgot dissolved the guild system, eliminated the corvee (the forced labor of the peasants), imposed a simple property tax and opposed all forms of economic privilege at the expense of the common good. He even set himself against Marie Antoinette, by refusing to grant favors to her cronies. Since everybody in France in the 18th century as well as every American in the 21st wanted the privilege of picking someone else’s pocket, Turgot eventually made enemies of nearly every class. Louis XVI, though responsible for the well-being of the entire nation, had not the strength to stand up to the special interests. Turgot even had a prophetic intuition and a view of history similar to our own. Periods of civilized progress are followed, he noted, by periods of barbarism and madness. Dismissed in 1776, he warned Louis XVI: “Do not forget, Sire, that it was feebleness that placed the head of Charles II on the block.”

Necker made enemies of no one. His program was the opposite of Turgot’s; he favored particular privileges at the expense of everybody else. Rather than tax people to pay for state expenses, Necker borrowed – taking short- term, high-interest loans that brought the government close to bankruptcy. Then, Necker turned to accounting tricks to show that the government was actually running a surplus! The patsies loved it.

Pushed out for the first time in 1781, Necker was called back on the eve of revolution in 1788 for another dose of his financial magic. But it was too late. The old miracle elixirs – heavier debt and cooked books – wouldn’t work any longer; bankruptcy was unavoidable. The aristocrats got rid of him again – on July 14, 1789. The mob, which still had faith, was so disappointed…it headed for the Bastille.

Your correspondent,

Bill Bonner
July 14, 2003

P.S. The American revolution was not a revolution at all – but just a revolt. The American colonists had gotten used to having their own way in the wilderness of North America. When King George III tried to reassert his control, Americans took up arms. An American in Baltimore or Philadelphia might have gone about his business before the War of Independence, during and after, and hardly have noticed the change.

Not so in France, where the revolution left hardly anyone undisturbed. Even my house in rural France – 200 miles from Paris – changed hands when the owners fled the country to avoid the guillotine.

P.P.S. King George III was no stranger to madness. He was already going mad from porphyria when the French revolution began. Thought cured on more than one occasion, George went mad permanently in the early 19th century and was replaced by his son, George IV.

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Your editors this side of the Atlantic are busy with extremely pressing matters…hard at work, that is, enjoying Bastille Day here in France. Bill and his family have chosen to celebrate the holiday as tradition demands: out at the chundefinedteau d’Ouzilly, their country home. Addison is at the hospital for the last time; he will welcome his son home for the first time tomorrow.

Your New York editor, however, has already had his holiday…and is still on call, bringing you the latest news from Manhattan. Forthwith, we leave you with his remarks.

Eric?

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Eric Fry, from the Big Apple:

– The stock market’s enigmatic rally continued last week. Every morning the stock exchange opened its doors to swarms of eager stock-buyers, none of whom seemed to worry about the dearth of upbeat economic news. A recovery may be nowhere in sight, but the stock-buyers could clearly see that share prices are rising…so why not buy a stock or two…or ten?

– During the week, a parade of tech company executives admitted that business conditions in the tech sector have improved little, if at all. After carefully and thoughtfully considering these unanimously glum reports from the like of Intel, Cisco Systems and Dell Computer, investors rushed in to buy tech stocks…again. Their feverish buying powered the Nasdaq to a whopping 4.2% gain for the week, to hit 1,733. The stodgy Dow, by comparison, added only 49 points to reach 9,119.

– The stock market’s recent trading action has been eerily reminiscent of the waning months of the 1990s bubble market – the riskier the stock, the greater its appeal. Investors are clamoring for “maximum juice.”

– “The Russell 2000, a widely followed barometer of small- cap performance, is up a smashing 24%, far outdistancing the 13% rise in the S&P 500,” Barron’s observes. “And it’s the sizzling performance of the very smallest of the small-caps that is sparking that index’s hefty advance…While small is certainly beautiful, it is small and speculative that is setting investors’ hearts aflutter. High-growth, high-multiple, high-beta stocks – especially if they are relatively illiquid – offer a terrific bang for the buck in a sharply rising market.

– “Another sign of fervent speculation,” Barron’s continues, “is that low-priced stocks are sky-rocketing. Shares in the Russell 2000 selling under $5 soared 54.8% in the April-June quarter, compared with a gain of 14.3% for stocks priced at $20 or more.”

– But while investors are snapping up risky, overpriced stocks, they are also dumping risky, overpriced bonds. “Long-term Treasury yields are significantly overvalued at current yields and the market is displaying the characteristic aspects of a bubble,” says The Bank Credit Analyst.

– “Buying Treasurys at current yields is a bit like playing chicken with the Fed,” continues the Analyst. “The Fed is trying to encourage investors to buy long-term Treasurys at yields below 3.5%. Yet, the Fed is explicitly targeting a stronger economy and increased inflation, two events that will ensure Treasurys purchased at current yields become a losing proposition….The challenge for investors will be to figure out how long to play the Fed’s game, and the challenge for the Fed will be to figure out how to eventually raise rates without causing complete carnage in the bond market. In practice, it probably will be impossible for the Fed to exit from its current super- easy stance without causing a Treasury market blow-up.”

– If you hate bonds, you’ll love buying one of the two mutual funds that specializes in selling short Treasury bonds.

– “For the bond bear that does understand the inverse correlation between yield and price, Grant’s presents a pair of ideas,” notes James Grant in the latest issue of Grant’s Interest Rate Observer. “They are Rydex Juno Fund [which your New York editor owns in his 401k] and ProFund’s Rising Rates Opportunity Fund. Each is an open- end mutual fund. Each rises or falls in value as long- dated Treasurys fall or rise in value…[In the Juno Fund] each 3/32 change in price of the long bond means approximately a one-penny move in the share price.”

– The Rising Rates Fund offers “a little more juice,” according to Grant, as it uses leverage to boost its investment performance. “Negative correlation between the Rising Rates price and the long bond’s price has been 125%, as opposed to a 100% correlation for Rydex.”

– So if it’s maximum juice that you’re looking for, you may find it by betting against the bond market rather than betting with the stock market.

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Back in Paris…

*** On this day – 214 years ago – France commenced its revolution.

A celebratory DR Classique follows, below…

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