Bastille Day, 2002

"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?

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, 1989, 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.

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 15, 2002

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.

Man oh man…we hope this week is better than the last. Week after week, the bear market grinds prices down. The Dow has dropped in 14 of the last 17 weeks. The S&P has been down 7 out of the last 8 weeks.

Mr. Bear must be getting a little tired. Besides, it’s summer…we wouldn’t be surprised to see him take a holiday for a week or two. We hope so; he could use the rest…and Daily Reckoning readers could use another good opportunity to panic out of stocks before everyone else does.

Because, even if he lets up for a while, we doubt we’ve seen the end of Mr. Bear. Stocks are still very expensive. Even with the Dow in the mid-8000s, says Robert Arnott of First Quadrant, they’ve only "now reached the same valuation as the market top in ’29."

Let’s turn to our man on Wall Street for the latest update. Eric?


Eric Fry, reporting from New York City:

– Well, it looks like we may have to re-admit the term "bear market" to the investing lexicon…There’s just no other way to describe what’s happening on Wall Street. Throughout the 1990s, we were able to get by with words like "correction" and "retracement" and "buying opportunity" to describe the market’s temporary sell- offs. Absolutely everybody knew that the declines wouldn’t last long, and that they would be followed by even higher highs. And bear markets were extinct – everyone knew that too.

– But of course, the bear market was not an extinct species. It just disappeared from view for a few years, like the California sea otter. Ursa Major is alive and as healthy as ever. – Last week, the stock market logged its eighth straight losing week. The Dow tumbled 695 points – or 7% – to 8,684, while the S&P 500 also collapsed nearly 7%. The Nasdaq, the overachiever in the crowd, lost 5.2% on the week.

– Bear markets share another interesting similarity with the sea otter: a voracious appetite. The sea otter consumes about 30% of its body weight daily, which means that it chows down about 25 pounds of clams, mussels, urchins, crabs and abalone every day. (In a New York restaurant, a seafood platter that size could cost a few hundred dollars.) Bear markets also have a hearty appetite…for capital. They keep chewing through capital until there is little left to chew. Certainly, most investors feel as though they’ve had a big bite taken out of them.

– Even so, as Addison noted in the weekend edition, "We ain’t seen nothing yet. During the last great bear market – lasting from January 1973 to December of 1974 – the Dow fell 45% and the Standard & Poor’s 500 lost 48%. ‘If stocks were to suffer a similar decline now,’ an analyst pontificates in USA Today, ‘the Dow could fall to 6448, or another 27%, and the S&P to 794, or 14%.’"

– With numbers like these, it’s easy to remain bearish. But is it too easy? All of a sudden, we bears have a lot of company. A skeptical view of the market is like a body-pierced and tattooed teenager – once a rare curiosity, but now utterly commonplace and conventional. Now that everyone is a bear, or at least talks like one, should we rethink our position?

– "When one’s most unconventional thoughts are repeated all day long as revealed truth on the stock market cable shows, a decision is in order – to think more highly of the TV set or reappraise the ideas," writes Jim Grant. "All the world today knows essentially what the bears alone used to know. It knows that the stock market is risky, that technology is especially risky, that telecommunication is overbuilt and that there was really no New Economy after all. It knows that some corporate executives are corrupt…Now you can read all about it in the New York Daily News, which, on June 30, in a page-one headline, printed the words ‘Crook St.’ in lieu of Wall Street, knowing its readers would get the meaning." – Grant wonders, therefore, if he should turn bullish…just to be able to say he did it. "We think we will wait," he says. "We have reached this conclusion after posing, and answering, a question, i.e.: What do the bears know now that the rest of the world doesn’t? We have thought of a few things. No. 1, the dollar exchange rate was also a bubble (foreign investors own tens of billions of dollars in the form of U.S. corporate debt). No. 2, corner-cutting financial and accounting practices were widespread, if not endemic, in the boom. No. 3, the political climate is turning chilly toward enterprise…There is a fourth important bearish perception, as a matter of fact. So high were prices at the peak that they are still not cheap more than two years after the peak…

– "We have learned a few things since 1991," Grant concludes, "foremost of which is that markets can do anything. We absolutely do not rule out a fabulous equity trading rally…But we are not frightened by the front page of the June 30 Daily News. The latest survey of institutional equity investors by International Strategy & Investment shows record-high bullishness. Bullishness – or denial?"


Back in Paris…

*** We read in the paper that in New York they plugged the Debt Clock back in. And in Washington, the government announced that it might end the fiscal year a little shorter than expected – with a budget deficit of $165 billion. At about 65% of GDP, U.S. debt has a long way to go before it equals Japan’s 130% of GDP. But, don’t worry, we’re confident that Washington will eventually catch up.

*** The weekend brought paradoxical news from the consumer front. Consumer confidence backed off in June, say the pollsters. But consumer spending bounced back from May’s decline and increased 1.1%. American consumers – like the U.S. government – are way behind Japanese trendsetters, who are reluctant to spend money even on life’s necessities. Japan’s population is about 10 years older than America’s…and its long, soft, slow depression is about 10 years further advanced. So don’t worry; we’ll catch up.

*** Yesterday was France’s big national holiday – Bastille Day. Celebrations were held all over France…but few people had any idea why they were raising their glasses or setting off fireworks

The Daily Reckoning