Day of Patrimony
"There are three stages of a king’s life. The first is war. The second is love. The third is architecture. Of the three, the last is by far the most costly."
"I just love these old stones."
The owner of the chateau was just explaining what made him want to spend 10 years of his life – and millions of dollars – fixing the pipes and roof tiles on the chateau Bois Morand.
For those who don’t speak the language, ‘chateau’ means ‘money pit’ in English. The Chateau Bois Morand was put up in the 15th century, probably on the ruins of an earlier building. It was the time of the 100 Years War. The region south of Poitiers had been invaded by the English. The French monarch seemed powerless to come to the aid of his subjects; they were on their own. So, they put up stone walls, dug moats, and sharpened their war axes.
It was a miserable time. Local war lords took prisoners and demanded ransom. If the money wasn’t paid the hostages were killed and entire towns burned to the ground. Both English and French forces set torches to crops and barns to deny sustenance to their enemies. Torturing prisoners was almost routine and probably one of the only forms of entertainment.
The weather turned bad too. A ‘mini-ice age’ developed in Northern Europe, beginning in 1450. Crop yields fell and people starved. Plague struck from time to time. European civilization – or, at least that part of it in western France – had entered a major downturn. Before long, the rural areas of Aquitaine were so barren of people that they reverted to wilderness. Along the riverbanks, protected by these stone fortresses, little enclaves of poor, semi-barbarous Christendom barely survived.
What went wrong? We take it for granted that civilization only goes in one direction – forward. Progress is thought to be undeniable, unstoppable, irreversible. And yet, after the collapse of the western Roman empire in 476, European civilization entered a dark period…with lower living standards and falling GDP per capita lasting nearly a thousand years. "That was where the moat used to be," the owner explained. "It was probably filled in during the 19th century when the place was renovated."
Bois Morand is for sale. As far we know, no one has ever made any money by investing in these huge old relics. Your editor, though always a contrarian, is no exception. But he can’t help dreaming.
So it was that on Saturday, he went to visit a neighboring chateau which came on the market recently. On Sunday, these thoughts came over him. For Sunday was the day the French celebrate their architectural heritage. We marked the occasion by opening the gates to our own little pile. Few people would be interested, we thought. But once the defenses were down, in came a group of about 40 visitors.
Elizabeth has been forewarned. She had prepared a tour, complete with historical commentary. So little is known about our house that we half expected her to invent a history to entertain the crowd.
"Local legend has it that this house was used by Charles Martel, as his headquarters, after defeating the Moors at Poitiers in 736," she might have said. Who would know the difference? Then, working up a good head of steam, she might have rolled back another 1700 years. "And Julius Caesar camped nearby as he continued his Gallic wars. And, [what the heck!] Mary Magdalen came here and buried the holy grail in the back yard."
But Elizabeth stuck to the facts…embellished with a little general history.
Louis XIV, who built Versailles, practically bankrupted the entire nation with his property investments. That partly explained why the French welcomed John Law – the world’s first central banker. Law promised to make the French rich by increasing the supply of currency. At first, people were doubtful…what was this new paper money really worth, they wanted to know?
As the money supply increased, more and more people became comfortable with the new Royal Bank paper money. Investors were getting rich as Law’s Mississippi Company shares rose. Who could argue with that?
Then of course, the bubble collapsed and Law had to flee the country for Italy. Advice to Alan Greenspan: get out while you can.
How much did it cost to build Bois Morand? It is impossible to say. Visiting the stone quarries of St. Emilion we were told that a medieval stone cutter could produce only two blocks of limestone per day. Chateaux such as Bois Morand must have consumed thousands of them. There are also the carefully sculpted ceilings, the doors and windows…stone staircases. If you were to rebuild it today – with its stone towers, oak paneling, painted ceilings, huge beams, and monumental fireplaces – you’d probably spend $10 million or so.
Even the stables are more solidly built and much more graceful than the average American split-foyer. The spoiled beasts enjoyed solid oak stall partitions, with wrought iron decorations capped with brass balls. Overhead, they had exposed beams and in front of their noses, mangers carved out of stone blocks.
The horses didn’t complain about it, but what they lacked from the American home of 2002 was comfort. There was no plush carpeting, no air-conditioning, no lazy-boy recliner. Instead, the poor nag stood in the drafts on the cold bare stones.
Our complaint with the typical American home is the very thing others regard as its nicest feature: its comfort. Whether in the middle of the Nevada desert or the swampy woods of Maine, a man enters his house and cuts himself off from the rigors – and pleasures – of the outside world. Ensconced in his own home, he is as remote and insensate to the changing seasons as a rutabaga is to the next national election. Soon, his senses are blunted by the uniform temperature. His vigor is sapped by the ease of it. He doesn’t even have to open the window. And thank God, few American-made windows open – even in a fire emergency.
He never feels the chill winds of autumn blowing through his living room…nor the cold stones beneath his feet. But neither does he have the pleasure of throwing open the windows to catch the decaying sun of an Indian summer or the sound of doves cooing. He is separated from the real world by glass, steel, wood and plastic… cut off…boxed up…sealed away. Turning on his wide- screen TV he might as well be in North Dakota as in South Florida – it is all the same on the inside. Before long, comfort dulls his brain, softens his body and wears down his sense of dignity. Soon, he’s wearing pants with elastic waistbands, eating his meals in front of the TV, and trailing his luggage behind him on wheels as if it were a pet dog.
That sort of thing doesn’t happen to a man who lives in a chateau; the place is too demanding. Try to put a lazy-boy recliner in a grand salon – the absurdity of it stops you. Even a TV has to be hidden away in some locked cupboard…a small maid’s room with an electric heater with a locked door…where you sneak away for a few moments of relaxation from time to time.
Nor can you sit down to a TV dinner in a monumental dining room with portraits of illustrious ancestors staring at you. Each one of them will seem to be pointing a finger and wondering about the source of the defective gene.
And forget wandering around the house in your underwear. These places are almost impossible to heat. Even in the summertime people wear sweaters indoors. In winter, they sit in front of open fires dreading the next trip to the woodpile.
But what these places demand most is money. Generations come and go. Each one carries the burden a few more years, until…finally, exhausted…the place moves to another family with more money and, perhaps, less sense. More on the Day of Patrimony…and what investors can learn from stones…Wednesday.
Your correspondent, making his way to Italy on the next train.
August 23, 2002
We are in transition, dear reader. Between winter and summer…war and peace…inflation and deflation. The weekend weather was spectacular. We sat outside and had our tea with neighbors – enjoying the warm sun on our backs and the clear-blue sky overhead.
That was Sunday, now it is Monday; that was still summer, now it is fall. At 4:56 am, the earth tilted ever so slightly, and suddenly, in the Northern Hemisphere, there is more darkness than light.
"Squeamish investors may want to avert their eyes," writes Eric Fry from Manhattan this morning. After 4 weeks of steady losses, he tells us, "The carnage on Wall Street is becoming pretty gruesome."
The rest of Eric’s report:
Eric Fry fresh back from The Supper Club fiesta…
– During the week, the Dow, S&P 500 and Nasdaq all fell to within a hairsbreadth of their July lows. The Dow dropped 326 points to finish the week below 8,000 at 7,986. The Standard & Poor’s 500, meanwhile, slumped 5% to 845, and the Nasdaq brought up the rear with a loss of 5.4% to 1,221.
– "A series of jarring profit warnings and a weak slate of employment and housing numbers quickened the pace of the September selloff," Barron’s remarked. "Earnings warnings arrived with increasing and devastating frequency in the last two weeks. J.P Morgan Chase, McDonald’s, Electronic Data Systems, Oracle, Morgan Stanley and Duke Energy last week either cautioned that they would come up short of targets, or delivered disappointing formal quarterly results."
– As it happens, Dan Denning, editor of the Strategic Trader Alert, issued an alert on September 9th urging his subscribers to buy puts on Morgan Stanley Dean Witter. Thanks to the timely call, subscribers who acted on Dan’s recommendation are already sitting on gains of more than 100%…The brokerage firms just aren’t making the money they used to.
– Whatever happened to the recovering corporate profits that Abby Joseph Cohen promised us earlier this year? Whatever happened to the "second-half recovery?" Earnings growth estimates for the S&P 500 companies have been falling day after day – like rain in Scotland. On July 1 consensus earnings estimates compiled by Thomson First Call indicated that S&P 500 earnings would grow 16% in the third quarter. Today, the earnings growth estimate is 8.9% and falling. Maybe Abby’s price target for the S&P still needs to come down a notch or two…
– Inflation may be MIA for the moment, but that doesn’t mean that it has shed its mortal coil. To be sure, the CPI is creeping lower and the US 10-year Treasury note pays a Japanese-style interest rate of less than 4%. But the commodity markets are behaving in a surprisingly inflationary manner for an economy supposedly in the grip of deflation. Nor is it any secret that the gold market revived more than a year ago from its decades- long slumber and, so far, has refused to nod off again.
– What’s more, Alan Greenspan is once again putting the pedal to the metal, monetarily speaking. The man can’t seem to ever find the brakes. M-2 increased nearly 10% annualized over the past three months, while M-3 increased at a nearly 8% rate.
– "In theory, the Fed can decrease the money supply as well as increase it," writes Andrew Kashdan of Apogee Research. "In practice, however, the Greenspan Fed is only in the business of increasing the money supply, although the rate of increase can fluctuate greatly. Now, of course, the money supply is expanding at such a clip that it’s swamping any increase in output. Hence, the possibility, if not probability, of [resurgent] inflation is omnipresent."
– Consistent with the bullish trends we’re seeing in the commodity indexes, the "resource economies" are faring pretty well these days. As Greg Weldon points out, "Australian and Canadian employment figures have been in a virtual race to the upside, and have presented a rarity – two countries that can boast of an uptrend in job creation." Canada reported that 59,600 jobs were created in August alone (for perspective, that’s equivalent to about 500,000 U.S. jobs)…Then recently, Australia reported what Weldon labels a ‘mammoth’ increase of 88,000 new jobs in August, 87,700 of which were full-time positions. You don’t see that kind of job growth every day.
– "The Canadians and the Aussies part ways when it comes to the effect of the jobs data on their currencies," Kashdan observes. "The Aussie has moved up smartly; not so the loonie. Weldon speculates that geography and Canada’s reliance on the U.S. consumer is affecting the behavior of the two currencies…If the global economy starts to pick up and price inflation returns, expect all the resource currencies to kick into high gear."
– But what’s good for the resource currencies is not so great for the owners of bonds. Bondholders beware.
Back in Paris…
*** Your editor shouldn’t be in Paris. He was supposed to get on a train to Milan last night. But two things went wrong. A traffic jam outside of Paris made him late…and the train didn’t leave anyway, because Italian transport workers are on strike.
*** Giscard d’Estaing has his work cut out for him. The Europeans have managed to build a common market…with open borders similar to those in the U.S. But imagine what would happen if airline employees went on strike in Chicago; or if people in New Jersey started speaking a different language. Well, now that we think about it, it probably wouldn’t make much difference. The scale of things in the U.S. – the common language, common currency, common markets and customs – give a sense of stability. But the whole is probably no more stable than the sum of its parts. It’s just that, when we go down… we all go down together.
*** Paris is cloudy and cold today. With a little luck, we’ll find a way to get to Milan…and write to you again tomorrow.