Dublin To Waterford

Europe is enjoying a wonderful Indian summer. The days have been much warmer than usual…warmed by a sun that seems as unwilling to yield to the approaching winter as an American investor to the bear market.

I left my hotel in Dublin this morning…walking down Thomas street towards Heuston Station. I passed the Guinness plant, which takes up what seems like an entire city block on both sides of the street. Guinness, next to the Irish people themselves, has been one of the country’s most successful exports.

Nearby the Guinness plant was a store selling tombstones. “Come in and browse,” a sign on the door invited passers-by.

People browse in antique stores, in furniture stores, even in appliance stores…but what kind of a morbid personality would spend his time browsing for a gravestone? A perverse curiosity grabbed me as I passed…a sentiment of the sort that overtakes me when I pass the Senate Office Building in Washington…I decided to browse.

Perhaps a visit to the headstone store in Dublin takes the place of the memento mori that people used to carry in the 19th century…a reminder to live well, and carefully, for death could come at any time. But the enterprise on Thomas Street was as much of a disappointment to me as it must be to the locals.

Alone, I read the suggested inscriptions – “may he rest in peace”…”gone but not forgotten” and so forth…cut into polished slabs and crosses of stone. As light and silly as the sentiments were, the stones were worse – bright red and blue marble in oval, square and simple cross shapes…and some free-form like a blob from a lava lamp that was suddenly petrified.

How much better it would be to have more useful remarks chiseled into traditional celtic crosses…for even fools can be martyrs for something: “Don’t forget the bend on O’Donagh Road”…or “A pack a day was probably too much for poor McConnell.”

There are times when people are fearful…and times when they need a reminder that there are things to fear.

Maybe investors ought to carry memento mori too – such as a portfolio statement for the first 3 quarters of this year, with notations. Every dollar lost, too, must have something to teach. A little souvenir of the mistakes one can make might be useful.

“Never again will I buy when prices are this high,” would suffice for almost any market and almost any time.

“If prices ever get that high again…don’t forget to sell!” might be a useful thing to find in your tickler file at the top of the next bull market.

“Pay no attention to shills, analysts and central bankers,” is the sort of sentiment that is not only useful, but timeless.

In science, and you may want to quote the Daily Reckoning on this, people make new mistakes all the time. In war, investments, and the rest of life…they make the same old ones.

When the memory of an egregious foolishness is forgotten…count on it to be repeated.

However little useful advice and information you are accustomed to finding in the Daily Reckoning – I have to warn you, dear reader – you will probably find even less today. In fact, you have already gotten it. What follows are merely more notes from my trip to Ireland.

As I made my way down to the station, I passed through good neighborhoods and bad ones. The bad ones seemed familiar to me. People looked like my relatives. The bad neighborhoods of Dublin are not very different from the poor white sections of Baltimore or Philadelphia.

People look the same, wear the same bad clothes, eat in the same bad restaurants, and shop for the same mawkish furniture and pay for it over time. The streets are dreary and depressing – along with almost everyone in them.

The train left Dublin on its way to Waterford with few people on board. Clearing Dublin, we found ourselves cutting through some of the most beautiful countryside on earth. Very green fields, often with sheep grazing, are bordered by stone fences, or hedges. Hills rise up and fall away to little copses of trees…around which groups of cattle lay sunning themselves.

But everywhere and always, nature achieves her balance; the Irish countryside is blemished by Irish buildings – houses, barns, factories, stores and office buildings… like small pox on a beautiful girl.

I say this with no malice aforethought. My father’s family came from Ireland. This is his country. But I am always a bit disappointed when I see what his people have done with it.

There are a few attractive houses and public buildings. But not many. And more often than not, the attractive buildings – old churches, rectories, and mansions, often with carved stone lintels and arched doorways – are attended by weeds or wrecking crews, or are already half-demolished and converted into pigsties.

The typical Irish house is depressing. It is made of cement walls with plain windows and doors stuck in at regular intervals, topped by a gray slate roof. For most of the year, to make matters worse, it is cold and wet.

But since I am in a mood to improve, having already reformed the country’s tombstone business, I offer a suggestion: Put on shutters, ivy, a thatched roof, a more sophisticated doorway – perhaps with Georgian columns – something, anything to add a little grace, charm or beauty.

The train trundled along, stopping to pick up passengers and let others off. After about an hour, a downpour began. Water rolled down the windows so heavily that I could barely see out.

A few minutes later, we stopped at the village of Athy. So small was the station that the cars at the rear were left well rear of the platform, with an orchard on one side and a graveyard on the other. The rain had calmed to a drizzle…and there in the cemetery was an ancient celtic cross…practically alone and untended.

The limb of a nearby tree, swaying in the breeze, touched it lightly…and water dripped off, like blood from a martyr.

Bill Bonner,
October 19, 2001

In the land of his ancestors…

Gold fell $4.20 yesterday. Bonds were up too. Both markets are telling us that things are going to get worse in the U.S. economy before they get better.”Greenspan says slump could last for months,” says a Washington Post headline.

But he also said that “Prospects for ongoing rapid technological advance and associated faster productivity growth are scarcely diminished. Those prospects, born of the ingenuity of our people and the strength of our system, fortify a promising future for our free nation.”

“Easy-money policies bring about, through a combination of innovations and booming financial markets, massive over-investment and a gross misallocation of capital,” wrote the DR Blue’s Dr. Marc Faber in a recent study of 19th century booms and busts.

“The downturn is ushered in when the over- investments lead to excess capacity and a collapse in prices, which in turn drive down profits, then stock prices, which in turn weakens the economy even more.” The ingenuity and strength of our people

notwithstanding, of course.

Meanwhile, a study by McKinsey Global Institute confirmed a suspicion we have been harboring here at the Daily Reckoning: productivity has little to do with business spending on information technology. All those billions spent in the late ’90s caused a boom…but they did not provide a lasting benefit.

Over to you, Eric…


Eric Fry on the island of Manhattan:

– The stock market wobbled a bit yesterday, but managed a decent performance…all things considered. The Dow fell 70 points to 9,163, while the Nasdaq Composite eked out a 6-point gain to 1,653.

– Terrorism never sleeps, we are discovering. Even when the terrorists themselves take a day off, the residual havoc and fear inflicted by their previous crimes lingers on. Investors keep trying to turn their attention to things like yesterday’s solid earnings reports from Tyco and Coke. But instead, they must confront a daily news assault about fresh anthrax cases, and try somehow to factor these “exogenous events” into the risk equation that adds up to either “buy stocks” or “sell stocks.”

– I’ve done the math. The answer looks to me like “sell stocks.” Or more precisely, sell some stocks and be very careful about the select few you chose to own. Terrorism is not bullish. Nor is declining corporate profitability, nor rising unemployment, nor collapsing industrial production. You get the idea.

– We’re heading straight into a geo-political and macro- economic headwind – maybe even a tornado. In such times, discretion is the better part of preserving accumulated wealth. Or, as Jim Grant put it recently, “Risk aversion entered a bull market 18 months ago…”

– “In the 1990s’ boom,” Grant explains, “the best offense was no defense. Savings, inventories and cash reserves were paired to the bone. Confident of happy outcomes, Americans renounced the theory and practice of a margin of safety.”

– But Grant predicts, “Before the cycle is over, families will save more, corporations will borrow less…safety will be taken to excess in the downturn just as audacity was in the bubble.”

– If Grant is to be believed, the risk-averse, post- bubble era has a lot longer to run before safety is taken to excess, and caution gives way to a new risk- taking mentality.

– We might need to see somewhat lower valuations in the stock market as well. For example, Fred Hickey observes that even though the Nasdaq has plunged nearly 70% over the past 18 months, it has hardly become a repository of value. Hickey compiled a table of the 36 largest Nasdaq tech stocks and compared their estimated 2001 P/E ratios to their average annual P/E ratios in various years, including 1987. The average P/E ratio of these stocks is now more than 40, compared to a P/E ratio of 21 at the market top in 1987.

– Residue of a bubble gone bust litters the economic landscape. And the former propagators of the bubble are now suffering the greatest financial distress: Wall Street and Silicon Valley.

– Merrill Lynch announced Wednesday that it would likely slash 10,000 jobs from its payroll. Yesterday, Bear Stearns joined the layoff chorus, saying that it would shrink its workforce by 7.5%. Lynn Carpenter had already found success selling Morgan Stanley short prior to the Sept. 11 attacks. Might be a good time to look at some of these other big financials.

– Meanwhile, “Unemployment in the heart of technology mecca Silicon Valley rose in September to 5.9%,” Reuters reports, “a big gain from 1.8% in the same month in 2000 as the area’s high-tech industry continued to shed workers…This is the region’s highest unemployment rate in seven years.”

– Popular opinion has it that Greenspan’s magic Fed funds rate will triumph over massive job losses and shrinking corporate profits. Seems a tall order for one little interest rate. But lower rates are spurring activity in some corners of our economy.

– “Auto sales have been booming,” notes the New York Observer’s Christopher Byron, “not so much because consumers are flush with cash as because automakers have been rolling out utterly irresistible deals to spur sales and get shoppers back in the dealer showrooms. Zero-interest [rate] loans are now commonplace, meaning that consumers are being offered what amounts to free money to buy a car – a powerful incentive to act quickly before the offer is withdrawn.”

– At the same time, the mortgage-refinancing locomotive keeps chugging along. “Fleet Bank has been deluged with so many applications in the New England region that some of its offices are backed up for weeks,” says Byron.

– Is the road to economic salvation paved with debt- financing?


Back to Bill on the Emerald Isle…

*** This week’s Barron’s includes an interview with Jean-Marie Eveillard, who manages the Eagel SoGen Global Fund. The fund has returned investors an average of 14.70% per year while Eveillard has managed it, since 1979. Not bad, especially when you consider that Jean- Marie’s investments have the protection of real value, rather than the relative value of Barron’s shopping list.

*** “The market was good for 20 years,” says Eveillard, “it has been bad for 18 months. If it has been good for 20 years, it can be bad for longer than 18 months. And so if anything, September 11 has given us the idea that we should insist more than ever on what Ben Graham called the margin of safety.”

*** Where does he find a margin of safety today? In Japan! (Kuwabarakuwabara!)

*** “A great number of Japanese securities have been in a 12-year bear market…we own some Japanese stocks in which the net cash, which is the cash and the portfolio of securities after the appropriate haircut for liquidating the portfolio and paying the capital gains tax, is in excess of market cap. You are paying less than nothing for the businesses.

“It is a situation that would be unthinkable in the U.S. or in Europe, because you would have financial raiders rushing in. It is only possible in Tokyo because of the 12-year bear market and because so far, although I think it will be changing in the next two or three years, no hostile takeover has succeeded in Japan.”

*** Eveillard mentioned a couple of names – Okumura and Shimano – without providing much additional detail.

The Daily Reckoning