Madame De St. Georges

Pierre was giving me a signal.

He waved his finger behind his back, urging me to stop talking.

We were looking down from the ramparts of the chateau at a field grown up in small trees and bushes that needed to be cleared. I had just suggested that perhaps Madame de St. Georges would like some help from a man we knew who does that kind of work, a Monsieur Dupont.

But Madame had already made Monsieur’s acquaintance and didn’t care to be reminded of his existence. That was what Pierre’s index finger was telling me.

It turns out that Mr. Dupont and Madame de St. Georges’ late husband shared a common interest – drinking…the late Mr. de St. Georges was out with Mr. Dupont on the night the former died. Driving home, the road took at sharp turn to the right – the same turn it had always taken. But for the first time in his life, Mr. de St. Georges continued straight ahead, flipped his car over, and died.

If Mr. Dupont feels guilty about letting his friend drive while drunk, it is a guilt he seems to bear privately and stoically. Perhaps he comforts himself with the knowledge that however drunk Mr. de St. Georges was that night, his companion was even drunker. Alas, the two had failed to designate a driver and shared the blame evenly.

We had come to visit Madame de St. Georges to see her house – a magnificent chateau about 15 minutes from Ouzilly. I will give you a brief description of it, dear reader. For it is a reminder that progress is far from guaranteed.

Like my own house, the chateau was reconstructed in the 19th century on the foundation of a medieval fortress. Built of gray limestone, it is just what it appears to be – a massive stone house that had been left to take care of itself for nearly half a century. It would an ideal place to film a horror movie…or stage a Halloween party.

Once tended by a team of maids, gardeners, and laborers, the house now has only the widow de St. Georges to look after it. The maids and gardeners are gone. The shutters hang at various angles, with paint peeling off so heavily they look like strange animals shedding their skin. Trees and bushes grow up where once there were gardens and lawn.

Inside, too, is more evidence that the de St. Georges fortune has been declining for a very long time. Family portraits grace the grand salon – none more recent than 1910. Even the collection of dead birds – so extensive that it attracted the interest of ornithologists from Paris – stopped growing in 1955 or so.

“My husband’s uncle collected them,” Madame de St. Georges explained.

The cabinet took up a good section of wall space. In it, standing on the top shelf, were a few birds that looked like terns or miniature sea gulls. Below were row upon row of birds that looked as though they had been brought in for lunch and forgotten. They were bright colors and dull ones. They were big and small…dozens, maybe hundreds, of them.

“They were all found or shot here,” the chatelaine told us, “and all stuffed.”

They did not look stuffed. They looked…dried out.

A grand stone staircase rose to the second floor, supported by two stone columns. On the wall in front of us as we went up the stairs was a collection of swords and more old paintings.

Like the paintings, the furniture was ancient. Except for the bedrooms that had been fixed up for paying guests, all of the furniture had been in the house for at least 50 years.

Most people take material progress for granted. But it is not guaranteed. Investors are shocked by the idea of a 17-year bear market. Economists are appalled at the suggestion of a Japan-style 11-year slowdown. But markets, assets, living standards, and incomes can go down for very long periods.

The Romans brought innovations such as baths and running water to Britain. When they left in 410 AD, the quality of life fell dramatically. The standard of living did not recover in Britain until, perhaps, more than 1,000 years later. That “perhaps” is there because no one really knows. But it is almost certain that the Anglo-Saxons in Britain lived more primitively than the Romans, at least until after the Norman Conquest in 1066…and probably until the 18th century.

Throughout Europe, the story was much the same. The Romans began a long decline and fall early in the First Millennium and finally “returned to trend” when Rome was sacked by the Visigoths in 410 AD…the same year the Romans left Britain. Thereafter, standards of material prosperity declined…only to return to Roman Empire levels many centuries later. Economists and historians have used up many pens, much ink, and a lot of typewriter ribbon attempting to explain why – but no one really knows.

In the Middle Ages progress was very slow – with some areas “backwards walking” for decades…and all of Europe hit by periodic setbacks, caused by disease, bad weather, and war.

The wars of religion, for example, created such havoc that fields and whole towns were abandoned or destroyed. Peasants took refuge from murderous armies by hiding in the hills and forests – where they often starved.

Most people grew richer in the 20th century, but not all. In the Soviet Union, for example, people labored hard for 70 years – only to get poorer each year. And even while people made material progress, trends in art, architecture, crime, politics, and manners were mostly retrograde.

In America, stocks rose in the average year of the 20th century. But an investor could have held stocks for 50 years – from 1929 to 1979 – with zero capital gains in real terms.

Even in real estate, there are trends and counter trends – as nature gives and takes. Property prices in France fell for a 70-year period in the 19th century. In the 20th century, as I’ve described in previous letters, our office building in Baltimore probably peaked in value before WWI…and has been in decline ever since. We bought it in 1993 for about 20% the cost of construction.

I do not know when or how the St. Georges family made its money. But I know what happened to it. Monsieur de St. Georges enjoyed a life that had been set out for him by his father – a life that seemed ideal.

He worked only about two days a week – overseeing his farms. The rest of the time, he went hunting or fishing, and participated in many local committees and organizations, both public and private. He had money; he had a beautiful wife; he had time; he had the respect of the people around him. But the farm economy in France changed dramatically after 1960. Labor became more and more expensive. Huge sums needed to be invested in equipment. World commodity prices – in real terms – fell. Margins tightened. Thus did Mr. de St. Georges buck the trend of a century. Over the course of his entire 62-year life, he became poorer.

He and his wife lived well and enjoyed it…even now, his widow is a lively and attractive woman. She does not look like the sort of woman a man would want to leave.

But as time went on, Mr. de St. Georges lived less and less well. Finally, he did not seem to enjoy living at all, some people thought…and they wonder why he missed the turn.

Nothing is guaranteed in life, dear reader.

Certainly, not progress.

Bill Bonner
August 31, 2001

P.S. In Business Week: “If you’re looking for a rosy economic forecast, don’t knock on Warren Buffett’s door. The Berkshire Hathaway chairman, and King of All Value Investing, has been telling executives he meets with to brace themselves for a long slowdown. Not only is there no turnaround in sight this quarter or even this year, according to Buffett, but those who’ve met with him say that he is predicting eight years of economic stagnation.”

People can walk backwards a long way.

Today is an important day.

Here’s the story:

*** Yesterday was a bad day for Wall Street…it began badly – when Michael Jackson rang the opening bell – and ended badly…with the Dow down 171 points and the Nasdaq down 51.

*** This brings the Dow below the 10,000 level… and the Nasdaq below 1,800.

*** Dell and IBM each fell 3%. MSFT dropped 5%. GE ended down 1%. These are the stocks that people own…and count on for their retirement financing.

*** American stock holders are getting discouraged. First, they lose money – most have lost money for the last two years. Then, they lose interest. That is why profits are sinking on Wall Street and why Schwab announced, yesterday, that it was cutting its payroll by 1,400 workers. Investors are still holding, but they are not buying…so there are fewer commissions for the brokerage houses.

*** “The ’90s were the psychedelic era for stocks,” writes Ben Stein. “There is no precedent for their return in most of our lifetimes. But we still keep hoping that the bubble will return – and then we’ll sell.

*** “[I]nvestors who lost big in the tech debacle often cannot bring themselves to sell because that would mean final recognition of their folly in getting in on the wrong side of the bubble. Not only that, but if they sold after colossal losses and the stocks did by some miracle rebound, they would be suicidal. Thus, they refrain from selling because of a combination of fear they will be wrong again and denial of the finality of the end of the bubble.

*** “Through the prisms of fear or just plain self- delusion investors see hope…”

*** But hope doesn’t pay the bills. Eventually, consumers lose income. They may have to cut back on over-time pay…or get a smaller bonus…or lose their jobs completely. For a while, they get by by refinancing their house…or running up credit card debt. But soon, the combination of lower income and uneasiness causes them to cut back. In July, personal spending rose – but only by 0.1%…only a fifth as much as the rise in personal incomes. People are beginning to do just what they’ve done in Japan…they are spending less and paying off debt.

*** As a bear market continues, investors finally decide to get out of stocks. That hasn’t happened yet. But many investors must be beginning to think about it…some because they want to, others because they need to.

*** Credit card companies are having a harder time collecting their payments. The delinquency rate rose for the 8th month in a row in July – to 5.06%. Hotels, restaurants and airlines all report declining revenues. Consumer confidence is falling.

*** So far, housing has been a bright spot. But, as the San Jose paper puts it, “Housing is due for a crumble under weight of economy.” (Do they speak English in San Jose?)

*** As a group, housing stocks are up about 80% from two years ago. Daily Reckoning readers will remember builders such as Centex and Toll Bros. We noticed that they were still cheap 18 months ago – when techs were expensive. Now the techs are less expensive…and the builders are less cheap.

*** The best move would probably be to get out of both of them. Neither is a good thing to own at the beginning of a recession. And the tech stocks are still preposterously expensive. The FT reports that software stocks still trade at a P/E of 58…and telecoms are still at 60 times earnings.

*** Amazon shares fell 6% yesterday…to $9.31. But AMZN is probably too expensive at any price. Very likely, Amazon will go bankrupt – wiping out all shareholders’ equity. The latest news from the River of No Returns is that the company announced it was heading into the jungle of online PC sales. Bezos is a little late, as, for the first time in history, PC sales just began to contract.

*** While Wall Street falls, the Nikkei Dow in Tokyo gives it a race for its money. The Nikkei index hit a 17-year low on Wednesday…and dropped another 41 points yesterday. Which will hit 5,000 first…Tokyo or New York?

*** But at least the financial press is on top of this story:

“Japan’s bad loans become worse,” worries the Financial Times.

“Japanese companies to cut more jobs,” again, the FT.

“Japan steps closer to recession,” the BBC.

*** The situation in Japan has gotten so bad that Gateway has closed its operations there.

What else can I tell you?

*** “If there is something that offers a bigger bang for your buck than natural gas, I don’t know what the hell it is,” relays our natural resource man John Myers, all the way from Calgary. After last winter’s peak, “the sluggish economy,” says John, “moderate weather and rising inventories have severely depressed natural gas prices this summer.” John’s got his eye on two companies he thinks will be Johnny-on-the-spot when the price begins to turn again. Watch this space.

*** Oh yes, this is interesting – the bond market is signaling that inflation is not going to be a problem. The gap between inflation-adjusted T-notes and those that are not adjusted for inflation has narrowed to just 1.39%. Strangely – and perhaps insanely – bond buyers are implying that inflation will not exceed 1.39% annually for the next 10 years!

*** So what will it be today? Greed or Fear? Will investors want to buy stocks at these “bargain” prices? Or will they prefer to sell stocks today so they can enjoy their Labor Day weekend without worrying about more losses?

We will see, dear reader, we will see.

The Daily Reckoning