Over the last two days, investors decided not to go gently into the night. They raged…and stock prices bounced.
We are witnesses to a life and death struggle. The greatest bull market of all time is fighting for life.
It is a battle that pits the Old Era against the New one…hope against experience…and greed versus fear.
In a curious way, it also provides a test of nature versus nurture…Darwinism versus Lamarckism…Mendel against Mitchourine.
Investors have been conditioned over the last 20 years to buy the dips. Until recently, no investment approach beat the mindless practice of simply buying the most famous names on Wall Street whenever they pulled back slightly. No stock analysis or fancy computer programs were needed. You just had to be able to recognize momentum when you saw it.
But buried deep in the human personality, like lust and the desire for cold beer in summer, is the capacity for fear as well as greed. Even 20 years of bull market have not exterminated it. It lies there, dormant, ready to be awakened without notice, and for no particular reason. At least that is what I am arguing in today’s letter.
Despite the strong rallies of the last 48 hours, it is a different market now than it was two weeks ago. There is an element of uncertainty.
I had dinner last night at the Chevy Chase Club in suburban Washington. A friend was celebrating a birthday in the company of a group of middle-aged men, of whom I was one. If the New Era has driven a gap between the rich and the poor, there was no doubt about which side of the great divide these men fell. Every one of them was involved in the New Economy — either as an investor, an entrepreneur or, in one case, a corporate lawyer.
I could feel the sigh of relief when the day’s market action was discussed. These men were rich. But they hoped to be much richer. And now that the market was marching ahead, it seemed to them that it was just a matter of time. God was in his heaven…Greenspan was in his chair at the head of the Fed…and all was right with the universe.
Bullishness, faith in the future, faith in themselves and their ability to master what lay ahead — the dinner discussion seemed to me to be marked by nearly unbounded confidence.
And yet, the biggest players at the table had not yet turned their dreams of great wealth into reality. It was still on paper — as near as I could tell. They had launched a successful IPO recently. But the shares were still locked up. One had been bankrupt before. If the Nasdaq crashed…could it happen again?
I asked no questions. In fact, I barely said a word. Living in Paris, going about my business, writing these daily letters — I have had little contact with these modern American Babbits. I was fascinated.
What had they done to get so rich? What manner of men were they? What bread, as Shakespeare asked, did they eat?
Well, the bread at the Chevy Chase Club, a very up-market watering hole in a very up-market area, was not like any I’d ever eaten. It had a flavor I couldn’t identify. But the filet mignon was good. And so were the Cuban cigars after dinner. And it was good to see my old friend and wish him a happy birthday.
But I doubted that the bread or meat imparted any magic powers. Take away the bull market…and these guys would be just trying to earn a living. And maybe we would have had the birthday dinner at a T.G.I.Friday’s or Ruth Chris.
But that is the issue. What kind of men are they? Have their genes been altered by the New Era? Are they New Men — conditioned by two decades of a bull market — who will not get spooked by falling prices? Or are they Old Men — who will cut and run at the worst possible time, as investors have always done?
Mr. DesHais, our gardener in France, is at the opposite end of the wealth spectrum. I would not say that he has fallen on bad times. Bad times seem to have welcomed him like a feather mattress. He has no intention of ever getting back on his feet.
To paint the picture of the man more fully, you need to know that Mr. DesHais wears plastic shopping bags on his hands when he is riding his moped. His driver’s license was taken away by the local gendarmes for the safety of the surrounding community. A motorbike is his only means of transportation. The plastic bags keep his hands warm, I suppose. He also does not seem to own a pair of pants with a working zipper. And, oh yes, he talks to himself all the time.
But he is a good gardener. His eyes brighten when he talks of his trade, and the garden itself sparkles in his care.
This past weekend, he was bending over the cold frames, thinning plants. He knows, from experience and tradition, that thinning plants will give you a better harvest.
Soviet scientists, meanwhile, turned their backs on experience and tradition. Under the spell of Mitchourine’s wishful thinking, they believed that thinning plants was unnecessary. I am not making this up. It’s in the book, “The Scientific Mythology of Communism.” In their imaginary socialist New Era, the Soviet plants would “sacrifice themselves for the good of the collective.” No need to thin. If the plants failed to thin themselves, as Lyssenko told comrades, “isn’t it always the class struggle” which is the problem? In other words — only bourgeois plants would be too selfish to thin themselves out.
Soviet scientists, unwilling to be held back by the slow evolution of Darwin or the careful study and genetic limitation of Mendel, believed in a wacky brand of Lamarckism. The idea was that traits developed during life could be passed on to the next generation. In other words, conditioned changes and learned behaviors could change a person’s genetic make-up.
The decisive research on this turned out to be a joke — literally. I.P. Pavlov reported in 1923 that mice were transmitting leaned behavior to their offspring. The mice learned that they would be fed at the sound of a bell. According to Pavlov, it took each successive generation less and less time to learn the lesson. He predicted that they would soon be born with the knowledge.
The only trouble was, a couple years later one of his lab assistants admitted that he had manipulated the whole experiment as a joke.
This didn’t stop the Soviets. Pavlov’s phony experiment told them what they wanted to hear: Nature could be instructed…altered…and fundamentally changed.
The Soviets applied this faulty insight everywhere — in medicine, agriculture…and the environment. On Oct. 20, 1948, the central committee approved “Stalin’s great plan for the transformation of nature.” Using slave labor, huge rivers were diverted from their natural watercourses. Lakes were created. Canals were dug — extending many hundreds of miles.
In one giant project, a barren area as large as France was to be transformed into temperate farmland. The plan was not merely to till the soil (for there was neither useable water nor useable soil)…but to actually change the climate. Following the crackpot theories and plans of their engineers, a huge, multi-year effort was launched. Millions of rubles were spent. Thousands of slave laborers — maybe millions — perished. And in the end, the land was an even worse wasteland than it was when they began.
The “WSJ” reports today that individual investors are “hanging tough.” They’ve learned not to sell stocks, says the paper. Could it be that Lamarck and Pavlov were really right? After 20 years of a bull market, investors may be now genetically incapable of selling. Perhaps they can only buy.
Baltimore, Maryland April 19, 2000
*** Do not go gently into that good night… Rage, rage against the dying of the light. Dylan Thomas
*** The Dow and Nasdaq both soared yesterday…as investors decided to rage rather than submit to a bear market. What’s with these investors, anyway…could they be mutants? More below…
*** They drove the Dow up 190 points. The S&P went up 40. And the Nasdaq…wonder of wonders…rose 254 points — its biggest one-day increase in history.
*** Well, I guess that means I was wrong…the bear market must be over, right? It’s clear sailing from here forward…isn’t it?
*** Of course, no one knows…but life is a game of chance. You look for the best odds you can find. Maybe the very expensive TNT stocks will become even more expensive. Maybe they’ll be expensive forever. Maybe there really is a New Era.
*** Of course, what do I know? I’ve been astonished by the strength of this market. It has already defied all odds. Stocks are higher than they’ve ever been — ever. No one could have foreseen that they would ever reach these levels. Anything is possible.
*** But it is still most likely that we’re witnessing a strong bear market rally — strong enough to keep the punters in the game…while the smart players slip out the back door.
*** “As the Nasdaq…roared toward its high on March 10,” explains the lead column in today’s “Wall Street Journal,” “many [insiders] were selling at a heavy pace. Owners of restricted shares — mostly venture capitalists, founders and others who got in on the ground floor — filed to sell $22.2 billion worth of their holdings in February. That was double the previous one- month record and it was more than 5 times as much as in February 1999…”
*** The big techs rose strongly yesterday. These are the companies that feel both solid and growth-oriented to investors. More likely, they provide only the illusion of stability, not the real thing. A small unknown company might grow spectacularly. But big companies that have been around for years…that are already worth a sizable fraction of the entire GDP…are unlikely to surprise investors on the upside. It is the downside that will be surprising.
*** Breadth improved yesterday — 1,972 stocks advanced and 1,028 declined. But there were still very few stocks hitting new highs…only 22 new highs compared to 73 new lows.
*** The Internets were up strongly. A report in yesterday’s “WSJ” said that 38% of the e-tailers were profitable. Among those notably absent from the list was AMZN, which nevertheless rose $7 yesterday.
*** The Internets should be moving to profitability. Why else be in business? Along with the profits should come more realistic share prices — as investors see that the profits are not in fantasyland. E-toys, for example, is down 90% from its high.
*** George Melloan writes in the “WSJ” that debt to equity ratios of the S&P 500 firms rose from 80% to 116% over the last decade, while mortgage debt, now 43%, was only 30% 15 years ago.
*** The euro, meanwhile, hit a new low — at 95 cents. And gold fell, too — down $1.20.
*** Another white farmer…and a black farmer manager…were killed by Mugabe’s thugs in Zimbabwe yesterday. The price of white-owned farms must be falling sharply as Mugabe calls the farmers “our enemies.”
*** The U.S. economy is the most competitive on earth, according to the Institute for Management Development in Switzerland. “In the year 2003, 10% of the U.S. GDP will be generated on the Internet,” says the group.