One Hundred Years Of Investing

Bill Bonner

Rathmullen, Ireland August 1, 2000

More Greatest Hits below…

(First aired Sept. 22 1999)

Blame it on the weather. After weeks of beautiful fin de Bubble weather in the late summer…fall is here. It is rainy, gray and cool.

Thus do one’s thoughts turn gray, too, as I darkly look through the glass at the financial news. I’ve been talking about the bubble and the coming bear market for quite a while…where did it come from…where does it go?

Stick with me for a moment. It is important because the next phase of the market cannot begin until this one ends.

It is a grim paradox of life that all that life dies. And as the fire of life burns hotter, life’s energy is used up faster too. A tree, for example, uses little energy…and can survive for hundreds of years. There are trees in California that were alive at the time of Christ. A chart of the life cycle of such a tree would show long, slow, steady grow…then, a peak…and a long, slow, steady death. You can’t even tell whether a tree is alive or dead sometimes…it’s life energy lays so quietly and deeply within it.

Markets, being natural things, follow the same rules. They can grow quietly and steadily for many years, in line with the underlying economies on which they are based. Or they catch fire…explode upwards…and quickly burn up whatever energy they had.

Back in 1900, you could buy a barrel of oil for just a bit more than $1. An ounce of gold, meanwhile, was about 15 times as much. This relationship went up and down…never too far out-of-whack for the entire century. A few months ago, you could still get an ounce of gold with 15 barrels of oil. (Today, an ounce of gold is only worth 12 times as much as a barrel of oil. My guess is that the ounce of gold is ready for an adjustment upwards…but who knows?)

Also, back in 1900, the Dow was at 61. So, in other words, it took three ounces of gold to buy the Dow. This too was subject to a lot of bouncing up and down. In the late `20s, for example, it took six ounces to buy the Dow. But that soon went back to normal when the Dow fell. Then in the late `60s, it took as many as 20 ounces of gold to buy the Dow. But that, too, was soon history when the price of gold soared…and the stock market fell. As late as the early `80s, the basic relationships were still intact. The Dow was worth about three ounces of gold…which, in turn, was worth about, well, 10 to 20 barrels of oil.

But something happened in the late `80s. The juice started flowing at a much faster pace. The chart shows the Dow stopped looking like the growth pattern of a redwood, and began looking like a morning glory. Today, it takes 40 ounces of gold to buy the Dow. Oil, meanwhile, has doubled in price in the last year. Still, while you could buy the Dow with about 50 barrels of oil in 1900…and still do so in the early `80s…today, you’ll have to bring 400 barrels of the black stuff to the table.

Inflation over the period – 1900 to 1999 – reduced the value of the dollar to about 5 cents. So, if an ounce of gold sold for $20 in 1900, it ought to sell for $400 now. Likewise, a barrel of oil that sold for $1.19 then should sell for…what’s this…$23.18.

That’s almost exactly the price of oil today.

So, oil is where it was in 1900. Gold is a little low, but not far from where it should be. And stocks? They’ve gone “off the charts.” If the market were only to keep up with inflation, the Dow should be at 1,220. Instead, it’s nearly 10 times that high.

Back to the chart…it shows a ragged line bumping along year after year. It took 82 years to go from 61 to over 1,000. And then, zoom…it took off. The chart looks like a topography map, with the line going from the tidal flats…to the piedmont…gently rising, with minor hills and valleys…and suddenly starting to climb Mt. Everest. Now, standing at the peak of Everest, investors look back and think it was inevitable. This is the way markets work, they think. You just buy and hold, and over the long run you make money. But as I pointed out two days ago, if an investor had turned to look in 1982 rather than 1999, the view would have been completely different. Then, the long term…from 1900 to 1982…would have given him a net loss against inflation.

What happened in the late `80s? Where did the juice come from? Where did the stock market get this sudden input of energy, enough to carry it from 3,000 to 11,000…from the late `80s until about 15 months ago? Why, after eight decades of “reasonable” behavior, compared to oil, gold and the dollar, should it suddenly go bubble? The bulls have their explanations. They say it is because the baby boomers are putting money in 401ks. Or the Internet is creating a New Era of productivity. Or, it’s the end of the Cold War…there’s a “peace dividend,” and a golden age of capitalism. Or, as professors Glassman and Hassett claim, investors just woke up and realized how much stocks are really worth.

Actually, the juice for this market blow-off came from an entirely different source. I will give you the details tomorrow…the never before told story of how a bull market turned into a bubble…

Your correspondent,

Bill Bonner

(Note: ‘One Hundred Years of Investing’ is part one of a two part series. Tomorrow: ‘How A Bull Turned Into A Bubble.’Addison)

*** After a brief visit to the office last week, the bear went back to the beach on the weekend. Stocks rose. The Dow was up 10 points by the close of business. The Nasdaq rose 104 points.

*** Stocks in Japan, beaten down for the last decade, managed a 2% increase.

*** And the big techs in the US came back with the Nasdaq. Cisco rose 2 5/8. Intel, Qualcomm…these big techs are the great hope for many thousands of investors. They allow the investor to feel as though he owns a piece of the glorious future of technology, without knowing anything about either the future or technology.

*** Reuters reports on a survey by Doremus showing that investors have little idea what they are getting when they buy stocks and bonds. They seemed to think Caterpillar was in the pet business, for example, and Halliburton, the giant oil-service business, was a fish company. Many investors also apparently believe that they are protected from trading losses by the FDIC when they buy T-bonds.

*** These investors are the people who bought Amazon at $113 last December in the belief that they had to get in on The Next Big Thing – the Internet. Amazon shares sold for less than $28 yesterday. CMGI, another ‘must own’ of 1999, also hit a new low.

*** But now it’s the big techs – Intel, Qualcomm, Cisco. People think owning these shares gives them a way to profit from the future. Unlike the Internets, these companies have profits. And as I have mentioned several times – there is almost no way earnings can grow enough to justify current share prices. They, too, will soon collapse…as the summer of love turns into the autumn of anxiety and the winter of our discontent.

*** Remember, bonds now yield 8 times as much as stocks. The Dow yield is only 1.6%. The S&P yield is lower – at 1.1%. And the Nasdaq yield is not even worth mentioning. It only makes sense to stay in stocks if prices are rising enough to surpass “risk free” bond yields. A stagnant market isn’t good enough.

*** Oil fell to its lowest point in 3 months – to $27.43.

*** Gold fell too…by 90 cents. Platinum rose $1.39.

*** “Investing is not a purely rational pursuit,” writes my old friend, Mark Hulbert, “If it were, those with higher IQs would have better track records. They don’t. Successful investing also requires mastery of your emotions, which otherwise can wreak havoc…” Mark makes the point that the rational thing to do in a bull market is to be fully invested in stocks, following a momentum- based system, such as OTC Insight or MPT Review. But when the market turns, these approaches lead the way down, just as they led the way up during the bull phase. Over the very long run, investors might do well just to stay with the system (they certainly did well for the last 18 years). But investors often over-estimate their own tolerance for risk and fail to control their own emotions. When these high-flying approaches plummet, investors panic and sell – often at the worst possible time.

*** The Irish Independent reports that foreigners are being attacked in Dublin. No reason was given.

*** And the infamous prison, the Maze, is being closed down. The Maze has been the holding tank for IRA and protestant terrorists. The murderers are being released, following the terms of the Good Friday peace agreement.

*** “I’m very glad to see that the Loyalists are coming out,” said one honest protestant woman quoted in the The Mail, “but I’d be happy to see the Catholics rot in hell.”

*** “The meaning of life does not jump out at us from desk-top computer screens,” said the Archbishop of Tuam. Ireland is booming. Almost everywhere we go, new houses are going up. The roads are often jammed with traffic. The bar in Donegal Town, where we stopped in for a drink on Saturday night, was so full we could not get a seat. Father John Cunningham, leading a group of pilgrims from Arizona, took the mike and sang “Oh dear what can the matter be, seven old maids locked in the lavatory.” The upsurge in material wealth seems to be upstaging Ireland’s traditional piety.

*** The Archbishop spoke on the summit of Croagh Patrick in County Mayo, a ‘Holy Mountain,’ from which St. Patrick is said to have banished snakes from Ireland. Twenty people were injured making the trek up the mountain to hear the Catholic bishop. “There is a danger,” he said, “that ruthless greed can become reality.”

*** Meanwhile, on Sunday, I led my own small band of pilgrims into the Presbyterian church in Rathmelton. The Church of Ireland church, Anglican, was closed. And the Catholic service had already commenced. So, what the heck, let’s see what Presbyterianism is all about.

“You all know how to ride a bicycle,” said the minister in his sermon, with a heavy accent that seemed almost Scottish, “there are certain rules you have to follow. If you dunna follow the rules, wha’ will ‘appen? You’ll fall down, won’ you?”

“It’s just the same with God’s rules. You have to follow them. Or you will fall down.”

Hmmm…this seemed simple enough. But the service was almost painfully plain. There were no chants. No elaborate robes or vestments. No sculpted figures. Not even an altar. There was no communion. No confession. I wondered how Presbyterianism survives. It has no mystery or magic. Nor does it have the vitality of the Southern Baptists.

*** After church, we went to the beach. There are a lot of very nice beaches in Donegal. You drive over moor-like hills and then down to very private coves, sometimes with thatched cottages near the water’s edge. The kids were happy throwing rocks and playing in the sand. Elizabeth and I went for the coldest swim we’ve ever had. I was afraid to go far from the beach – fearing that my muscles would go numb and I wouldn’t be able to get back to the shore.

*** The scenery in this part of Ireland is spectacular. There are fields, moors, salt water marshes, mountains, and craggy rocks marching out into the sea. We explored one castle,which was in ruins…climbing up the derelict tower for a dramatic view over Lough Swilly. The castle, in the middle of the field, has been forgotten. Its owner, a local farmer, did not seem to know when it was built, or by whom.

Until tomorrow…