“How is the garden doing?” I asked Mr. Deshais yesterday.
Our gardener has been a disappointment to me lately. He’s stopped talking to himself. I used to enjoy his comments – spurting out of his mouth like water out of a hole in a garden hose.
But now I have to work to have a conversation with him, as if I were laboring on a rusty old pump handle.
“Oh, it is too dry. We need rain.”
“Wasn’t there a lot of rain this summer?”
“Yes, but that was earlier in the summer…It has been dry for the last three weeks.”
“I thought it rained hard a couple of nights ago.”
“Ah, but that was the wrong kind of rain. Too hard. We need a soft rain…so the water gets down to the roots.”
“You’re getting very picky…”
“Well, water is the key ingredient…There are only three things that really matter,” he continued. “Earth, sun, and water…
“If I had a lot of money, I know what I would do with it – I’d buy land. You can’t own the sun. And water…some of the best companies in France are water companies. But I don’t trust people who run big companies. I would buy land.”
“But agricultural commodities are near all-time lows…” I protest. “It’s very hard to get a decent return on farmland.”
“No, I wouldn’t bother farming. Farming is finished in Europe. All the farmers have such big, expensive equipment…”
He pointed towards Pierre’s huge new tractor.
“Sooner or later they’re going to eliminate the subsidies and the farmers are going to be out of business. No, I would buy land and plant trees on it. Hardwoods, like oak and walnut. Every year, the trees grow. I’d rather leave my children land with timber on it than money.
“Children would just waste the money. Or money might waste them! But land and trees is a good patrimony. The land doesn’t go away and the trees just keep growing. Every year they’re more valuable.
“And you know what else…,” he continued, thinking big. “When you clean up around the good trees…you cut out the bad trees and thin out the plantation…you can use that wood to heat your house. So, they’re another line of profit.”
“In real terms,” wrote Porter Stansberry recently, “according to Julian Simon, one of the most well respected economists of the 20th century, the typical American worker produced about $2-$3 worth of output every hour in 1900. Today that figure is between $20-$25 – a ten-fold increase.”
Porter and many others believe there is a direct relationship between higher productivity, higher profits, and higher stock prices. That was, after all, the promise of the New Era. Information technology was supposed to increase productivity – justifying much higher stock prices than Americans were accustomed to.
Like a man who might have enjoyed a ham and cheese sandwich, but for the fact that he had neither bread, ham nor cheese, American investors might have enjoyed the benefits of a productivity-driven profit boom…except that there was no extra productivity and even if there had been it would not have led to greater profits.
The rate of productivity growth today is still 50% less than it was in 1917-’29. And Jeremy Grantham of Grantham, Mayo, Van Otterloo explains (in Barron’s) why productivity doesn’t lead to profits and higher stock prices:
“People say productivity justified higher P/Es through higher profits. But I’ll give you a simple thought experiment…Say you come out with a seed corn that is twice as productive – that is, for every dollar of seed it will grow twice as much corn in an acre. Give it to everybody at the same price as the old seed. Productivity will double. But what will happen to the price of corn and what will happen to the profits of the farmers in the following year? I think it is fairly obvious to everybody that they will be drowning in red ink and there will be corn coming out of every silo…The whole productivity argument was interesting but it has no relevance to how much money the system makes and how high a P/E you should pay for it.”
A report from the U.S. Agriculture Dept. tells us what happened in the real farm economy. “Productivity growth is a more important source of output growth in agriculture than it is for other industries,” it says. Working the earth, in other words, has benefited more from productivity gains than working computer terminals. Thanks to machinery, even a Democrat, out on the plains, can produce more wheat than thousands of farmers before the Industrial Revolution. (Think what he might have done if he had had access to the internet!)
Yet, a quick glance at Forbes’ list of the richest Americans reveals not a single person who has made his fortune tilling the soil. On the contrary, farmers have become so productive that they have shrunk as an occupational group from 70% of the population in 1840 to less than 5% today…and those few who are still planting and hoeing are now almost all sustained – in America as in Europe – by taxpayer handouts.
If rising farm productivity has not produced investment profits…what has?
According to Jeremy Grantham, “timber is the only low- risk, high return asset class in existence. People are not familiar with it. What they are not familiar with they avoid. But timber is the only commodity that has had a steadily rising price for 200 years, 100 years, 50 years, 10 years. And a unit of wood, just the price of a piece of wood – in real terms – beat the S&P over most of the 20th Century, from 1910 to 2000.”
Thus does Mother Nature, in her wisdom, reward patient investors while punishing the day traders…and give the highest profits to a business which has benefited little from productivity enhancements. Even in this Information Age, dear reader, it can take 50 years for a hardwood tree to mature. But the annual return from planting trees has been 40% higher than the S&P.
“The price of a piece of wood actually outgrew the price of a share of the S&P, which is an unfair context, because there is some growth embedded in the share of the S&P and there is no growth embedded in a single cubic foot of wood. The yield from timber averaged about 6.5%. The yield from the S&P averaged 4.5%. The current yield on the S&P is 1.25% and the current yield on timber is 6.5%.”
Not only have trees proved to be good for good times, they’ve also proven good investments for bad times. “In each of the three great past bear markets…1929-’45 and 1965-’82, and a third one that’s off everyone’s radar screen, which is post-World War I, 1917-’25 – the price of timber went up. It is the only reliably negatively correlated asset class when you really need it to be.
“One reason for that is that you can withhold the forest. If you find the price of lumber is no good, you don’t cut. Not only is there no cost of storage, the tree continues to grow and it gets more valuable.”
But no investment is risk free.
“What about what happened two years ago,” I remind Mr. Deshais, “when that storm flattened forests all over France? Nobody expected it. And the trees weren’t insured. Growers must have lost a fortune.”
“Well, at least they had plenty of firewood to heat their houses.”
Day trading stocks didn’t work for you? Try day trading
“Liquidity always heads towards a rising market,” wrote Marc Faber at the beginning of the year. Marc was guessing that the Fed’s rate cuts might find their way into the real estate market rather than the stock market. It now looks as though he was right.
New home sales rose 4.9% in July. But the real action is in existing home sales. Believe it or not, back in the late ’60s, the annual number of existing home sales was scarcely more than the number of new sales. Today, existing homes are flipped nearly as often as hamburgers – with about 4 times as many old homes trading hands as new sales.
Prices rose 4.9% in the first quarter…and then 6.4% in the second. According to the National Association of Realtors, housing prices are going up at double digit rates in 35 metro areas, such as Orange Co., CA, where houses rose 15% in the month of July…Refinancing applications are up 65% over last year…and the refi index alone rose 3% last week.
“How smart is it to takes loans against most of the value of your home?” asks Jane Bryant Quinn in the Washington Post.
“As long as prices keep rising, people will feel reasonably wealthy despite the drop in stocks. But ask yourself how good you would feel if you borrowed to the hilt and house prices didn’t rise. With little or no home equity, you couldn’t afford to sell and pay off your loan.
“That last happened in the 1990-91 recession. High-flying real estate markets plunged. Condominium owners, in particular, found they couldn’t afford to sell.
“Whether the slowdown technically registers as a recession remains to be seen. But businesses are going to keep cutting workers loose. Unemployment, which is at 4.5 percent, is likely to top 5 percent before the slowdown ends. Fewer jobs means fewer home buyers. In many hot markets, sales have already slowed…This is no time to be adding to debt.”
Ms. Quinn might have added that bankruptcy filings are rising at a 24.5% annual rate. And a real estate bubble pops just like a stock market one. Except that when stocks go down, you don’t have to continue making payments on them.
Eric, what else is happening?
Eric Fry, reporting from Manhattan…
– An accident waiting to happen usually does, although sometimes it takes a while. The stocks of both “sub-prime” credit card lenders and savings and loan companies have been accidents-in-waiting for some time. Finally, last week, some of these stocks buckled under the realization that lenders are sailing into stormy seas.
– Even though loan delinquencies in most consumer loan categories have been rising for several quarters, the shares of most consumer credit companies have been soaring. . .Stocks like Americredit, Washington Mutual, Golden West Financial and Charter One Financial have eachposted all-time highs within the last two months.
– But Friday, the world suddenly seemed to change for these stocks. Mr. Market roughed them up a bit, along with everything else remotely related to consumer credit.
– Adding gasoline to the fire, Goldman Sachs analyst, Michael Hodes, weighed in Friday morning with negative comments about sub-prime credit card lender Providan Financial.
– “The company continues to be challenged by the effects of a continued weak economy, high and volatile charge- offs,” said Hodes, “and uncertainty into the 2002 macroeconomic outlook.”
– But the consumer credit stocks were the exception to the rule on Friday as the market soared.
– The Dow spiked 194 points, nearly 2%, to 10,423, while the Nasdaq jumped 4% to 1,916. All the major indexes finished the day near their highs for the day and the week.
– Cisco led the charge, by announcing that it would be rearranging the deck chairs – so to speak – within its titanic operating structure. The networking giant announced it would replace its three main divisions with 11 technology groups subdivided according to the equipment they sell. Chief Executive John Chambers also said sales are stabilizing. Although Chambers didn’t really say anything very different from what he had forecast two weeks ago, Cisco’s shares advanced 9%.
– But still, the stock market stands on the clay feet of feeble national balance sheets. Both consumers and corporations carry so much already that it will be difficult for them to borrow enough money to do the spending and investing that our economy needs.
– The latest Newsweek cover story, “Maxed Out,” observes, “As the expansion slows to a crawl, many Americans carry a dubious legacy: too much debt. Together consumers owe $7.3 trillion, according to the Federal Reserve – double the amount they carried into the last recession…The present danger to everyone – debt-ridden and debt-free – isn’t that millions of Americans suddenly become deadbeats. It’s more subtle: that their big debts act like a giant headwind, limiting the consumer spending that’s helped fend off a recession.”
– “Watching so many households reshuffle their I.O.U.s is a sobering reminder of how complex financial life has become…As so many other families rebuild their balance sheets amid this teetering economy, we’ll all have a stake in their decisions.”
– The Wall Street Journal reports, “The decline of the Internet economy has produced a physical legacy scattered across the countryside – enormous warehouses, sometimes equipped with state-of-the-art refrigeration, freezer systems, conveyor belts and loading facilities.” Now, many of these big boxes are empty.
– “The dot-com debacle has left some large buildings in its wake, many ranging anywhere from 100,000 to 800,000 square feet. That makes the possibility of finding one tenant to occupy space unlikely.”
– Offering up what is probably the understatement of the year, Webvan’s director of real estate, Alan Arthur, admitted to the Wall Street Journal, “We ended up leasing a lot more space than we ended up needing.” If memory serves, the amount of space Webvan now needs is zero. Didn’t it file for bankruptcy protection in July?
– Among the vast space no longer needed by the Webvan is a 360,000-square foot warehouse near Chicago, IL. Webvan signed the lease in 1999, moved in in 2000 and moved out in 2001. Such was the dot-com life-cycle. About one-third of the now-empty space consists of “cooling, freezing and food-production space waiting for something to chill,” according to the Wall Street Journal.
– Reuters reports, “As U.S. technology and telecom companies shutter operations in a lagging economy, the office furniture that once filled their lively workspaces is now stacked high in warehouses around the country. Cliff Schorer, president of Bottomline Exchange in Boston, said that never before has he bought such great quality furniture at such dirt-cheap prices. In addition to a packed warehouse, Schorer stores office furniture in 119 trailer trucks in two parking lots…”
– “To get an idea of how cheap furniture can get, consider Herman Miller’s Aeron brand chair – one of the most expensive and plush office chairs around. The Aeron models, which sell for $745 when new, are now available in some cases at a 75% discount, for $170.
Back to Bill in Ouzilly…
*** Here in Ouzilly, we’re beginning a series of seminars and conferences…so things are getting even more hectic than usual. Our guests are coming from all over – South Africa, Poland, Romania…and, of course, many from the U.S.A.
*** The first event, a writer’s conference, began last night.
*** But other things continue according to the pace and traditions of rural France. I noticed that Edward, 7, has been getting up early and going out to the chicken yard. I thought he was collecting eggs, feeding the ducks or enjoying the bucolic charm of dawn.
*** “I just want to help Mr. Deshais kill the chickens,” he explained cheerfully.