Screw the Limit

The investment world is full of more empty promises. One of them is the promise of “Long-Term Investing.” Over the long term, it is widely believed, you will make money. “Time defeats risk,” in other words.

But time did not defeat risk for John Maynard Keynes, for whom the long run arrived before I was born. He died. We will all die sooner or later. If not, the hope of heaven, of which Father Jean Louis spoke this morning, will have to be revisited in a dramatically new way. No death, no heaven. No heaven, no hell. No hell…?

Then Blaise Pascal can stop worrying and go back to enjoying himself. There is a Far Side cartoon that sums up the moral consequences of this attitude. A pair of fishermen look behind them and see the familiar post-WWII mushroom cloud. One turns to the other and says, “You know what this means…Screw the limit!”

Likewise, if time defeats risk…investors can enjoy themselves, confident that they just have to live long enough to reap the rewards.

Multiplying Risks: Time Will Beat Risk

The human life span brings a certain time limit and sense of purpose to investment decisions. We are told that we should invest prudently in our old age – in utilities, bonds and other income-producing instruments. But when we are young, we should invest more recklessly. Time will beat risk, Wall Street analysts repeat. A young man has time to recover from his mistakes. An old one does not.

An investment life span should probably be about 30 to 40 years. That is the time the average person might be making investment decisions – from the time he has accumulated investable resources to the time he shuffles off this mortal coil.

There is an interesting account of one such period, written by Robert Lovett, and recited by James Grant in his book, The Problem with Prosperity:

“If an investor had purchased 100 shares of each of the twenty most popular dividend-paying stocks on December 31, 1901, and held them through 1936, adding, in the meantime, all the melons in the form of stock dividends, and all the plums in the form of stock split-ups, and had exercised all the valuable rights to subscribe to additional stock, the aggregate market value of his total holdings at December 31, 1936, would have shown a shrinkage of 39%.”

Multiplying Risks: Time Will Not Defeat Risk

If you added bonds into the mix, by the way, the loss during this investment life span – which was one of the most economically robust in history – was only 25%…with one out of every four companies and bonds going into bankruptcy.

Over this 36-year investment life span, in other words, neither stocks nor bonds defeated risk. And in any similar period, the contest might go in either direction. Obviously, the average investment life span is not long enough to guarantee financial success.

Perhaps we need to think more long-term. Maybe an investment in RCA would have made sense, if you had bought it in the ’20s and held through the acquisition by GE and the subsequent bull market. Thus, from 1929 to 1999, maybe you could have defeated the financial risk, even if the mortal risk had triumphed.

But if you can look seriously at an investment term that exceeds the human life expectancy, why stop at seven decades? Why not 10 decades…or 100? If investing for the long term really does pay off, where are the long-term investments that have done so superbly well? The biggest stock in the U.S., after all, has only been on the market for 13 years. And of the major companies on the US market at the turn of the century…only one, that self-same buyer of RCA – GE – is still in business.

Time does not defeat risks…it multiplies them. I thought of this as I was driving back from Notre Dame de Plaisance. Passing a moated, fortified house from the 14th century, it occurred to me that there were at least one or two ancient châteaux in the region that were still in the hands of the same families that owned them almost 1,000 years ago. The Château de Bourg Archambault, for example. Built of stone, with a slate roof…its owners have beaten pestilence, bear markets, inflation, devaluations, busts, war, revolutions, MTV and rap music. But it is a huge white elephant. Expensive to maintain, cold and uncomfortable as a well digger’s derrière. It is probably worth less today than it was when it was built.

Bill Bonner
June 5, 2003


“Greenspan suggests U.S. Economy Poised to Accelerate,” says a Bloomberg headline.

Elsewhere, other cheerful news stories describe what has become a kind of Echo Bubble:

The Dow is back above the 9,000 mark. The Dow has regained nearly 40% of its losses, from the peak. S&P 500 stocks now trade at a P/E of 31. If that number seems high to you, it is because it never reached that level until 1998. After this echo bubble pops, it may never again.

The National Association of Realtors expects 5.59 million existing home sales this year – a new record. People are mortgaging their houses at a record pace, too.

It is all great fun. And why worry? Mr. Greenspan tells us we have nothing to fear, not even fear itself. What fool would be afraid when neither deflation nor inflation poses a threat?

And voilà, dear reader; here we are. Not so much worrying as puzzling, trying to fit the pieces together…and wondering how it will all end.

For while American investors celebrate on deck, down in the engine room of the Great Boom, the boys are having trouble. The hull has sprung a leak, and the stacks of dollars – the high-octane fuel that drives the titanic ship forward – are getting a little soggy.

Already, reports the Financial Times, the dollar has lost a third of its value against the euro. Against gold, it is down about 40%. Is this the end of it? Has the greenback hit bottom already – without anyone noticing?

And yet, the trade imbalance is still with us…as are the trillions of dollars’ worth of dollar assets in twitchy foreign hands. And U.S. debts and deficits are getting worse.

“We are heading for a currency crisis as soon as this summer,” said an analyst to the Financial Times. Between ’85 and ’87, the dollar lost 57% of its value against the euro’s predecessor, the German mark. That is the least we would expect from this cycle. But we can’t help but wonder: is this downswing is cyclical…or terminal?

The wonder crossed our minds, and not for the first time, when we read this comment from Alex Wallenwein, found on Richard Russell’s website:

“Now, that the euro (a) exists, and (b) has already achieved a tremendous amount of penetration of the international currency markets and even central bank reserves to some extent, and (c) has not lost decisively in value but has gained back all ‘losses’ to date, the stage is set for a slow, gradual, but complete takeover by the euro of the dollar’s role as the international reserve currency. “This process will not be allowed to take place too suddenly, because a complete and rapid ‘crash’ of the U.S. economy would still hurt too many countries that are dependent on the U.S. market for their exports. Their export routes will have to be shifted first. “Rather, the U.S. economy will be allowed to slowly suffocate under its own dollar-weight, letting it go into a gradual recession, with gradual deflationary pressures exerting themselves at first à la Japan (now happening), which the Fed is presently proceeding to ‘fight’ with mammoth inflation, and that will eventually help bring about hyper-inflation.”

Mr. Wallenwein is only guessing, of course, just like the rest of us. But his guesses are at least as good as those of Mr. Greenspan. Maybe better.

And now, over to our man on Wall Street, Eric Fry:


Eric Fry in New York…

– U.S. stocks may be pricey, but don’t bother trying to tell that to the lumpeninvestoriat. They love buying expensive stocks – an elevated price merely stimulates the impulse to buy.

– Yesterday, the lumps’ fast and furious stock-buying lifted the Dow 116 points to 9,039 – the blue-chips’ first close above 9,000 since last July. The Nasdaq jumped nearly 2% higher to 1,635, its highest level in more than a year.

– So it’s now official, the bear market is over…just in time to start a new bear market! The bear market is over, technically speaking, thanks to the fact that all three of the major stock averages have gained at least 20% from their recent lows.

– “Ding Dong the Bear Market’s Dead,” heralded a headline from the Toronto Globe and Mail. “Like the delirious munchkins in The Wizard of Oz,” the article noted, “investors are joining hands and humming a merry tune to celebrate the end of the wicked old bear market.”

– The Nasdaq index is up by almost 45% from its lows of last October, the Dow has gained 20%, and broader Standard & Poor’s 500 is ahead 25%.

– “This meets the technical definition of a bull market, a rise of 20 per cent,” the Globe and Mail notes. “But does it pass the smell test?”

– Good question, but the answer depends upon who is doing the smelling. To the bulls, the recent rally exudes the pleasant aroma of economic recovery. But to the bears, the stock market’s recent advance reeks of overvaluation and bear-market déjà vu…Haven’t we witnessed several major rallies since the market peaked three years ago – each one embraced by the bulls as the start of something wonderful – – only to watch them crumble and blow away?

– “The major indexes rocketed higher after Sept. 11, 2001,” the Globe and Mail recalls. “The Dow climbed 25 per cent between September and January of 2002, while the S&P 500 rose 20 per cent and the Nasdaq jumped 45 per cent. Was that the start of a new bull market? Hardly. In the spring of 2001, the major indexes jumped almost 20 per cent in the space of a month, with the Nasdaq up 35 per cent. Did that mark the birth of a new bull? Far from it.

– “There is little objective evidence that things are improving dramatically in the U.S. economy, or even the global economy, for that matter. Apart from the end of the war and a few helpful events such as a drop in the dollar, there is little that makes the current environment 30 per cent or 40 per cent better than it was in October…For the third year in a row, the market has seen a sharp run-up in the first half of the year based on the hope of a second- half recovery – and we know how the movie ended those first two times. Will the third time be the charm? Will the U.S. economy not just recover, but start to accelerate at a healthy rate of speed? It had better – investors are already paying for it.”

– Indeed, investors would appear to be paying dearly for some pretty dicey earnings growth prospects. Based on generally accepted accounting principles, the S&P 500 is selling for about 31.4 times trailing 12-month earnings, up from 27.5 at the end of March. Before 1998, stocks had NEVER sold for more than 30 times trailing earnings. Why should they this time around?

– “Just as disconcerting as how stretched valuations have got is what’s rallied most lately,” CNN/Money notes. “Merrill Lynch chief U.S. strategist Rich Bernstein points out that, on a sector basis, the two best-performing groups in the S&P have been techs and consumer cyclical stocks. But both groups continue to struggle with the excesses built up during the late 1990s, and are operating far below their potential capacity. Meanwhile, areas of the economy that are running closer to full capacity, like utilities and energy companies, aren’t getting much attention paid to them by investors.”…Something would seem to be amiss.

– “People are paying Bentley prices for Volkswagens and Volkswagen prices for Bentleys,” said Bernstein. “As in the bubble, people ignore the fundamentals.”


Bill Bonner, back in Baltimore…

*** Our old friend Mark Hulbert brings encouraging news for those us who are trying to figure out whether stocks will go up or down: it is not impossible!

“Surprising news about timing…A new academic study has found that a not-insignificant number of investment newsletters are able to successfully time the stock market. “This is startling not because of its conclusion, but because of its source. For several decades, it was orthodoxy in the Ivory Tower (i.e. Universities and Colleges) that successful market timing was impossible. No doctoral candidate dreaming of getting tenure would ever think otherwise – much less utter such a sacrilegious notion in public. While this orthodoxy has relaxed somewhat in recent years, believing in market timing remains the minority position.

“Nevertheless, Alok Kumar and Vicente Pons, doctoral students in economics and finance at Cornell and Yale universities, respectively, were willing to buck this still prevailing skepticism. The pair conducted their research using the Hulbert Financial Digest’s database of market- timing signals issued by newsletters between June 30, 1980, and November 30, 2001 – a period covering more than 21 years. The study as yet is unpublished, and is instead circulating in academic circles as a working paper:

“Behavior and Performance of Investment Newsletter Analysts.”

*** “The best investment decision I ever made was to invest in government bonds,” writes another old friend, Martin Spring.

“I started moving into them six years ago, in the face of notable lack of enthusiasm by financial advisers. Those were the final years of the global bull market in equities. Bonds weren’t on the radar screen of individual investors, or their advisers. If I insisted on buying them, I was told, I should prefer shorter-dated to longer-dated, corporates to governments. Later, I was told that stocks should be bought for recovery, as they were higher-return investments long-term, and/or that bonds were too expensive.

“All this advice was completely wrong. Fortunately I disregarded it.

*** Has America changed? Another friend, an American of swarthy mien, sends this memoir:

“We just returned to the U.S. from a trip to Spain and the Netherlands. It was our first visit to Spain. We spent time in Madrid, Valencia, Granada and Seville. The weather was breathtaking, the people friendly and helpful, and the prices very reasonable, even with a strong euro. While touring Spain, I could not help but compare the atmosphere in the country once dominated by a dictatorship to the U.S., a country once considered the freest society in our lifetime. Don’t get me wrong, I still like the U.S. and plan on living here for a long time. But, I could not help but notice the transformation over the past two years.

“I remember coming home from the USSR in 1982. As soon as we landed on U.S. soil, many of the people in my group kissed the ground. They had good reason. While in the Soviet Union, we were surrounded by the state security apparatus. At the airports, we waited for hours while our luggage was hand-searched, not for bombs, but for contraband. Things like rubles, icons, lacquer boxes could not be taken out of the country unless officially sanctioned. While in major cities, we were monitored by the state apparatchik. Our every move was captured by a diarist in the dark. No one smiled, everyone was paranoid about what they said. Any bad mouthing of the state had to be uttered in the darkest of corners. Never in a hotel room – no, that was the KGB’s bugging ground.

“On every street corner, defenders of the homeland were in full view. Anyone exercising the freedom of anything was quickly whisked away. There were still a lot of bread trucks in Moscow – curiously, there was not much bread. Our movement from city to city was monitored and regulated by special visas.

“We were interviewed by the national TV station about a book that four of us authored – it appeared the next evening. Fully censored, of course.

“Back to Spain. I have not felt such freedom as I did over the past couple of weeks. The day after I left Valencia, the Basque Separatists detonated a bomb – it was the week of the Municipal Elections in Spain. I took a sleeper from Valencia to Granada. On the way, I helped a middle aged woman and her 9-year-old daughter with their luggage. Come to think of it, there were a lot of children, well dressed as is the Spanish custom, running around the old town streets in all the cities – unsupervised, I might add. No one asked to inspect my luggage, there were no ID checkers with wands patting down grandmas or scared 4-year olds. There was a scary moment, though, when someone lit up a cigarette in the non-smoking section of the waiting area. It was the man who worked at the stations “client services” desk taking a break.

“When was the last time you saw anything resembling client services that actually was manned and operated with a smile?

“By the way, smoking is legal in Spain – everywhere but on airplanes. Oh, did I mention the cockpit door was open for the whole flight between Madrid and Valencia. This in a country with strong Islamic ties.

“It was about 10:30 pm on a Thursday night. We were just getting seated for dinner in a restaurant overlooking the Guadalquivir in Seville. The city was hopping. After the meal, which consisted of two whole fish, perfectly fried, with gazpacho, drinks, flan and arroz con leche for desert, we headed back to our hotel for a late evening coffee. It was close to 1 am before we reached the Hotel, after a leisurely stroll over the Triana Bridge. The streets were hardly empty, well, there were no policemen.

“We sat down. Our waiter speaking perfect Spanish, approached our table immediately. Two decafinados con leche, por favor. Throngs of tourists and locals walked past our outdoor café. Sitting at a table across the way was a single lady. We could tell she was companionless because there was no other place setting at her table. She was dressed to the nines, beautiful 18-carat jewelry, shoes and a purse that perfectly matched her outfit. Spain must have the highest number of shoe and purse stores per capita. She had just finished dinner and was sipping some coffee. Some loudmouths approached the tables, dressed very down-market.

“Were we about to get our first taste of Spanish hooliganism?

“No. It was a leftover group of drunk British soccer fans – there was a big match in Seville the weekend before. They muttered something with a strong cockney accent that nobody could decipher. Then as they passed the woman, they yelled porfavorgracias and laughed. The woman calmly finished her dessert, paid her check and strolled down the avenue, presumably to her home. She was at least 70 years old.

“We left on Sunday afternoon, just a few hours before the bullfight at Seville’s Plaza de Toros. How uncivilized of us. Our flight for Madrid left at 3pm. We were advised to be at the airport by 2pm at the earliest. We went through security, I kept my shoes and belt on, and exited the other side. Not so fast. The scanner guy looked over to us. He was about 40, pudgy, with a very tired look about him. After all, it was almost 3pm in Spain. If you don’t know, 3pm is the beginning of the daily siesta when almost all Spaniards drop what they are doing and take a two-hour break to rest or recreate. How did the country ever make First World status? He asked us if a plastic bag that was at the end of the conveyor was ours. It wasn’t, we said.

“We thought about dropping to the floor as hundreds of SWAT team members would most definitely be on the scene very soon. Would they use tear gas, how many explosives experts would show up, what about those mean-looking, bomb-sniffing dogs – Is Miranda a Spanish name? He leaned over…it was too much to ask for him to actually stand up. He opened the bag and said ‘miel’.

“Oh, it was just a couple of jars of honey. But, who did it belong to? Would they shut down the terminal until the perp was found? Would the airport be shutdown? We knew it would happen, after all, we’re from America. He took the top off one of the jars and stuck his finger in, pulled it out, tasted it, and said that he would take it home if no one claimed it.

“What drama!

“After a brief stop in Madrid, we were off for a day in Amsterdam before hopping on our United flight back home. Oh Amsterdam! What’s new in the city of filth and freedom. Well, red is still the favorite color. Immigrants still wander back alleys getting high with the locals. Sexually suppressed Britons still dominate the tourist population. Oh, here’s one for you: the Dutch parliament are considering a proposal that would lower the age of consent to twelve! The gay population is protesting that this would be unfair for the younger boys. At least the hotel was nice. The greenback does not go very far here.

“At Schiphol, we went through the Dutch version of passport control.

“‘Passport please. Thank you.’

“Then came a little piece of home in Amsterdam. Before we could board our U.S.-flagged carrier, it was time for 20 questions, a second baggage security screening and the infamous random wanding of the deaf, blind, aged and those under 5. The questions were really complex and meant to trip us up. ‘Do you have any explosives in your bag?’ ‘Are you members of any subversive groups or the ACLU?’ ‘Is voting important to you?’ ‘Is Al-Qaeda spelled with a u?’ The last question was really tricky. There is no u.

“After an eight-hour flight with a group of geriatrics, and passengers, we landed. Between getting off the plane, still in a secured area, and transferring to our next plane, still in a secured area, we had to go through four separate security checks. And just in case we really were not who we said we were at passport control, we were asked for IDs one more time at the gate. We were home.

“Damn those terrorists – they’ve succeeded!”

Oh là là!