Stroke Of Luck
Dr. Bessau, who had made an emergency visit to my house, at about midnight Sunday, did not like what he found.
It looked as though I was having a stroke. I did not know what was going on. I could not take my eyes off the bathroom faucet, or even close them, or I would become violently ill. Was I going crazy? Stroke? Heart attack? None of the possibilities were very promising.
Dr. Bessau summoned reinforcements. Within minutes an entire team of doctors and nurses from nearby Montmorillon were on the scene. I can barely recall any of the details. I was only semi-conscious. One of the doctors had an accent. Various injections were made. To an uninterested observer, it must have been rather exciting…even comic. True to my doom and gloom roots, I was sure the Black Grim had gotten his grip on me. It was a melodramatic moment that I didn’t want to waste.
I searched for final words. I recalled Jefferson’s final exclamation: “Adams still lives!” I couldn’t quite remember what Stonewall Jackson had said – something about ‘crossing the river and resting in the shade.’ And Lee, still deep in the action of the Civil War, “Tell A.P. Hill to bring his troops up.” Something like that.
I could think of nothing appropriate. Maybe I should just tell Thom to ‘tell Elizabeth that I love her.’ Oh my…too maudlin.
Then, after retching a few more times, a more practical ‘last words’ occurred to me: ‘Thom,’ I thought to myself, ‘what did you put in the ratatouille?”
I hope you will forgive me, dear reader, for passing along this memoire of my recent illness. I have written so much about things about which I know so little – stock prices, economics, politics. Maybe this recollection of an actual personal experience will unlock some small truth…some insight about the way our doomed species, homo sapiens analogiens, really think and act. Maybe we will even find a better understanding of how markets work.
A virus can lay dormant in a human body for a very long time. AIDS can take a decade to make itself known. Mad cow disease can take two decades or more.
Some viruses seem to do little damage…and then all of a sudden, they flare up in a dramatic way. Scientists don’t understand why or how the change occurs.
Viruses, like markets, seem to reach a ‘tipping point.”
“Maybe you were under a lot of stress?” asked Dr. Cremiere, a small woman who reminded me of Edith Piaf. “Sometimes a lot of traveling will do it. Or, often, after a death in the family or a divorce… We don’t really know.”
‘We don’t really know’ seems like an appropriate ‘last words’ for our attempts to understand the stock market too. Movements in stock prices are more a product of what we don’t know than what we do. New technology, interest rates, productivity – these objective conditions seem to excite human emotions…and provide rationalizations for the positions we take. But the why, how and when of major turning points seems to be buried as deeply in the human spirit as a viral infection. It can lay dormant for many years – then, suddenly, for no apparent reason…it can flare up – either in a burst of sensational optimism or an imploding depression of animal spirits.
Ultimately, as Warren Buffett reminds us, stocks are nothing more than the streams of income they represent. As the flow of cash increases, so should the price we are willing to pay to own it.
But there is no rational explanation for the willingness of investors to pay more for the same stream of income one year than the next – or more for a stream of income from one source than from the next.
A safe bond yielding $10 a year should be worth about as much as another safe bond yielding $10 a year. And both should be worth about as much as a safe stock with the same yield. Stocks may sell for less money – when investors fear that the stream of income is less sure in the future…or more, if they think the flow of cash will increase. But all things being equal, the capital values of equal streams of income should be equal.
Thus, you’d expect that the yield you might get from a Triple-A bond would be about the same as the yield you would get from the S&P 500. Before 1950, it was common for investors to want a bit more yield from stocks – to offset the risk of owning them. Now it is common for investors to want a bit more yield from bonds – to offset the risk of depreciating currency.
In 1929 – when stocks were almost as big a sensation as they are today – prices of stocks rose to the point where dividend yields fell well below bond yields. Bonds yielded about 1.7 times what you could get from stocks.
Today, according to Ned Davis Research, the ratio has soared to its highest level in history – more than 6…that is, you can get 6 times the yield of the S&P 500 in Triple-A bonds.
Stocks have been cut off from their stream-of-income roots. They’ve become popular sensations whose prices depend completely on investors’ willingness to buy them. Like celebrities who are only famous for being famous, these sensational stocks are only valuable as long as people think they are valuable.
This phenomenon is a feature of crowd psychology. It is why, for example, it was impossible for me to find a copy of the latest Harry Potter book. The book is not appreciably better than many other children’s books. But it is a sensation.
Likewise, Henry returned from his visit with a friend in Brittany with even more Pokemon cards, which he promptly added to his collection book. Pokemon is indecipherable to adults, but it is a rage among 9-year-olds.
And why do people wear those goofy running shoes with straps and laces, air pockets and miniature nuclear reactors built into the soles? They look fashionable now. In ten years, they will look ridiculous.
There have been a number of books and academic studies of popular sensations. Gary Scott wrote me yesterday with more thoughts on Malcolm Gladwell’s “Tipping Point” book:
“The Tipping Point points out why most investors have trouble estimating dramatic exponential change. We cannot conceive the power of exponential growth. For example, a piece of paper folded over just fifty times attains a thickness that reaches from the earth to the sun. Yet the normal human mind can only deal with about seven cognitive categories at once so is denied a full understanding of such powers.
“The book then explains the power of social epidemics (such as the use of fax machines) and how Metcalf’s Law helps determine explosions of use of such instruments. For example, Sharp introduced and sold 80,000 fax machines in 1984, the first year of their use. For the next three years steadily sold more faxes were sold. In 1987 enough people had faxes that it made sense for everyone to have faxes. This year (1987) was the tipping point for the fax. A million machines were sold that year and by 1989 two million machines had been put into operation.
“There are three types of people that are required to make an epidemic grow, connectors, mavens and salesmen. Gladwell goes into quite some detail about each personality type and the part each plays in spreading news. JFK, for example was a salesman of the bare head. Until he became President it was fashionable for men to wear hats. JFK did not and his unintentional salesmanship all but ruined the haberdashery trade.”
Robert Prechter’s latest book examines the phenomenon from an investor’s standpoint. “The prime mover of aggregate stock market prices,” he writes in The Wave Principle of Human Social Behavior and the New Science of Socionomics, “is mass emotional change, which itself must be, and demonstrably is, independent of outside influence.”
I suspect Prechter exaggerates when he says the change is independent of outside influence. But he is probably right on the money when he notes that it is the “limbic part of the human brain that gives rise to emotional responses kicks in quicker than the cerebral cortex that generates rational thought.”
“When a herd ‘thinks,'” he continues, “the result is not reason but an emotional interpersonal super-organic dynamic that must be the source of waves.”
My limbic system must have sounded like the alarm system on the Kursk Sunday night. It was on red alert. But viral infections, like popular sensations, come and go.
After some panicky consultation, the doctors on the scene decided that I should be rushed to the hospital in Poitiers. I didn’t care much for the idea. Every movement was torment. But at that point, it didn’t seem to make much difference.
They slid me into what seemed like a body bag without the zipper…and somehow carried me downstairs. I was fitted with various tubes and sent off.
Once at the hospital, I was rushed into a brain scanner – which detected nothing unusual. Nor were any other vital signs cause for concern. From all appearances, I was the healthiest dying man they had seen in a long time.
Some of the tests were diabolical. Hot water was shot into my ears to see if I would get woozy. Electrodes were fastened to my head…while loud noises that sounded like one of Sophia’s CD’s, featuring a band called Korn, were blared in one ear. This torture revealed only that Korn makes me sick – which I already knew.
Finally, after a day and a half, when they ran out of tortures, the medical staff gave up. “It’s probably a virus,” said Dr. Cremiere. “You might as well go home.”
Remarkably, as soon as I left the hospital, I felt much better. The sensations that so disturbed me passed.
The sun was as bright as I had ever seen it. Elizabeth had taken a cab down from Paris (fortunately, this was a couple days before the taxis went on strike). We spent an unexpected and delightful afternoon together…and then things returned, more or less, to normal.
Your correspondent, a bit embarrassed…but happy to be alive…
Ouzilly, France September 7, 2000
P.S. The Black Grim will eventually take the Big Techs down…and destroy the popular sensation that is the U.S. economy, the dollar and the equity markets. It will take us all down…including me, sooner or later. But not yet, dear reader, not yet.
*** “Tech Stocks Slam Lower on Earnings Angst” – says today’s Reuters headline. I’ve been warning ad nauseum (no…let’s not use that phrase for a week or two) about the Big Techs. Sooner or later, they’re going to get taken down. But when? How? See below…
*** They got taken down a bit yesterday. The Nasdaq lost another 129 points. The Sox index – which measures semiconductor stocks – fell 5.7%. Intel lost about $3.50. And Micron fell 10%. An analyst had a target of $120 for Micron…which he decided to revise to $50.
*** That’s the way it goes. One day a stock is thought to be worth $120…and the next day it is only worth $50. And nothing really happened in the intervening 24 hours.
*** The most important news yesterday was that the productivity increase for the 2nd quarter was revised upwards from 5.3% to 5.7%. An analyst was quoted as saying that this was a “spectacular” increase. Perhaps “incredible,” “unbelievable,” or “fantastic” would have been more appropriate modifiers. These numbers come from the fantasy world of the BLS, which also reported a drop in unit labor costs for the quarter.
*** But so what if it’s nonsense? It gave a big boost to the dollar. The dollar index hit a new high of 113.26 and drove the euro down to a new record low – 87 cents. The fundamentals in Europe are actually very good. Unemployment is going down. Taxes are falling. People have savings and are willing to spend.
*** But who cares about fundamentals any more? “Sentiment [against the euro]” says the Financial Times, “remains determinedly sour.” Meanwhile, the dollar, the U.S. economy, the big techs are all sensational. Eventually, of course, they will lose their sensational glow. But not yet, dear reader, not quite yet.
*** “How about that Euro, anyway?” asked Addison, up in Paris this morning. Since the Franc is loosely tied to the Euro, he says his Vin de Pays L’Aude just got “a whole lot closer to a buck a bottle.”
*** Oil was sensational yesterday too – rising $1.07 to a new high of $34.90. Treauries lost ground – worried about the oil price. Gold fell – as it does when the dollar goes up. It lost $1.80. Platinum, though, gained a big $9.80.
*** Compared to stocks, treasury bonds provide the highest yields in history. Digital Man, Ed Yardeni, comments: “I expect the 10-year Treasury yield to fall to 5% by the end of next year (if not sooner) and to 4.5% by mid-decade (if not sooner). US debt is down $565 billion since Mar ’97. There are only $630 billion in long bonds. This is equivalent to a mere 5% of the value of the S&P 500.”
*** “Walmart at a P/E of five?!… Yes!” says the Oxford Club’s Steve Sjuggerud writing from Ecuador. “I went to the Supermercados La Favorita headquarters just outside Quito, eager to see the company firsthand. Supermaxi (as it’s more commonly called) is the Microsoft of Ecuador’s stock exchange, the stock that everybody knows and can easily trade.” Steve believes he has figured out a way to make 200% or more on this darn cheap stock…
*** Japan, which can’t seem to find the light switch of the New Economy, watched in darkness as the Nikkei fell back below 17,000 this morning.
*** If labor is so much more productive, how come laborers are not earning more money? A new report from the Economic Policy Institute found that:
– “an average middle-class family’s income rose by 9.2 percent, after inflation, from 1989 to 1998. But they also spent 6.8 percent more time at work to reap it.
– “Without increased earnings from wives, the study’s authors concluded, the average middle-class family’s income would have risen only 3.6 percent over the decade.
*** The EPI study said middle-class black families work an average of 9.4 hours more per week than their white counterparts. Blacks work more hours than whites at every income level, said economist Larry Michel, a co-author.
*** The study also found that middle-class Hispanic families work five hours more per week than their white counterparts. Upper-income Hispanic families work the most of any group in any economic class, putting in 12.9 hours more per week than whites, the study said. Other ethnic groups were not profiled in the study.
*** Mr. DesHais’ driver’s license was taken away. But he went along with Celine into town to get gasoline, preparing for the strike. Seeing the gendarmes in the station, who recognized him…he explained that the gas was not for himself, but for Monsieur Bonner. Then, according to Elizabeth, “he gave them the French equivalent of ‘the finger.'”