Sympathy For The Devil
You have to admire old Beelzebub. If human weakness is his cake, irony is his icing. He lathers it on thick…and gooey.
Hardly a soul gets close without coming away with sticky fingers…but what thanks does he get? Religious modernists have been trying to run him out of the church for years…and now academic writers are trying to ignore his work in the financial markets.
I have promised to stick to useful market commentary in today’s message. But I cannot resist this observation after reading Edward Chancellor’s book, “Devil Take the Hindmost”: failing to give the devil his due is probably the chief shortcoming of the eternal bulls.
Of course, in this post-modern age…with its Internet, online trading, Geraldo and Howard Stern…we no longer believe in the devil. We believe in psychologists and chronic fatigue syndrome. We are logical beings. We are alone in the universe with markets that are computer- driven, efficient and nearly perfect. If the price of AOL discounts earnings to the year 2200…it must be right. The price is always right…there is no room for human emotion…folly, wishful thinking, chicanery, tomfoolery or a severe case of Seasonal Disaffection Disorder.
Chancellor recounts the stories of several market manias, including the well-known Tulip-mania in Holland, and other less well-known bubbles. In each case, investors are gripped by the thrill of fast, easy money. This leads, of course, to where all impossible dreams reach. Judgement is impaired. Slightly at first. Then grossly. The worst of the human sins and weaknesses rise to the surface like the scum on a cold bath. Greed, gluttony, hubris, envy, jealousy, treachery, stupidity – you name it…a bubble makes people behave as badly as IRS agents or English clergymen.
In 1720 the South Sea Company had a monopoly on trade with the Spanish colonies of South America. But what created the South Sea Bubble was a plan to privatize the British national debt. The details are confusing. So was the market’s reaction to them. Isaac Newton commented, “I can calculate the motions of the heavenly bodies, but not the madness of the people.”
But such is the nature of manias, that the more obscure the vision…the more delightful we can imagine it to be. It is a little like the difference between meeting a woman by candlelight…and seeing her the next day at the beach. The first meeting requires imagination. It is the bull market phase. The second is the correction and usually requires gin and tonic.
Freud tells us that when the devil visits his paramours at night…he comes bearing gifts of gold. But by morning light…the gold turns to excrement. Daylight destroys illusions.
One of the heavenly bodies to whom Newton wrote was Lady Mary Herbert; he wisely advised her that the South Sea stock could be kept up “for some time, perhaps some years…but a melancholy prospect for those who shall stay last.”
Seeing the money that was being made…and the demand for shares…a number of other companies rushed to get out IPOs. But the South Sea Bubble did not last long. By midsummer of 1720 the price of the shares had risen 800%…and insiders were bailing out, even selling short. By September the stock had fallen 75%…and not long after became totally worthless.
“The progress of science is cumulative; the progress of financial markets is cyclical.” That’s how Jim Grant puts it. The devil is a product of human emotion, imagination and experience – not science. He comes and goes, cyclically…taking his opportunities for mischief where he finds them. He lodges in the human heart, not in the brain. (He prefers the grander accommodations.) But it is in the heart where the serious decisions are made.
There have been some revisionist works on the South Sea Bubble…as well as Tulip-mania. Professors of finance have tried get rid of the devil altogether…by showing that it was rational to pay such high prices for investments. Their argument is simple. Since no one can know when prices will rise or fall…or how much…all prices are inherently logical. The investors who bought the tulips or the South Sea shares, even at the height of the mania, were acting sensibly.
The devil appreciates this kind of thinking. So do the markets. They bring in the fools like a carney at a circus. But even the supply of fools, though usually so fulsome and copious, eventually runs thin. Selling overwhelms buying…and the rational price gets a lot lower.
Even investors who understand how the devil operates are tempted to ride along with him…just for the fun of it. As prices rise, and friends and neighbors get rich, the temptation is almost irresistible. James Cramer of TheStreet.com said of Internet companies: “As company after company went public and was successful, eventually it hit these journalists that maybe it’s for real. It became too difficult to stay negative and have credibility, because people are just making too much money.”
It was too much of a temptation for London banker John Martin in 1720. “When the rest of the world is mad,” he said, “we must imitate them in some measure.” `Tis a pity, though. When he looked for a fool to buy his shares…none was available. He waited too long. He lost a fortune.
Donegal, Ireland July 31, 2000
*** The bear decided to go back into the office last week. Not a big deal. Return a few phone calls. Catch up on a little paperwork.
*** He’s been enjoying a vacation at the beach…while investors and consumers continue their ‘summer of love.’ Margin accounts are still expanding. IPOs are still coming out. People still think stocks will rise forever.
*** But, last week, it seemed like time for the bear to go back to work and stir things up a bit.
*** The Dow fell 74 points – just enough to remind serious investors of what lies ahead. The Nasdaq took a loss of 179 points. The big techs – the worst place for your money – took a big hit. Cisco, for example, dropped more than $5 a share. JDSU fell more than $12.
*** Our old River of No Returns stock, Amazon, is now struggling to stay above $30. It was over $100 when I wrote about it last year. Amazon is not likely to disappear. But the stock still has a long way to go – down, of course.
*** Another Internet stock, iVillage, is featured in today’s Financial Times. Candace Carpenter, the ‘digital diva’ who started the company, resigned as CEO. iVillage, which provides ‘content for women,’ lost 94 cents a share over the last 12 months. How much will investors pay for a 94 cents loss? Well, iVillage buyers are paying $6. A lot less than the $130 they paid a year ago…but still a lot more than they are likely to pay in the future.
*** The whole market looked terrible on Friday – with twice as many stocks declining as advancing. The Dow is still trading at 20 times earnings. The S&P is nearly 30 times earnings. And the Nasdaq price is nearly 150 times earnings. So, when the bear finally finishes his vacation, he’ll have plenty to work with. The Dow could easily be cut in half…and the Nasdaq reduced by 80%…before this cycle is over.
*** The Nikkei Dow has been suffering too – it fell below 16,000 last week. Investors who believe stock prices always go up over the long term might want to recall that the Nikkei was over 39,000 in 1989.
*** Philip Morris announced an increase in the price of smokes. Look for more price hikes as the tobacco companies become regulated utilities run for the benefit of lawyers and bureaucrats, rather than shareholders or customers.
*** Meanwhile, in Zimbabwe, the government has announced that it will confiscate, without compensation, half the commercial farms in the country.
*** We passed a pleasant night aboard the Normandy making the passage from Cherbourg to Rosslare, Ireland. The gentle rocking of the ferry made for a good night’s sleep.
*** Our dreams were interrupted in the middle of the night when the intercom asked: “Would anyone with medical training please make themselves known to the ship’s staff.” Hmmm…some poor wretch must be sick, I thought to myself before drifting back to sleep.
But in the morning we learned the cause: “During the night,” announced the ship’s captain, “our passenger list grew by one – a woman gave birth to a healthy boy. Many thanks to all who helped out and congratulations to the family.”
*** We almost needed medical attention ourselves when I forgot that the Irish drive on the left side of the road. It seemed like every truck in the republic was on the same road we were – making our way from the southeast corner of the Emerald Isle to the northwestern most extremity. And since my steering wheel is on the left side, as it is on an American car, I could see around the trucks in front of me only by pulling out in the lane of on-coming traffic. This made for some excitement in the car…but I had the situation in hand until I forgot which side of the road I was supposed to be on. For a moment, I thought the truck facing us must be passing and would have to yield. But then I realized, it was I who was passing…I quickly gave way, to the sound of shrieks coming from the back seat.
*** Ireland is a beautiful place, much favored by nature, though as I reported on my last trip, man has been less generous. In England, you will occasionally find a house of weathered, mellow brick and a Tudor-style which is fetching. Or maybe a mansion with Italian pretensions. Sometimes, even a Georgian house is nice to look at.
*** But in Ireland, almost all the buildings I saw from the N3 motorway – public and private – were dreary. There were some exceptions – the entry to the King’s School at Ennisfree, where Oscar Wilde was a student, is magnificent. And there were one or two Georgian manor houses that didn’t look bad. And we passed a couple thatched cottages that were picturesque. But the general look of Irish architecture is depressing, for reasons I will explain later.
*** We stayed a few days at a St. Ernan’s House Hotel, on an island just outside of Donegal Town. The House was built in 1826 for a nephew of Lord Wellington and has been carefully updated and tastefully decorated, with acres of ancient trees and gardens surrounding the house. The house itself shares the charmless quality of most domestic architecture in Ireland, on the outside. But the interior is nicely done. We had a drink in front of the fire (even in July, a small fire is welcome here). And then took our places in the dining room for a very nice dinner. I had the black pudding (blood sausage…which goes by ‘boudin’ on French menus). It was very good. There are only twelve rooms. The O’Dowds, who run the place, would be happy to have you visit. Tel: 353 73 21065.
*** I’ll have more to tell you…tomorrow…
Your man on the scene…