The Age of Chic

It is always a pleasure to get to the office, dear reader, and begin work. We are eager to see what the day has in store for us. For we have no fixed theory to guide us. Neither does Mr. Market nor God Himself whisper in our ear. We merely open our eyes…and hope to see something.

Yesterday, Maria came to the office and spent a few hours stuffing envelopes. (Few children of direct mail publishers reach adulthood without paper cuts. Maria is no exception.) Then, we walked over the Pont Neuf to the Left Bank and stopped for dinner at a busy intersection…where the rue St. Andre, rue Mazarine and several others come together. Sitting outside, we enjoyed a whole parade of evening revelers passing before us.

Style is all that counts, we noticed. In the late, degenerate capitalist age, no one cares about politics anymore. Sitting at a cafundefined in the heart of the Latin Quarter, and listening to the conversations at neighboring tables, not once did I hear anyone mention Marx, Lenin, Freud, Foucault or Sartre. They might as well all be dead.

In the Age of Chic, fashion is all that matters.

If there were an index of chicness, Maria – looking like the fashion model she is – would have elevated the average about as much as her father depressed it.

Together, we left the street corner chic index about as we found it. But each group that arrived at the corner moved the barometer according to its own qualities. The French were usually well dressed, held themselves erect and walked crisply. You could almost feel the averages moving upwards when they sat down to eat. The Germans and Scandinavians, by contrast, were bigger, but usually less well turned out. Tall, often heavy, blonde women from the Northern countries tend to wear flat Earthshoe- type sandals that make them look even plainer than they are.

And then, there were the Americans. You can spot them coming from far off. They move slowly…like cargo vessels so freighted down they sink to their gunwhales and barely disturb the surface of the water. The chic index plummets as soon as they appear.

Popular among both young and old are blue jeans and Che Guevara tee shirts. Popular too is holding hands – but only among homosexuals. Several couples – lesbians and gays – went by, hand in hand.

And so we reflect on the state of things. Times change, we note. Thirty years ago, this street corner was so smitten by politics that the revolutionaries of the era pried up the paving stones and built barricades. “Come the revolution,” they would say to each other, “things will be different.” Cafes and restaurants were crowded then too…but not with tourists. Instead, they were full of ideologues – greasy-haired youths, who smoked, drank and squabbled about the fine points of Marxism until the wee-hours. Che was not on their undershirts, but on their lips and in their brains, such as they were.

Two hundred and thirteen years ago the scene was probably not much different. The French Revolution was “the source of all the present communist, anarchist and socialist conceptions,” wrote Prince Peter Kropotkin.

France at the end of the 18th century enjoyed an exaltation not too much different from that of America at the end of the 20th. She was the biggest country, with the biggest economy and Europe’s dominant military power. (It was French intervention that allowed the American colonies to escape British rule a decade earlier.) France could even lecture other countries on the benefits of free enterprise!

But success is self-correcting, we’ve noticed. Turgot and the Physiocrats had been applying their “laissez faire” principles to the French economy, to great effect. In doing so, they had disturbed powerful interests close to the monarchy who were concerned with protecting their privileges and their markets – much like the West Virginia steel mills and Kansas farmers of the Bush years. In 1776, the same year in which the American war for independence began, Turgot was given the boot.

“The dismissal of this great man,” wrote Voltaire, “crushed me…Since that fatal day, I have not followed anything…and am waiting patiently for someone to cut our throats.”

Someone came along with a knife just a few years later. On July 14th, 1789, a Paris mob attacked the old fortress at the Bastille. There, they liberated “two fools, four forgers, and a debaucher,” wrote an observer at the time. The prison guards were promised safe-conduct in return for surrender, but once they laid down their arms, the mob cut them to pieces and was soon marching through the streets of Paris with their heads, torsos and other body parts on the ends of pikes.

For the next 25 years, France rocked and reeled from one collective madness after another. The Marquise de Sade was released from prison…while thousands of decent people took his place. Paper money replaced gold and silver. Identity cards were required of every citizen, called “Certificates of Good Citizenship.” Permits were required for nearly everything. And travel was strictly controlled.

Every revolution is an assault against tradition – whether it is a New Era on Wall Street…or a new era in Paris. The church was plundered. Local languages, schools, and legal jurisdictions were dismantled. Even the old forms of address were tossed out – henceforth, everyone would be called “citizen.”

Finally, the French could stand no more. Napoleon Bonaparte brought order to Paris with “a whiff of grapeshot” at a critical moment.

But today…the only revolutions one talks about are in technology. There are lesbians on every street corner, but you can search an entire city and find only a few moth-eaten communists who lost their minds 30 years ago. There are Che tee-shirts, but who cares – except for a few tenured relics of the ’60s – what Che said? There are no republicans either. For how is Mr. Bush’s agenda different from Mr. Clinton’s…or Mr. Chirac’s…Mr. Blair’s or Louis XVI’s? They all do the same things – tax, spend, and regulate as much as they can get away with. What is this strange intersection we’ve come to? All major governments seem to have come together in some unholy socialism…but where are the socialists? Few politicians will even admit to the creed they all share. And what voter really cares?

“We lived through the Reagan revolution…mainly rhetorical…” writes Gary North. “After Reagan, we lived through the Bush-Clinton counter-revolution. Now we are getting more of the same under the present Administration: more controls on our lives, more government spending, larger Federal deficits.”

“The Reagan victory did not shrink the State,” Gary continues. “We are not going to see lower taxes, reduced government regulation of business, a lower Federal budget, the repayment of the national debt, better schools, safer cities, and smaller welfare rolls…”

What are we going to see, we ask ourselves?

Bill Bonner
Paris, France
June 27, 2002
Another rush to the downside yesterday…with stocks down more than 200 points early on.

But still no stampede. No panic. Instead, investors worked prices back up and came close to breaking even for the day.

“I believe in this market,” say the characters on a popular CNBC ad. Faith keeps them in stocks…holding on and hoping for a new bull phase. But investors don’t get what they expect from a market – they get what they deserve.

What does a man who bought Worldcom at $62 deserve?

What does an executive who inflated earnings by $3.8 billion deserve? What do consumers who spent every penny that came their way…and then borrowed more…deserve? And what about an economy…where the most outrageous business practices were encouraged, all while lecturing the rest of the world about the superiority of the American free enterprise model – what does it deserve?

We don’t know…but we have a feeling we will find out.

More and more, the great heroes of American business of the ’90s are appearing, not on the adoring covers of BusinessWeek, but in police line-ups. And day by day, investors are beginning to wonder. Maybe the Great Boom of the late ’90s wasn’t all it was supposed to be.

Maybe the promise of new technology, productivity, and long-term stock market profits aren’t what they were supposed to be either…

“Finally, all these accounting messes show what we have been saying all along,” wrote Dave Skarica back in January. “The bull market wasn’t driven by fundamentals or a so-called ‘new era’. It was hype, a bubble. Everything was inflated, it was false hopes and dreams. And now, finally, this is being exposed.”

So, let’s check in with Eric for the latest on who was exposing himself on Wall Street:


Eric Fry (refreshed and on the job) in New York…

– The Cavalcade of Corruption continues on Wall Street.

– The latest episode features a massive accounting “gaffe” by Worldcom. It seems that the company recorded $3.8 billion of expenses on the “capital expenditures” line – Oops! – the effect of which was to greatly overstate earnings. Worldcom will restate its results for the past five quarters, wiping out all profits it had recorded in that period. Unfortunately, the hapless investors who believed the bogus numbers cannot “restate” their investment losses into profits.

– The Securities and Exchange Commission characterized Worldcom’s fraudulent activity as “accounting improprieties of unprecedented magnitude.” Although $3.8 billion is a lot of money, we doubt that Worldcom’s improprieties are as “unprecedented” as the SEC asserts. More than likely, the SEC simply hasn’t uncovered the others yet.

– Worldcom’s mea culpa knocked the market for a loop once again. All the major averages tumbled to fresh multi-month lows yesterday morning, before recovering to finish the day more or less unchanged. The Dow wound up just 6 points lower at 9,120, while the Nasdaq recovered from a 3% loss to gain 5 points to 1,429.

– Wednesday’s session continued the recent pattern of bone-jarring volatility on Wall Street. Amidst the unnerving conditions, very few investors are enjoying themselves. But for those investors with a ‘contrarian’ bent…these are good times, indeed. Apogee Research (for whom I also toil) is thriving in this environment. Its most recent short sale recommendation has produced a 25% gain – so far – in less than two weeks.

– And the “SI Trader” is performing brilliantly. As it’s a relatively new trading service launched by Strategic Investment’s Dan Denning…I went to the source for an update to be sure: “Eric, the crux of our current trading strategy is: sell financials and buy hard assets,” says Denning, “and as you might imagine – it’s paying off nicely.”

– For example? “We recommended buying put options on the Philly Banking Index two weeks ago,” Denning continues, “those are up 62%. We have also targeted a couple of specific financials to sell short…those trades are working out quite well. Given the corruption and the shrinking deal flow on the Street, there will definitely be more problems ahead for the brokers…and that means there should be more gains ahead for our well-placed positions.

– “We’ve also made out like bandits by betting against the Fed raising interest rates,” Dan adds. “In March we recommended buying long-dated eurodollar calls. As of today’s close, these options have racked up a gain of 296%. And with the Fed standing pat on raising rates, this trade may not be finished yet. You can’t win ’em all. But so far we’re doing pretty well.”

– Mr. Denning has also teed up a recent call-option trade in the gold-stock sector. Although gold has picked up a few admirers over the last several months, betting on gold still feels like a contrarian play.

– The question remains: Can gold really mount a significant and sustainable rally from current levels? Most folks doubt it. Given the outsized gains that so many gold stocks have mustered over the last year, is there anything left to gain? Jim Grant answers unapologetically in the affirmative.

– “In no field of endeavor is impossibility more common than in the investing field,” he proclaimed at the recent London Bullion Market Association Gold Conference in San Francisco. “My assignment this evening is to discuss an impossibility even stranger than the bust that followed the boom. I mean the rehabilitation of gold. – “Demonstrably, there is no worse investment over time than the ancient monetary metal. Gold is cash, perfectly liquid but non-interest-bearing. …through almost 200 years of American history, equities appreciated at a compound annual rate of 8.7%, bonds at 5% and gold at 1.3%…Interest not earned on a single gold coin struck off by the Roman mint would by now cover a sizable land mass with $100 bills. The world could have retired on it…As an investment asset, gold is forever waging a rearguard action against compound interest.”

– Despite this considerable handicap, Grant is bullish. That’s because he is unequivocally bearish on the dollar.

– The dollar is nothing more than an “act of faith,” he says. “The monetary competition between gold and non- gold is probably as old as the first gold coin and the first banker’s promise. Many contend that non-gold has scored a final victory and that monetary history is over. Don’t believe a word of it. My bet is on the impossible.”


Back in Paris…

*** The Feds did what we expected yesterday – nothing. Greenspan is trapped, we believe. He can’t lower rates while the dollar is falling and gold is rising – without risking a disastrous collapse. And he can’t raise rates either – or he’ll destroy the real estate bubble…and the consumer’s ability to keep spending.

*** The euro edged up closer to the $1 level. Gold rose $4 at the opening, but fell back to close only 30 cents ahead.

*** Worldcom, if it goes under, will be the biggest bankruptcy in history. The company borrowed nearly $30 billion to buy other telecoms during the go-go years. It still has a reported $90 billion or so in assets. But the poor folks just don’t have much cash to pay their bills.

*** It’s summertime here in Paris, as in the rest of the Northern Hemisphere. Paris streets are filled with tourists…many of them Americans. Money is our beat here at the Daily Reckoning. But we don’t mind giving some unsolicited advice about other matters from time to time.

So, here we offer you, dear reader, a few pompous sartorial suggestions, just as we did last year: If you come to Europe this summer, remember this, Europe is neither a beach nor a desert. There is no need for huge floppy safari hats, nor shorts, nor backpacks, nor water bottles. If you are tired or thirsty, you have only to sit down at the nearest bar and order a drink. Your survival is never at risk in a city like Paris; only your dignity.

We have a heightened fashion sense here in the Paris office, after being an object of ridicule for many years. Thus a big debate erupted on whether slacks were acceptable. We finally agreed that they were okay – but only for men. Women should wear summer dresses. We prefer white, but don’t mind pink, provided the hemline is short enough. Think of Audrey Hepburn in Roman Holiday or Brigitte Bardot in almost anything. Men should wear a suitable jacket…a blue sport coat is preferable…which they should never remove, even when in the shower.

There, we hope that helps.

The Daily Reckoning