The Black Grim
“Those were the days, my friend.
We thought they’d never end.
We’d sing and dance forever and a day.”
Poitiers seems to be situated in natural bowl. From my hospital window, I can see about 120 degrees of the rim, running from East to South. The sun is clear and bright, as it often is in late summer. I see green trees everywhere – aspens, oaks, plantain trees (which look for all the world like sycamores)…and Lombardy poplars.
When things have been going very well for a very long time it is hard to believe they could ever be any different. From this distance, all the leaves I can see seem to be completely green. There is no trace of the seasonal reversal that will kill them. I can scarcely imagine how they will look when they have turned brown. And yet, I know that that is what will happen. It always does.
Predicting the future is a hit or miss game. Harry Potter learns to read tea leaves…and crystal balls. But he knows his instructor, Professor Trelawny, has only been right twice in 15 years. Still, he searches for the distinctive pattern of foreboding – the black dog, known as ‘the Black Grim,’ signifying death.
I thought the Black Grim had paid me a visit on Sunday night. In the events that followed, I suffered the symptoms of a miserable and humiliating death, but without the customary result. More about that later…
Economists, analysts, and Fed chairmen must occasionally have an honest moment. Perhaps looking into the mirror they say, quietly…to themselves alone… ‘you have no idea what you’re talking about, do you.’
Irving Fisher – the leading economist of the late 20s must have felt like a fool. He had done as much as any economist could have done: he had extrapolated current trends into the future.
On October 23, 1929, the highly esteemed Yale University economic professor spoke to the District of Columbia Bankers Association to explain the “truth regarding the level of prices on the stock market.” He noted that had a wise person invested $100,000 in the most popular stocks just three years earlier in 1926…that “100,000 today would be over $1,000,000.”
To refresh a memory that probably neither of us ever had, the 1920s were Big Tech years too. The tech stocks of the day…radio…automobiles…electrical appliances and utilities…airplanes…and motion pictures…were driving the market up wildly. If you had invested in $10,000 in General Motors in 1919, it would have been worth $1.5 million in the summer of ’29. Radio Corporation of America, RCA, or just “radio” as it was known in those days… was selling at an unheard of 73 times earnings.
But this was not a “house of cards,” Fisher explained. Instead, it was the result of “the application of invention to industry.” He touted the work of inventor, Thomas Edison. And the 4,000 scientists working at ATT… “and the laboratory of no university could equal that.”
“All the resources of modern scientific chemistry, metallurgy, electricity, are being utilized for what? To make big incomes for the people of the United States in the future, to add dividends to the corporations…to raise the share prices of the stocks that represent these new inventions,” he boldly proclaimed.
Fisher went on to say that scientific management, which he called ‘Fordizing,’ cooperation from labor, price stability and, believe it or not, prohibition were also helping to assure steady increases in stock prices.
Here are his final words to those D.C. bankers:
“Of course, I am not here to prophesy. I am not a prophet, nor the son of a prophet. I am not infallible…”
But, “unless there is a real panic tomorrow…a very radical change in psychology or unless this lunatic fringe is much larger than I have ever dreamed it was. We shall not see very much further, if any, recession in the stock market. But rather a ragged stock market in the next few weeks, and then after the first of the year, a resumption of the bull market, not as rapidly as it has been in the past, but still a bull rather than a bear movement.”
Fisher’s crystal ball may have been a little foggy. But his timing was clearly perfect.
It happened that very next day, October 24, 1929, Winston Churchill was visiting New York City on a lecture tour. …walking down Wall Street and he stopped to see for himself the home of the “eighth wonder of the world” the longest bull market in history – the trading floor of the New York Stock Exchange. As Winston watched in horror (he had earlier that week bought shares on margin) stocks crashed. It was the day the Black Grim visited Wall Street.
Extrapolating from recent experience, investors bought the dips. Stocks always bounced right back… Or at least that was what they thought. But stocks did not bounce back as expected. Stock prices did not recover until more than 20 years later.
And now, many seasons later, our own Harry Potter Greenspan, in his Jackson Hole speech about two weeks ago:
“…this extraordinary period of technological advance continues to exhibit great vitality, bringing with it the prospect of further globalization, greater competition, and the resulting improvements in the economic welfare of most of the world’s citizens. It is almost surely the case that, the longer the process of globalization of economic activity continues, the more firmly entrenched will be the gains we are beginning to realize.”
But Greenspan is no fool. He knows that the odds of successful forecasting are against him.
“But our past endeavors at long-term forecasting,” he continued, “afford us little confidence in being able to anticipate seminal changes in global economics and finance.”
Simple extrapolation only takes you so far. Tomorrow probably will be like today and yesterday, unless it is different. And the seminal changes are nearly impossible to see coming.
Mr. Market doesn’t like to do the predictable thing – unless it is unexpected.
In all of nature, of which markets are a part, there are built in seminal changes. Surprises. Reversals. Jerks. Cycles. Tides. Seasons. Some are more regular than others. But they all have a common feature – the Black Grim. The old must be buried to make room for the young. Old enterprises. Old technology. Old people. Old stocks too must pass away.
Analysts extrapolate the growth patterns and stock price patterns of the Big Techs, apparently unaware that their very success carries with it, shall we say – the program code – of their destruction. Graham and Dodd described how this worked:
“There are several reasons why we cannot be sure that a trend of profits shown in the past will continue in the future. In the broad economic sense, there is the law of diminishing returns and of increasing competition which finally flatten out any sharply upward curve of growth.”
The sharper the upward curve…the more quickly it flattens…or even curves downward. That is true of Big Techs stocks as it is of plants. The fast-growing weeds of springtime are already brown and dead. The oaks are still green.
More to come. As always,
C.H.R. Hospital, Poitiers, France September 6, 2000
P.S. Thom “Bomb” Hickling and I sat on the veranda Sunday night. We admired the green oaks and the fading light as we worked out the a few songs on our guitars. It had been a busy weekend. We performed to a small group on Saturday night. Jean Paul, a pleasant man in his 60s, got very drunk and sentimental. He kissed me three times before the evening was over. I felt like Sgt. York being awarded the Croix de Guerre…but without the customary medal.
Then, on Sunday, I stacked up firewood and tried to get things prepared for our return to Paris. By Sunday evening we were all worn out. Thom went out to work in the office. I cleared off the table. By then, it had gotten dark. Suddenly, from out in the darkness came an animal noise. But a strange one. It sounded like the beating of immense wings – hellish and scary. I didn’t want to go out and investigate. Instead, I went closed the door, locked it and went to bed.
*** Wow…a very exciting past couple of days. The Daily Reckoning command center was struck by a nasty virus (I think)…appropriately, an old-fashioned, creepy crawly virus. More about that below.
*** Back on the job, more or less, I notice that Addison did a good job of filling in for me. “The graveyards are full of indispensable people,” says my friend Michel. I am glad that I am, not yet, among them.
*** Oil hit 10-year highs yesterday, rising to $33.83. The Boston Globe reports that state utilities are asking for the “sharpest rate hikes since the 1970s.”
*** But oil seemed to bead up and run off Wall Street’s back yesterday. Investors care only about Big Tech… So, Big Tech was where the action was.
*** Last week, the Wall Street Journal carried a negative piece on Yahoo that sent shares down $7. Yesterday, an analyst downgraded Intel, the world’s number one semiconductor maker, from a “strong buy” to just an ordinary “buy.” This dropped Intel by $4.69. Other rumors, reports, and gossip knocked $3.16 off Worldcom… and other of the Big Techs suffered too – including Dell, Gateway, Ciena and so on. Readers with a sense of humor might wonder what’s the difference between a “strong buy” and a regular one. Either way, the buyer will be long the stock and suffer whatever happens.
*** Barron’s provides a helpful update on how over-priced these Big Tech stocks are. Price to SALES ratios:
Worldcom is at 2.5 times SALES
Sun Micro 12.2
JDS Uniphase 62.6
Siebel Systems 28.4
Sycamore Networks 141.4
Juniper Networks 213.9
*** These stocks have very low yields. Compared to yields on bonds, the S&P 500 yields are the lowest in history.
*** Last week provided evidence for the long-awaited ‘soft landing.’ The jobless rate for August rose to 4.1%. The census takers were finally let go. Factory jobs fell. Factory orders dropped.
*** All of this was good news to Wall Street. The Dow barely budged, but the Nasdaq had one of its best weeks in a long time – up 4.74%, just like the good old days.
*** Now, summer is over. The kids are back in school. Volume is up on Wall Street and anything could happen.
*** Yesterday, the Dow ended up 21 points. But the Big Techs dragged the Nasdaq down 91. It was “a correction,” said a ‘strategist’ asked by Reuters, “not the beginning of something significant.” How could he know?
*** There were about as many stocks going up as down. But the number of issues hitting new highs outnumbered those hitting new lows, 4 to 1.
*** Gold lost $1.20. Platinum gained $6.
*** In the currency markets, the titanic, 3-way struggle continues. The euro is the weakest of the three combatants. It hit a new low against the yen yesterday – and barely held its own against the dollar.
*** “Better fill up your gas tank,” advised Pierre yesterday. A nationwide strike and blockade by truckers is now reaching into the heart of France. Stations are running out of gas.
*** But what do I care? I’m not going anywhere.