The Existential Investor

Americans still believe in the stock market. They believe stocks are the road to wealth. They believe in technology too – and that the future will be brighter than today.

And they believe in their Fed chairman.

James Grant points out that this was not always so. “Central bankers were not always celebrities,” he writes. “About the time of the bear-market lows a quarter-century ago, the percentage of Americans who knew ‘of’ the Fed Chairman was in the single digits.”

Today, according to the same WSJ/NBC poll mentioned above, 55% percent of the people polled not only knew of Alan Greenspan, but also gave him a positive rating. Only 8% rated him negatively.

Somehow, the famous Alan Greenspan of 2001 is supposed to be able to do what the unknown Greenspan of an earlier era could not.

Little remembered is the fact that before Alan Greenspan became the master of the world’s money system, he did his apprenticeship and journeyman service at various other posts. For the purposes of today’s letter, let it be recalled that in the darkest hour of the American economy during the last half-century – that is, approximately 60 days after Gerald Ford took the oath of office, at the end of the Watergate scandal…and at one of the lowest points in stocks prices since the Great Depression – none other than Alan Greenspan was chairman of the President’s Council of Economic Advisors.

But then, times were different. “A quarter century ago,” continues Grant, “investors expected little except inflation, rising interest rates…”

How could it be that investors now hope for so much from the same man from whom they previously expected so little?

And yet, that is what they seem to anticipate – that Gerald Ford’s former chief of economic advisors, now chief of the Federal reserve, will be able to turn things around.

The question, ‘How will he do so?’ leaps to the lips faster than a margin call.

‘By lowering interest rates,’ comes the answer.

‘Isn’t this what the Japanese have been doing for the last 10 years?’ the skeptic replies.

But the purpose of today’s letter is not to question the effectiveness of interest rate cuts or Mr. Greenspan’s competence. Cutting interest rates is probably as good as anything else he could do. And as far as demi-gods go, Mr. Greenspan is as good as any other.

No, dear reader, today I raise a deeper question…a question so profound that it usually lies undisturbed beneath centuries of philosophical effluent.

Do we humans send the market hither and thither – running as a dog directed by its master? Driving it up hill after a quail one day…and down towards a rabbit the next? Or is it the market that that tosses the bone?

In a bubble market, investors become existentialists. They believe in nothing – except that they are going to get rich. In a bear market, they become fundamental determinists. In a bull market they have almost infinite faith in their own ability to figure things out. In a bear market, they may carry a rabbit’s foot, cross themselves at every occasion and never pass a penny on the sidewalk without bending down and picking it up.

I say this with the confidence of someone who just looked it up. Man, according to the Existential Philosophy Website, is “open to a future which he determines by his choices and actions; he is free. Other entities – stones, trees, tigers – have a fixed nature or essence that determines what they are and what they do. In contrast, neither as a species nor as individuals do human beings have such an essence that governs their conduct. Man makes himself what he is by his choices.”

You may not be interested in philosophy. I am not. But there are times when the absurdities of contemporary philosophy help us understand the absurdities of investing.

Investors believe the market is subject to the will of the people – and that, in turn, can be managed by one man in particular – the aforementioned Fed chief.

Yet, a quarter century ago, he was unable to do the job. “When President Ford moved into the White House in August,” recalls Jim Grant, “the Dow was at 770; by early October, it was below 600. By the time the bear market had run its course, stock prices were falling mainly because they had been falling.”

“As a refresher,” Grant elaborates, “in the Oct. 7, 1974 issue of Barron’s, Value Line published an advertisement calling attention to a selection of profitable U.S. companies changing hands at less than 3 times earnings. ‘The average price of these stocks works out to be about $15,’ the copy said, ‘against average 1974 estimated earnings of nearly $6.60 a share – for an average p/e of 2.3.'”

Mr. Greenspan has lived through a time when investors wanted nothing to do with stocks, and a time when they could not bear to be separated from them. His philosophy has changed too. He was once a serious disciple of Ayn Rand and a gold bug. But as his own fortunes developed, his philosophy adjusted – like an elastic belt on a fat man – to accommodate it. He became a believer in managed currencies…and, we may presume, a market existentialist.

What’s next? A return to gold and fundamentalism? Maybe, dear reader, maybe…

Bill Bonner Paris, France March 21, 2001

P.S. A new British art show offers what may be the ultimate expression of existential nothingness. The show, in the Custard Factory arts center in Birmingham, features no paintings, no sculptures, no nothing. Just blank walls.

“It’s dreadful,” said one visitor. “While this may be a good test of people’s imagination, I personally prefer art you can see,” said another.

On the other hand, compared to the art you are likely to see at such a show – this may be an improvement. Most modern art is, if I may steal a turn of phrase from Beckett, a stain on a plain wall.

*** Oh la la! It’s over. Fini. Kaput. Or as we say in Esperanto: finita!

*** I refer, of course, to the Great Boom of 1982-2000. It has been over for a long time – with sector after sector, market after market, hitting a peak and beginning its descent. But yesterday marked an important event: Mr. Bear was out in the middle of the road, red in tooth and claw. He mauled the Dow. He ripped more flesh from the Nasdaq. He even got his claws into the dollar.

*** Never, since 1945, has household wealth declined – in spite of double-digit interest rates, double-digit inflation rates, stagflation and bongo drums… year after year, households grew richer. Until, that is, last year – when they declined by 2%.

*** And, as Richard Russell points out, never in the past 19 years has the Dow closed below the low of a preceding year – that is, until yesterday.

*** The low from last year was 9654. The Dow crashed through that level yesterday as it lost 238 points.

*** “The top is in,” wrote Russell yesterday. “The trap has closed…today, I could hear the bull’s death rattle.”

*** The blame for yesterday’s drop in the Dow was laid on Alan Greenspan’s door. The Fed chairman gave the market a rate cut – as expected. But he could come up with no surprises. Instead, the fed funds rate was cut by 50 basis points – the minimum expected.

*** It was what happened next that was interesting. Rate cuts are supposed to be the panacea investors have been waiting for. But after Greenspan administered his magic elixir, the patient seems to have taken a turn for the worse. Not only was the Dow down, but so was the Nasdaq – off 93 points.

*** Markets all over the world are falling. The Nikkei index, for example, fell 160 points and ended below 12,000. [It was almost 39,000 11 years ago.] But investors did not take refuge in the dollar. Instead, the dollar went down too. The euro rose above 90 cents and gold mining stocks rose 1% – they were practically the only group of stocks that went up.

*** We are still waiting for capitulation…but the hour draweth nigh, and soon will be.

*** What happened to all the forecasts of spectacular growth in the stock market for years to come? Glassman and Hassett, authors of “Dow 36,000,” write in the Wall Street Journal that “it’s still a good bet.” They look for a continuation of rapid growth – once we put this rough patch behind us.

*** Many people – perhaps a majority – still believe stock prices respond to the will of the Fed chairman. “The Fed is going to support the economy and market with lower interest rates,” writes Al Frank, “and we are buying.” Bon chance…bon courage.

*** And a WSJ/NBC News poll found recently that Mr. Greenspan has “the highest net approval rating of any public official… Mr. Greenspan’s popularity is strongest among older Americans, investors, those earning higher incomes and those who feel the economic future is bright.” That leaves me out.

*** Investor’s Business Daily keeps track of what investors in leading mutual funds are doing. Its Mutual Fund Index is down 17% for the year – probably close to the actual experience of the average investor. That represents a capital loss of about $1.19 trillion or roughly $13,000 per household.

*** The big stocks that everyone owns – the big techs, the glamour companies, the high-fliers – are being steadily worn down by the bear market. GE fell 3% yesterday.

*** “PSINet on its last leg” declares a headline on UPSIDE. “The business Internet service provider announced that soon its stock might not be worth the paper its printed on,” said the following article. Even analysts noticed that it might be time bid adieu to PSINet. A.G.Edwards, for example, issued a rare ‘sell’ on the company – as the undertaker appeared at the door.

*** “Shoot all the analysts” suggests a cheerful headline in the Financial Times. Being an analyst “used to be a respectable if rather dull trade,” the paper explained. “Accountants, actuaries and other worthy citizens could be found in the dustier corners of the brokerage offices working out the production costs of cement or the number of no-fault claims in Massachusetts.” But the brokers were taken over by the investment bankers…who found it more profitable to use their analysts as celebrity touts rather than objective advisors. Soon, those with the most chutzpah were appearing on TV, hyping stocks so doggy that they should have been subject to ‘poop and scoop’ ordinances, rather than SEC regulations.

*** Investors are beginning to realize that these stocks will not just bounce back. Mentioning the high prices once enjoyed by Yahoo! and Amazon, an article in S.F. Gate warns: “People could hold these stocks for half a lifetime and never see that price again.” Leading tech stocks don’t just go up and down – sometimes they get taken out. Zenith went bankrupt. So did Wang Labs. RCA – the leading wireless communications company of the 20s – never recovered after the ’29 crash.

*** If information were wealth, members of Congress would be as rich as Croesus. Congress received 80 million email messages last year, according to The Standard. What did your representatives do with it? “Members of Congress are ignoring email from constituents,” says the article. Politicians got so much information on constituent preferences that they were overwhelmed. The more information you have, the less it is worth. And the cost of dealing with it? Congress is asking for $50,000 per office.