The Summer Of Love, Part II
The sun reaches its zenith in countries north of the equator on the 21st of June. On midsummer’s eve, celebrated as the Fete de St. Jean in France, bonfires are lit throughout Europe – following an old pagan custom.
But the heat of the summer doesn’t peak until a month later. Heat has a momentum of its own and continues to build up for weeks after the event that will mean its decline – the summer solstice.
Likewise, the Roman Empire continued to thrive – even expand – for at least 100 years after the events that would eventually mean its demise.
And at this time of year, 187 years ago, Napoleon’s army continued its advance into Russia – despite the fact that it was already doomed. Its momentum carried it all the way to Moscow…but alas, for 97% of the soldiers…not all the way home.
Markets, too, have a momentum. The most speculative and exaggerated prices – like the fluff of a milkweed flower – have been blown away. The Internets are in decline – with many facing imminent extinction. Probably 97% of them, too, will die before the winter is over.
But still, spirits are high. The momentum of nearly two decades of rising stock prices…and an economy that everyone says is booming keeps investors holding on and hoping that the good times will last forever.
“[T]he 18-year bull market,” writes Lord Rees Mogg in Strategic Investment, “has made investors almost unanimous as long-term bulls.”
Rees-Mogg cites the survey done last year by Robert J. Shiller, author of Irrational Exuberance. Seventy-six percent of respondents agreed that “the stock market is the best investment for long-term holders.” Nearly half agreed that even following a crash such as the one in 1987, “the market will surely be back up to its former levels in a couple of years or so.” Maybe Americans have no history after all. Certainly, investors have none. As Shiller points out, there have been long periods where the returns from stocks greatly underperformed the returns from bonds. The “average real return on the S&P composite Index was 0.2% a year,” he writes, “from June 1901 to June 1921, 0.4% a year from September 1929 to September 1949, and 1.9% a year from January 1966 to January 1986.”
For these three 20-year stretches, investors got almost nothing from their stock market investments. At current prices, it is likely that another long stretch of low stock market returns lies ahead. Even if prices remain stable, it will take many years for earnings to catch up. Investors, like Napoleon’s soldiers marching along in good order in the summertime, are still hopeful. But they are probably doomed.
Down in Galesville, Maryland, a nearly full moon lit up the West River when I visited. Galesville used to be a fishing village near the Chesapeake Bay. It is an unusual place, where women of whatever age or marital status were addressed as “Miss Elsie” or “Miss Alice.” And men of whatever profession were called “Cap’n Bob” or “Cap’n Elmo.”
Summer in Galesville used to be different. Cap’n Earl and Cap’n Dick used to sit out on a derelict pier and drink beer – tossing the empty cans into the river. Nearby, down at “Molly and Dave’s” customers would pick their way over rotten planks to the bar, which tilted towards the opposite shore, making it easy to roll drunks into the river. Motorboats roared up and down the river, and the smell of steamed crabs – with their distinctive Cayenne pepper flavoring – seasoned the heavy night air.
But that was back during the Johnson Administration. The Great Society changed Galesville. It brought a lot of money to the Washington area…so much that it overflowed the Potomac and trickled down into the Chesapeake. My cousin now rents a little summer cottage – winterized and upgraded – for $2,000 a month. The motorboats have disappeared, replaced by sailboats. Molly & Dave’s is now a quichey restaurant with deckboards so solid you could drop a Republican congressman from 20 feet and still not develop enough momentum to break them. And the 4th of July fireworks – which used to be lit and stuck down Larry Hall’s pants – are now set off from a barge in the middle of the river with the approval of every federal, state and county agency south of the 40th parallel.
Money is visible everywhere in Galesville. It washed ashore in waves. The first wave was robbed from taxpayers in Minnesota and Arizona. But the most recent wave is a result of the l8-year bull market. The yachts are a quarter of a million each – and packed so thick you can almost walk across the river on them. The houses are so expensive that the sons of oystermen can barely afford to live there.
“It’s hard to be a doom and gloomer in the summertime,” said an old friend of mine, PG, as we dined in Baltimore. PG has been a doom and gloomer for years – even though his own fortunes have done quite well. He is a good writer and earns a lot of money at it.
“I’m techno-challenged,” he said, “but I try to look at the big picture. And the big picture is that there is good technology and bad technology. You can’t get one without the other.”
PG is worried about the momentum of technology. “There are always nuts among us,” he told me. “Some people will always go postal and start killing other people. They run amok with a knife or a gun. Some people die.”
“But now, a single nut-case can go on the Internet and get the plans for building a nuclear bomb…or a deadly new bug…or a computer bug that closes down the world’s hospitals..or the ATM machines…or who knows what?”
“The point is,” he went on, “no technology has ever been used just for good things. Human nature doesn’t work that way. And human nature hasn’t changed.”
The chemical industry – heralded as one of the great innovations of the last 100 years – was begun in Germany at the debut of the century. Within less than 20 years – deadly mustard gas was used in the trenches of WWI.
Another of the century’s great breakthroughs was heavier- than-air transportation. Again, less than two decades after the invention of flying machines, airplanes were used to drop bombs.
Some innovations have less potential for harm than others, of course. Refrigeration and air-conditioning are, as far as I know, never been especially lethal. Television, on the other hand, has probably deadened more brains than opium.
What evil lurks within the Internet, or the human genome, or any of the other breakthroughs Wall Street now celebrates? When will the dollar crash and bring down the whole structure of modern finance? Will the Nasdaq collapse and bankrupt millions of American families? No one knows. But the events that will determine our future have already happened. Stocks have reached unsustainable heights. The Internet is a fact of life. So are dozens of other innovations we haven’t even heard of yet.
But in this summer of love, under the hazy moon of Galesville, or the bright moon of Ouzilly, the threats from nuts and bears seem a long way off.
Your correspondent…enjoying the summer…
Ouzilly, France July 25, 2000
*** Up down…down…up – the Nasdaq fell yesterday and is once again in negative territory for the year. It lost 112 points following a report that computer makers are shipping fewer boxes than they did a year ago.
*** How could it be that people aren’t buying more and more PCs? Don’t they know that the new machines are cheaper and more powerful (as the BLS tells us)…and that they increase productivity more than enough to pay for themselves (as New Era pundits claim)?
*** I guess not. Instead, they think that last year’s computer is plenty fast…and that all this IT spending may not be paying off after all.
*** So, Dell and Apple both fell about 10%. Gateway lost about 8%. But component suppliers Intel and Micron held steady. Go figure.
*** The Dow fell too – down 48 points. No reason given, and none needed.
*** Priceline.com came out yesterday and announced that it ‘beat the numbers.’ That is, it exceeded analysts’ expectations in the 2nd quarter. Apparently, it should have roughed up the numbers a bit more. The stock fell $9 – or nearly 25%.
*** Beating the numbers isn’t good enough. Not with an average P/E of 145 for the Nasdaq. Small increases in the “E” don’t do much. E has to increase about 7-fold in order for the numbers to make sense. And that, dear reader, is not going to happen. It is not the E that will adjust, I confidently predict, but the P.
*** Bonds now yield 8 times as much as the S&P. Investors don’t have to be geniuses to figure out that when stocks are falling their money is better off in bonds.
*** All but one major newspaper has reported stronger earnings in the 2nd quarter. Wall Street is “stunned” said the Reuters report. The Internet was supposed to put old economy newspapers out of business. Instead, it is the dot.coms that are going out of business.
*** Which is bad news for the newspapers, too. Knight Ridder, for example, took in $6 million in dot.com advertising in the 2nd quarter…and another $16 million from the tele-coms.
*** There were 1105 stocks advancing on the NYSE yesterday against 1742 declining. The average stock is, once again, going down.
*** Gold fell $1.30. Platinum fell $4.30. The gold shares are getting down to what could turn out to be super- bargain levels. NEM is at $17. HM is at 5 7/16ths.
*** “The U.S. is running out of electricity,” says the Electronic Telegraph. Electricity use has grown 35% the past 10 years due to the increased use of computers and various electronic gadgets. “The United States as a whole is using 3% more electricity each year,” writes Dan Ferris. “To simply keep up with that demand, the entire electric generating capacity of the island of Taiwan, a country of over 22 million people, must be added to the U.S. power grid-every two years… But in Silicon Valley, electricity demand is rising 5% per year…” Dan believes he has found more than one way to profit.
*** Currency traders are spotting the opportunity in the euro. The dollar topped out against the euro on May 17, though almost no one noticed it. Euro-land grew at 3.4% for the last 12 months, above expectations. And the U.S. trade deficit continues to grow. In addition, interest rates between Europe and the US are converging – so the advantage of U.S. dollar deposits is declining.
*** “[The U.S.] is running a trade deficit of almost a billion dollars a day.” says Gary North. “Foreign investors are funding this nation’s buying spree. They bought $100 billion of U.S. shares in 1999; in 1996, they bought only $12.5 billion… When the U.S. goes into recession next year, the rest of the world will be coming out of theirs… the dollar will fall and import prices will rise… American consumers are not ready for this, but it’s going to come.”
*** Another thing…Germany’s tax reform bill includes cuts in both corporate and personal rates. And currency traders tell me that that the dollar has a seasonal tendency to decline against European currencies in the second half of the year.
*** A major subject of discussion at the latest G-7 meeting was debt relief for poor countries. Poor countries could have borrowed on the open market if their projects had been able to clear the hurdle of prevailing interest rates – that is, if they’d been economically viable. They weren’t. So, the rich countries robbed their taxpayers in order to back loans made by rich bankers to the rich mountebanks who run poor, third world nations. The money was, of course, stolen and wasted – like the ill-gotten loot it was. And now, in the name of compassion, the do-gooders are asking that the loans be forgiven. But the whole matter is make-believe from the beginning to the end. It is like a huge, plush float in a Macy’s parade. The bankers, third world potentates…and a few hectoring, clueless moralists…all sip champagne or Perrier, pausing to wave to the crowds or talk to reporters – while the whole trundling contraption is tugged by poor taxpayers on one end and pushed along by poor Bengladeshi hod carriers and Brazilian trash pickers on the other.
*** A quote from Justin Mamis: “CNBC has become the standard bearer of optimism – give them a choice about how to interpret a statistic and the grins come out. If something’s down, it’s its own fault; if something’s up, it’s a sign of how marvelous the market still is. We’ll wager, grumpily, that it takes 5 to 1 ups in a typical portfolio to make up for the loss in that 1 down. Nay, 10 to 1, if we include the false-start ups, the inadequate ups, the irrational ups. It is, to be blunt about it, a helluva lot easier to lose money nowadays than it is to make any…”
*** If the report in today’s Financial Times is correct, Dick Cheney – who headed Gov. Bush’s search for a running mate – found someone…himself.
*** “Give the readers a break,” said Addison, encouraging me to lay off for a few days. Tomorrow, I’m taking the ferry from Cherbourg to Ireland – beginning a family vacation. I will try to keep up with the Daily Reckoning as I go…but I cannot promise anything. Addison, however, will still be at work in Paris.