The Tipping Point
A DR Classique, first run on this date 2 years ago…
At some point, things will change. They always do. In the markets. In public attitudes. In art, architecture and P/E ratios. Confidence, optimism and self-esteem – at epic highs in America today – will someday, somehow give way. One day, believe it or not, merchants will be reluctant to take dollars. But when?
I missed Francis Fukuyama’s piece in the Wall Street Journal. On New Year’s Eve, he wrote proposing an alternative to TIME’s Man of the Century: Albert Einstein.
Fukuyama nominated WWI German Gen. Alexander von Kluck.
Inadvertently, and perhaps there is no other way, von Kluck changed the course of history. He brought Western Civilization to “the tipping point.”
Von Kluck is the inspiration for the expression ‘you dumb kluck.’ He is blamed for having departed from the Schlieffen Plan which Germany followed in its attack on France in 1914.
I have told the story before, from the French perspective. From the German perspective it is not such a happy tale.
Seeing the French army in full retreat before him, von Kluck came to a conclusion that proved too optimistic. He thought the French were nearly beaten. Diverting his troops from the strategic objective – Paris – he decided instead to follow the retreating French troops in order to crush them.
Many German officers questioned the decision. If French troops were really close to giving up, more of them would be surrendering. But there were few prisoners – suggesting that the French still had the will to fight…and that they were merely retreating in good order.
But von Kluck had his way. And the old French warhorse, Galieni, saw his error almost immediately. “Gentlemen,” he is supposed to have said to his colleagues, “they offer us their flank.” Diverting his troops from the plan, von Kluck had opened a 30-mile gap between his 1st Army and von Bulow’s 2nd Army. He exposed them both to counterattack. The French took advantage of it. They commandeered 600 Paris taxi-cabs to take troops to the front. The battle of the Marne had begun, which after a half a million casualties, brought an end to the German advance.
What would have happened if von Kluck has kept to the plan? Fukuyama speculates, via Ray DeVoe:
* The Germans [would have] swept on to Paris by the end of September, forcing a capitulation by the French government (which occurred in 1870-71 and again in 1940).
* “A quick German victory would have left unimpaired the cultural self-confidence of 19th-century European civilization.”
* “The 8.5 million casualties of WWI would not have spawned a radical revolutionary movement in Russia called Bolshevism” – and then Communism.
* With no German military humiliation there would have been no market for rabble-rousers such as Hitler – and no National Socialism.
Mr. Fukuyama states: “there’s more”-
* No Russian Revolution * No Cold War * No Nazism, no World War II, no Holocaust * No Chinese or Vietnamese revolutions
“And the U.S. which came of age as a great power due to the world wars, may have remained the isolationist paradise fondly remembered by Patrick Buchanan,” according to the author.
Ray DeVoe refers to von Kluck’s decision as a “tipping point” as defined by Malcolm Gladwell in his book, “Tipping Points.” A tipping point, Gladwell says, does not only come after a meal or at the end of taxi ride; instead it is “that one dramatic moment when everything can change all at once.” “Tipping points” can be very small things – with very large effects. Also, when changes occur, they often happen all of a sudden.
WWI may be said to have gotten underway after Archduke Ferdinand’s chauffeur took a wrong turn and came upon a group of terrorists, who couldn’t believe their luck.
According to Mr. Gladwell, “This possibility of sudden change is the center of the idea of the Tipping Point and might be the hardest of all to accept. The expression first came into popular use in the 1970’s to describe the flight to the suburbs of whites living in the older cities of the American Northeast. When the number of incoming African-Americans in a particular neighborhood reached a certain point – 20%, say… sociologists observed that the community would ‘tip’: most of the remaining whites would leave almost immediately. The Tipping Point is the moment of critical mass, the threshold, the boiling point.”
Ray DeVoe: “This happens in technology as well. Cited in the book is the introduction by Sharp of low cost fax machines in 1984 which built up slowly until 1987. Then enough people had fax machines that it made sense for many others to have them. 1987 was the Tipping Point for fax machines – sales more than doubled that year to a million machines, and by 1989 two million units were sold.”
Cellular phones and ATM machines followed similar paths. At first, people resisted ATM machines. Customers said they preferred to speak to a “real human being,” and settled for bank clerks.
DeVoe also mentions the Battle of Midway as the “tipping point” of WWII in the Pacific. After that battle was over, Japan could not win. And after April of ’44, when 45 German U-Boats were sunk, submarines became known as “Iron Coffins” in Germany and were virtually ineffective. Gladwell is a staff writer for the New Yorker. He shows how small things seem to trigger a mass change in attitude – in the way the removal of graffiti seems to have led to a dramatic decrease in crime rates on N.Y.C. subways. And sometimes the actions of a very small number of people completely change the way most people think.
Unfortunately, there is no way of knowing who, when…or what will be the ‘tipping point.’
At the end of the WWI, Germany could have kept fighting. The Kaiser could have pulled back East of the Rhine. The war might have gone on for many more years.
But a tipping point had been reached. Hitler wrote about the war’s commencement: “To all those who experienced it, the exaltation of the August days of 1914 belongs among the most unforgettable memories of the highest sort…” But 4 years later, the memories of most German soldiers had filled up with sickness and death. The arrival of fresh American troops to reinforce their enemies must have been a fatal psychological blow, like a case of flu in a room full of wheezing octogenarians.
The soldiers gave up. Dying for their country didn’t seem like such a good idea. The German High Command merely recognized the inevitable.
Your WWI correspondent,
September 2, 2002
P.S. This poem, “Dulce et Decorum est,” by Wilfred Owen shows how attitudes changed on both sides as the war dragged on:
Gas! GAS! Quick boys!… If you could hear, at every jolt, the blood Come gargling from the forth-corrupted lungs, Obscene as cancer, bitter as cud Of vile, incurable sores on innocent tongues, – My friend you would not tell with such high zest To children ardent for some desperate glory, The old Lie: Dulce et decorum est Pro patria mori.
There is a saying that man can live 30 days without food, 7 days without water, but only a few days without hope.
“However much your intellect might believe that economic and technical factors point to a protracted bear market,” the International Harry Schultz writes in his latest book Bear Market Strategies, “your heart will inject the hope that the data is wrong.”
“The hardest part of making money in a bear market is facing the fact that we are in one,” Uncle Harry continues. “And that, at least for a while, there will be few concrete signals that a critical turnaround is in sight.”
See any critical signals last week, Eric?
Eric Fry in New York…
– Nope. In fact, Mr. Market’s Sisyphean struggle continues. Sisyphus, as you may recall, was the mythological king of Corinth who was condemned to an unusual eternal torment – repeatedly pushing a huge stone up a hill, only to have it roll right back down again.
– Similarly, Mr. Market’s exertions are producing no lasting gains. After every uphill struggle, stocks tumble right back down again. It’s been sheer torment for the bulls. Mr. Market wouldn’t have to work up much of a sweat at all if he simply turned around and gave stocks a slight nudge downhill. That seems to be the course of least resistance.
– The Dow’s triple-digit gain on Friday morning fizzled by day’s end, as the blue-chip index dipped 7 points to 8,663. The Nasdaq Composite lost 1.6%, to 1,315. For the week, the Dow fell 2.4% and the Nasdaq dropped 4.8%. The Dow’s losses snapped its five-week winning streak, but preserved its five-month losing streak.
– Yes, it’s true, the Dow and Nasdaq have both racked up five straight losing months.
– Speaking of eternal torment, Alan Greenspan delivered another of his torturously mind-numbing speeches last Friday at a Fed-sponsored symposium in Jackson Hole, Wyoming. But in a departure from his usual style, Greenspan’s message was clear – very clear – and straight to the point: the bubble wasn’t his fault.
– Yeah, right.
– “Bubblarious,” is what Financial Sense.com’s Jim Puplava called Greenspan’s disingenuous self- exoneration.
– “According to the Fed,” says Puplava, “asset bubbles can’t be prevented. The reason is that raising interest rates to prevent a bubble from taking place would wreck the economy. In the words of Mr. Greenspan, ‘No low- risk, low cost, incremental monetary tightening exists that can reliably deflate a bubble.'”
– In Greenspan’s speech – a textbook example of historical revisionism – the Chairman portrays himself as a concerned, yet impotent observer of the developing stock market bubble – fully aware of its destabilizing presence, but powerless to prevent it without also destroying the economy. The only problem with this revisionist fairy tale is that it is just that, a fairy tale.
– The truth is, Greenspan was a credulous acolyte of the New Era fallacy. He embraced the fallacy wholeheartedly and actively nurtured the resulting bubble – both by conducting a very easy monetary policy throughout most of the late 1990s and also by legitimizing the bubble as a “productivity revolution.” By legitimizing a farce, Greenspan encouraged folks to throw their money into an absurdly over-valued stock market.
– “The struggle to understand developments in the economy and financial markets since the mid-1990s has been particularly challenging for monetary policymakers,” Greenspan admits. “We were confronted with forces that none of us had personally experienced. Aside from the then-recent experience of Japan, only history books and musty archives gave us clues to the appropriate stance for policy.”
– Musty archives? Gosh, what good could possibly come from examining those? Remember, history never repeats itself exactly, it merely rhymes. So what could Alan Greenspan possibly have learned from studying the mistakes of those who preceded him? Musty archives would certainly have been of no use to him while he was presiding over a New Era of productivity miracles. Thus, by ignoring the lessons of history, Greenspan blithely set about the business of bubble-building.
– “As events evolved,” the Fed Chariman recalls, “we recognized that, despite our suspicions, it was very difficult to definitively identify a bubble until after the fact – that is, when its bursting confirmed its existence.”
– Well, maybe so, but Nasdaq’s peak PE ratio of 243 in early 2000 was not the very first clue that the speculative fever in the stock market had gotten a little out of hand. Just maybe, there were one or two hints per year in 1996 and 1997 and 1998 and 1999 and 2000 that an epic stock market bubble was gestating.
– “The notion that a well-timed incremental tightening could have been calibrated to prevent the late 1990s bubble is almost surely an illusion,” the Chairman asserts.
– What is surely no illusion, however, is that Greenspan’s well-timed incremental EASINGS throughout the late 1990s fueled the bubble – the very same bubble that he now claims to have found so troubling while it was inflating.
– “Human psychology being what it is, bubbles tend to feed on themselves,” Greenspan continues, “and booms in their later stages are often supported by implausible projections of potential demand. Stock prices and equity premiums are then driven to unsustainable levels. Certainly, a bubble cannot persist indefinitely. Eventually, unrealistic expectations of future earnings will be proven wrong. As this happens, asset prices will gravitate back to levels that are in line with a sustainable path for earnings.”
– Oy…NOW he tells us!
Back in Paris…
*** “In a sense, a bear is more of an optimist than a permanent bull,” Harry Schultz muses. “A permanent bull wants the past to continue forever, and when it doesn’t, he becomes disoriented and/or depressed. But bulls who become bears when markets turn are bigger optimists because they know the downturn will not be permanent… in spite of setbacks the history of human societies shows that the super long-term trend is up, and that even a HUGE bear market is only a multi-year setback in the grand scheme of things.”
Be not an optimist, nor a pessimist, Harry recommends, but a realist. Coming from a man who’s lived, digested, and invested wisely through one of the most extreme bear markets of the 20th century, as well as through its most egregious bubble, sounds like pretty darn good advice.
*** Bill is chaperoning his daughter, Maria, on a fashion excursion to Milan this morning. You’ll find a DR classique below.
p.s. If you’re interested in putting Harry Schultz’s many-year career to work for you during this, the first great bear market of the 21st century, may I recommend his newsletter:
The International Harry Schultz