The Tipping Point

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 Frenc perspective. From the German perspective it is not such a happy tale. Seeing the French army in full retreat before them, 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 81/2 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 percent, 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,

Bill Bonner

Ouzilly, France September 1, 2000

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.

*** Well…another bumptious summer day on Wall Street. Everything was up – like corn in Iowa and the murder rate in Baltimore.

*** The Dow rose 112 points – led by the brokerage houses. The Nasdaq was up 101 points – led by, what else, the Big Techs.

*** “Investors welcomed economic data,” says the Reuters report, “that suggested slowing U.S. economic growth.” Slower growth = less worry about inflation = less concern about rate hikes. But wait, it also means lower profits.

*** Cisco, Oracle and Qualcomm all pulled ahead smartly yesterday. After all, they’re New Economy companies, run by people with very high IQs. They’re not concerned about P/E ratios. Nor interest rates, for that matter. They’re the wave of the future. Progress!

*** But those poor retailers. Gap, Target, Best Buys – when the economy slows these Old Economy companies lose sales and profits. They’re struggling with higher labor costs and higher interest rates. And consumer spending represents nearly 10 times as much of the whole economy as computers and information technology.

*** Volume was low yesterday, as we approach the Labor Day holiday and the end of summer. But maybe this time it really is different. Maybe this summer will never end.

*** Everything looked good yesterday. There were 1714 advancing stocks, against only 1149 declining ones. There were 138 new highs on the NYSE; only 31 new lows.

*** Bonds were up…utilities… Even gold – a metal that seemed to have been visited by the Black Grim – rose $3.90. Silver went up too. But platinum fell $4.70.

*** And, of course, the dollar rose. The dollar index shot up 49 – to a new high. And now I am officially wrong. The dollar hit a new high against the euro. The previous high was .8844 to the euro. Yesterday, the zero, I mean the euro, hit .8838.

*** “The euro has been driven down not by speculative selling,” said a Deutsche Bank official, “but by relentless investment flows in search of superior returns in the U.S.” Gerhard Schroder, Chancellor of the Huns, I mean the Germans, said “the euro is a strong currency and will remain so.”

*** Yes, I was wrong. I thought the dollar topped out on May 17 at .8844 per euro. I thought that that date marked the beginning of the end for the biggest bubble in financial history. It all hinges on the dollar, after all. And it won’t fall until that hinge finally gives out. But not yet, dear reader, not yet.

*** Meanwhile, Laurent Fabius, the frog finance minister, I mean the French Finance Minister, is following through on his promised tax cuts. Yesterday, he announced cuts of $16 billion.

*** “Earnings at 122 companies [listed on the S&P 500] fell by more than half when adjusted for employee stock options.” This according to a Bear, Stearns study by way of the New York Times. Of those, “12 companies that had an operating profit in 1999 would have had an operating loss if employee options were considered an expense. For instance, the $6-million in operating income that Micron Technology made last year would have been an operating loss of $120 million.”

*** “Consumer spending surged as a share of GDP,” writes Dr. Richebacher “from a long-term average of 66% to 94% in the first quarter of 2000… a growing share of this spending spree has bypassed U.S. domestic production and ended up in soaring imports. Still, in terms of share of GDP this measurement conveys the extreme excess to which U.S. consumer spending has gone in recent years.”

*** Today, a cool breeze is blowing at Ouzilly, as the summer comes to a close. Little golden leaves from the Aspen trees are beginning to litter the ground. A week ago, it seemed like the summer would never end…and now, all of a sudden…things are changing.

*** This last week of summer – out in the remote countryside, was supposed to be relaxing and productive. Instead, it has been marked by one interruption after another. Heavy equipment arrived almost every day – each piece greeted like Caesar’s legions entering Rome, with a mixture of alarm and admiration. They set to work on the pond, and as Mr. DesHais feared, have made a diabolical mess.

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