The Wrong Stuff
Contrarian instincts, like crowd-following ones, are no guarantee of success. The contrarian insight is merely the realization that people are swayed by emotion as much as by logic — and that they frequently become either too bearish or too bullish. Prices eventually tend to regress to the mean, so you can make money by buying what is unusually cheap and selling what is dear — assuming they return to more normal levels.
But sometimes the trends that lie beneath cycles of despair and euphoria are extremely long. In many of America’s East Coast cities, for example, real estate prices peaked out, in real terms, early in the 20th century. Since then, almost every investment — even at very low prices — has been a losing one.
I have to give my speech in a few minutes. So I only have time to tell you about my train trip from Baltimore to New York. As the hippies used to say, it was a trip.
The trains pull out of Baltimore’s station. You pass through the black slums of East Baltimore…and then the white slums — peering over fences and into backyards onto scenes of such dilapidation and depravity that you believe yourself transported — either in space or in time.
Either you are visiting some Third World hellhole, such as Lagos, Nigeria, or a 19th century Dickensian one. Whichever direction you look, right or left, it is the wrong side of the track. Mattresses lying on the ground in backyards, rusted out cars and factories, boarded up or broken out window — garbage everywhere…in piles, in ditches, even in the trees. The scenes are hard to reconcile with the vision of a New Era — and everyone getting rich. These people certainly are not rich. They are not even poor. They would have to work for years and save their money to reach poverty.
Caen, Dresden, Hiroshima — many European and Asian cities were bombed to smithereens just a half century ago. And yet every one of them is a model of prosperity compared to these East Coast dumps. In fact, they probably looked better even in 1946 than East Baltimore does today.
In 1983, I bought a beautiful house in a “bombed out” section of Baltimore for $27,000. I spent several times that amount fixing it up. Seventeen years later I felt glad to be able to sell it for less than I had spent on it.
But at least that house — built for wealthy Jewish merchants in the late 19th century — was attractive to look at. Most of the places you see from the train seem to have been put up by people completely ignorant of the architectural improvements of the last three millennia. Glasgow’s industrial slums are attractive in comparison.
In fact, it is hard to find anything that is not appealing in comparison. Few areas of the world are so misbegotten, forlorn and unmitigatedly depressing.
It is hard to turn your eyes away. The scenes are so preposterously abject — so unrelentingly ugly, trashy and revolting — it is like watching MTV…you are almost hypnotized by the sublime wretchedness of it all. There are hospital waste dumps that are more attractive and healthier places to live. In fact, some of the buildings are in such a condition that you can’t tell if they are dwellings — or just heaps of discarded building materials. And some of the neighborhoods are so bleak and forbidding even the rats must have decamped.
If you believe there is an explosion of wealth creation going on in America, I invite you to take the train and open your eyes. Whatever explosions are occurring, no shock waves of wealth have reached this corridor. No houses — visible from anywhere along the route — are being bid up to ridiculous levels. I would bet that not a single one has sold above the offer price in the last 50 years.
Not all the houses are abandoned — or even in bad repair. Some are well-maintained. With their aluminum siding, formstone and Depression-era designs, however, one wonders why anyone would bother to keep them up. It would be better to walk away and call in a bomb strike. They were a disgrace the day they were built. Today they are an embarrassment. They are houses that bombs and termites would improve.
I did not see a single building I would want to live in. I say that not out of snobbery, but simply the instinct for self-preservation. These places look lethal — if not to the body, certainly to the spirit.
Even nature seems to have turned malignant. The typical bucolic scene along the NJ tracks is misshapen catalpa trees with plastic bags hanging from the branches. Somehow, the catalpa tree seems to have mutated so it grows in concrete. And plastic bags are ubiquitous. Many of the commercial buildings still in service seem to use them to decorate the razor wire they run along the roofs — putting a blue or white plastic bag at intervals of every three feet or so.
The most attractive thing I saw along the entire trip — through Wilmington, Philadelphia, Trenton and Newark — was a huge pile of smoking metal — a place that looked like it had been hit by a squadron of bombers about 3 hours before. At least the rubbish had been burned.
May 25, 2000 New York, New York
*** Turnaround Tuesday came a day late. “We finally got the rally,” said one trader, quoted by Reuters. The Dow rose 113 points. The Nasdaq rose 106 points. And again, the bulls are on TV claiming that the worst is over.
*** Almost every day, the market opens up. Sentiment is still bullish — or at least, not bearish. And when the market seems to be melting down, there is often an impressive rally in the last hour.
*** Could someone be “painting the tape” — deliberately trying to manipulate not merely the price of a single stock, but the entire market? Moving the whole market would be a Herculean task, but Richard Russell points out how easy it would be for a large institution to drive up the Dow index. The purchase of 10,000 shares of IBM might take the price up $6, for example, which would move the Dow up 32.8 points.
*** The whole market, though, is another story. Yesterday, for example, while the Dow was up 113 points, more stocks fell than rose on the NYSE — 1,485 to 1,410. And the number of stocks hitting new highs was less than a third of those hitting new lows — 39 to 127.
*** So the turnaround was not very impressive. The Nasdaq is still 35% below its high. The Dow is still down 10% and the S&P is down 9%. So, unless something happens to change our minds, we should expect further declines as this bear market continues.
*** Richard Russell also points out that the real selling has not even begun. So far, says Russell, “this market has been sinking on the phenomena of No Bids. … [T]here’s been no real selling, just a process of hitting the bids. THE VOLUME SELLING LIES AHEAD.”
*** The low volume is hurting the brokerage houses. The online brokers, especially, are taking a beating. Thin profit margins (or non-existent ones) really start to hurt when volume falls. Ameritrade is just a little over $11. And e-trade is below $14.
*** But the e-brokers are not the only ones in danger. A consultant for Ernst and Young, quoted by Richard Russell, says “there are 30,000 e-tailers out there, and probably 25,000 will have to go away.”
*** The bubble itself is still as big as when the Fed first began tightening. It got bigger after the Fed first began its niggling rate hikes…and then deflated slightly.
*** “Why can’t it just stay as it is,” you might ask…a question I put to myself on major birthdays. I’ve had enough birthdays: “I am old enough. Couldn’t I stay right here?” But “every day, all this earth ages, drooping unto death,” as it says in the ancient poem, The Earthstepper. The bubble must be destroyed to make way for what comes after it.
*** But when? And how? The Clinton Administration would, no doubt, like to see the bubble persist at least until after the November elections. “USA Today” reports that three out of four likely voters own stock. Greenspan would probably like to accommodate the Democrats. Any significant crack in the economy or the market will probably give him a rationale for not continuing the rate increases.
*** Speaking of Democrats, I am in a hotel room in the N.Y. Hilton and I turned on the TV last night. I do not own a working TV and have missed much of what passes for popular entertainment. Maybe that’s why I am always appalled when I see what people actually watch on the tube. Last night there was some sort of Democratic lovefest featuring Hillary, Bill, Tipper and Al — none with the slightest sense of charm or dignity. I guess that is no surprise, but why was such a spectacle…with no redeeming social value…broadcast to the nation?
*** I shared a cab with a woman who almost immediately began telling me about her marriage…and how she would stay with her husband for six months and then live by herself for six months…and how her husband had a girlfriend…
“This is New York,” I thought to myself…unaccustomed to the openness. A French woman would never tell you such things — not even if you had known her all your life.
*** My fame precedes me. A young woman came up to me in the lobby of the Hilton and began speaking to me in French. She called me by name — but I could place neither her face nor her name. My center of gravity had been shaken by the woman in the cab.
“What next?” I wondered. I thought she might be a DailyReckoning.com fan. Maybe I could develop some groupies who follow me around…ah… But it turned out she worked for a friend’s company in Paris.
*** I’m here to give a speech to the NY Direct Marketing Association. The program describes me as perhaps “the world’s best copywriter.” You have to take what you can get in life…no matter how undeserved or inaccurate. Actually, what I am supposed to talk about is the “Daily Reckoning.” How does it work? Why do you do it? Does it make money? It’s probably time I asked myself those questions, too.
*** The trip up to New York from Baltimore was also appalling — in its own way. More below…
*** Oil rose $1.19 yesterday. Oil is now over $30…and natural gas is over $4 — for the first time in history.