Uniting Europe

Giscard d’Estaing spent the summer, the Figaro reported, reading – among other things – David McCullough’s biography of John Adams. He was trying to figure out how to build a more perfect union out of the states of Europe and thought he might learn something from the American federalist example.

Here at the Daily Reckoning, by accident, we found ourselves reading about a previous effort to unify Europe; we herewith recommend to Monsieur d’Estaing “The Memoirs of General Baron de Marbot”. We carried the book around all summer – from Baltimore to Colorado to Nicaragua to Italy and finally, home to Ouzilly – reading it slowly every spare moment, when we should have been preparing a speech, when we should have been writing the Daily Reckoning, even when we should have been sleeping. We could not help telling friends and family about it…so often that they groaned when we mentioned the name. You, dear reader, will not be spared either.

Marbot grew up during the French Revolution and joined the army at age 17. In two thick volumes he tells what happened to himself throughout the Napoleonic Wars…the campaigns in Italy, Germany, Spain, and Russia. Marbot is a great writer; he merely opens his eyes and tells us what he sees. But, looking back on his career, he also feels obliged to explain why he and his fellow soldiers did such remarkable things.

Collectively, we have often observed in these letters, people lurch from one absurdity to another. They may believe that they must rescue the Holy Land from the infidel…throw maidens into volcanoes to appease the gods…make the world safe for democracy…or bring Europe together under a single government. No matter how preposterous the cause, it gives rise to the most extraordinary exertions and sacrifices – often, acts of valor and selflessness so glorious that we are inclined to forget the sordid circumstances.

At the battle of Eylau, for example, the emperor noticed a company of French soldiers – the 14th – cut off and surrounded by Russian troops. The poor French had been holding out for three days on a small hill – outnumbered, under constant artillery fire, with nothing to eat but potatoes and melted snow. His sympathy aroused, Napoleon sent an order to the company commander giving him permission to retreat back to the main French line.

But how to get the message delivered? There were thousands of mounted Cossacks separating the small group from the rest of the army.

The task of carrying these orders fell to the junior staff officers, of whom Marbot was one. The custom was for the young officers to present themselves, with the mission falling to whomever was first in line. Thus it was that a lieutenant was sent off, saber in hand – and soon disappeared in the mass of Cossacks. It was obvious to everyone that it was suicide to attempt to get through the Cossacks, but an order was an order.

Another officer was sent off in the same direction, again with his saber in his hand, as if he would be able to hack his way through the Cossacks. And again, he was soon unhorsed and killed.

Next in line was Marbot himself. In his memoirs he recalls that his commanding general had tears in his eyes when he gave him the order to attempt to reach the stranded company.

“He could not ignore the fact that he was sending me to near certain death,” Marbot remembers, “but he had to obey the Emperor.”

So the young officer took off. But rather than try to fight his way through the enemy, he decided to try to race through. In this he was aided by a horse that had a reputation for being insane, for she had killed a stable boy by kicking him to ground and tearing out his intestines with her teeth.

Instead of confronting the Cossacks, Marbot rode like a madman, dodging one and then the other…and finally, jumping over the bodies of the fallen soldiers and horses, he arrived at the little group of French. There, his troubles were just beginning:

“I found the 14th formed in a square on the top of the little hill…surrounded by the cadavers of horses and Russian dragoons…

“Under a hail of bullets, I transmitted the order to leave the position in order to rejoin the main force. The commander pointed out that he had lost so many men to the enemy artillery in the last hour that his small handful of soldiers would be quickly exterminated if they left their hilltop position, and that besides he did not have time to execute the movement because there was a column of Russian infantry headed in his direction, now less than 100 paces away…”

Realizing that they could not save themselves, the French gave Marbot their flag and standards so they wouldn’t fall into the hands of the enemy. “Vive l’Empereur,” they shouted a final time…urging Marbot to make his getaway. But at that moment, a bullet grazed his head…

“It was as though I had been knocked out, but I didn’t fall from my horse. Blood ran from my nose, my ears and even my eyes; nevertheless, I could still hear, see…I had all my faculties…but I was paralyzed!

“Meanwhile, the Russian infantry came closer…They had been given alcohol and they fell upon the feeble debris of the 14th with a fury…Still, the brave French defended themselves valiantly with their bayonets, and as the square shrank, they reformed into a few squads and the uneven combat continued…”

Poor Marbot. He sat on his horse, unable to move, watching the Russians get closer and closer. Since he was the only one mounted, they mistook him for the commanding officer and began shooting at him. Then, approaching closer over the fallen bodies…they began jabbing at him with their own bayonets.

“A Russian grenadier, whom drunkenness had made unsteady, tried to stab one of the French soldiers whose back was against my horse. His bayonet missed and went into my coat that the wind had billowed out…[then] seeing that I did not fall, he poked at me several times, missing most of the time, but finally stabbing me in the left arm, from which I felt warm blood running…

“Redoubling his fury, the Russian grenadier lunged with such force that he lost his balance and instead of getting me, his bayonet went into the side of my horse, who instantly returned to her ferocious instincts, turned around and with one single bite grabbed the Russian’s nose, lips, and thus ripped off his entire face, so that he had the face of the living dead…all red. It was horrible to see! Then, running madly in the middle of the combatants, she bit everyone who got in her way!…A Russian officer tried to grab her by the bridle; she seized him by the stomach, picked him up, carried him out of the melee, tore out his entrails and stomped him to death…and then took off back towards our lines like a racehorse.”

That was not the end of his adventure. His horse collapsed on the battlefield from blood loss…leaving him dying in the snow. Believing him beyond hope, he was stripped of his clothes and left for dead. Then, by a stroke of almost unbelievable luck, he was discovered by someone who knew him and rescued.

Marbot was no idiot. When Napoleon sent troops to Spain, with the intention of unseating the royal family and setting up his brother, Joseph, in their place, most of his officers saw the campaign as dishonorable and futile. Still, they did their duty…often with great courage and integrity.

The emperor was convinced that Spain would fall to his authority with relatively little bloodshed. He was building a united European – united under a single imperial family, the House of Bonaparte. He could not believe that Spain would resist.

Yet, the Spanish fought back in ways the little Corsican had not anticipated…using a campaign of guerrilla warfare and terrorism against the French, who found themselves under attack from all directions, and not just from disciplined troops, but also from barely- civilized peasants who often tortured and killed their prisoners.

The Iberian campaign was a lost cause from the beginning, marking the beginning of the end of Bonaparte’s power. But for a brief time, after much sturm and drang, blood and tears, Europe was united and peaceful…from the straits of Gibraltar to the banks of the Bug.

Your editor,

Bill Bonner
September 9, 2002

P.S. Napoleon’s efforts to unify Europe succeeded – perhaps all too well – in Germany. Bonaparte reduced the number of separate states in Germany to a handful… laying the groundwork for the First, Second and Third Reichs.

Stocks are the best investment ‘for the long run.’ Everybody says so. They’ve returned 6.7% per year for the last 100 years.

Investors probably thought that if they bought stocks on Friday the worst they would do over the long haul was about 6.7%.

And over the last 20 years, they’ve done much better than that – nearly three times the historical average. So, why not buy stocks? Maybe you’ll get lucky again.

But wait, what’s this? Nearly 2/3rds of the return over the past 100 years came from dividends…about 4.2%. In order to get that level of dividend today, stock prices have to fall in half…and then some.

Which makes sense. It doesn’t take a John Nash to tell you that after almost two decades of 18% annual returns, investors are going to have to endure some very bad years in order to get the long-term average down to 6.7%.

Believe it or not, investors are still listening to Abby Cohen, Lou Rukeyser and Alan Greenspan. They think higher levels of productivity are going to boost profits so much that P/E levels can decline even as stocks go up in price. They don’t seem to realize that productivity rates are not unusually high; they have been higher many times before.

What’s more, over the past century very little of stocks’ growth has come from greater earnings – only 0.6%. And Peter Bernstein points out that more than half of the earnings growth since 1960 has come from ‘mystical’ sources – pro forma and phonied up accounts.

Maybe stocks do go up in the long run. But they also go down for periods of 20 years and more. For the last 3 years, we’ve guessed that we were beginning one of those long periods of falling prices. Nothing has happened, yet, to change our opinion.

Eric Fry, with the latest from Wall Street:


Eric Fry in Manhattan:

– On Friday, the glass-half-full contingent of US investors responded jubilantly to the news that: A) our national employment situation in August was not quite as bad as expected and; B) Intel’s third-quarter revenues were not quite as dismal as feared.

– Intel, a prominent member of both the Dow Jones Industrial Average and the Nasdaq Composite, jumped 7.3% Friday, giving a big boost to both indices. The Dow gained 143 points to 8,427, while the Nasdaq soared 3.5% to 1,295. Despite the festive Friday action, however, the Dow and the Nasdaq both registered losses for the week.

– So what was the sensational news from Intel? Merely that its third-quarter revenues would fall only slightly below the midpoint of its previous guidance of $6.3 billion to $6.9 billion, to something more like $6.3 billion to $6.7 billion. Given the unrelenting bad news that has been flowing out of the semiconductor sector lately, Intel’s SLIGHT revenue shortfall seemed like good news.

– And what about the terrific unemployment report from the Labor Department? Well, at first blush, the August employment report seemed pretty darned good. The unemployment rate dipped to 5.7%, from 5.9%, while payrolls increased by 39,000.

– However, as Alan Abelson observes, “of those 39,000 additions, all and then some – 41,000, to be exact – came courtesy of Uncle Sam; there were zero net new jobs created by private industry. On this score, more than a little troubling was a 68,000 drop in manufacturing employment, the steepest decline since the cold days of January. Worth noting, too, we think, is that in each of the past two weeks, new claims for unemployment insurance topped 400,000. That intimates the current month’s job numbers and jobless rate could be more than a touch bleak.”

– Economic news that is less grim than feared might be able to boost stocks for a day or two, but a sustainable bull market will require bona fide good news, and lots of it. Sadly, that’s not in the forecast.

– As Addison noted in the Weekend Edition, Bill Gross, Managing Director of PIMCO, thinks “Stocks stink and will continue to do so until they’re priced appropriately, probably somewhere around Dow 5,000, S&P 650, or NASDAQ God knows where.” Gross, in his latest monthly letter, continues, “Come on people, get a hold of yourselves. Earnings have been phonied up for years and the market still sells at high multiples of phony earnings. Dividends and dividend increases have been miserly to say the least for several decades now… Companies have been diluting your equity via stock options claiming that management needs incentives of millions of dollars just to get up in the morning and come in to work. Then they pick you off by trading on insider information, selling shares before the bad news hits and you have a chance to get out.”

– That about sums it up, folks. Mr. Gross deftly recaps the litany of negative factors that we’ve been highlighting for months in the Daily Reckoning.

– “Come on stockholders of America,” Gross indelicately continues, “are you naundefinedve, stupid, masochistic, or better yet, in this for the ‘long run?’ Ah, that’s it, you own stocks for the ‘long run.'”

– Unfortunately, the long run can be a very long time indeed. “The return on [stocks] depends significantly on their beginning valuation and right now valuation remains poor,” says Gross.

– If you pay too much for stocks, a poor investment outcome is all but baked into the cake. We’ve all heard the grim statistics about ill-timed stock buys: After crashing from its 1929 high, twenty-six long years elapsed before the Dow finally regained all of the ground it had lost. Again, after falling below 1,000 in 1973, more than a decade passed before the Dow climbed back through that level for good. And most recently, in Japan the beleaguered Nikkei Index has tumbled more than 75% since topping out in 1989. Anyone who purchased Japanese stocks in 1989 is still nursing massive losses 13 years later, and the prospect of getting back to breakeven is nowhere in sight.

– “Stocks historically return more than almost all other alternative investments,” says Gross, “but only when priced right when the race begins. If you start from day one with P/E’s too high or importantly, dividends too low, you will not obtain equity returns in excess of bonds.”

– The “right” price, according to Gross, is somewhere below Dow 5,000. “Dow 4,000 would do it, as would S&P 400,” he says. “Until then, stocks are losers and anyone who owns too many of them will be losers too.”


Meanwhile, back in Paris…

*** The French press loves to make fun of Americans who, it must be admitted, give them plenty of material. A front page article in Le Figaro, for example, tells of the strange goings on around the latrine at whiskey distiller Jim Beam.

“How can we reconcile productivity with the physical needs of our employees?” the paper quotes the CEO. Reading on, we discover that Jim Beam’s productivity must be threatened by employees going to the bathroom too often. The company consulted a urologist and came up with a rule: workers were allowed one visit every two hours. If they want to go more often they have to ask permission.

“Our policy is fair and reasonable,” said the human relations head, “and it respects the real needs of our employees.

The union didn’t think so and took Jim Beam to court. The magistrate, reports Le Figaro, has appointed a commission to study the issue.

*** Summer is over. The children are back in school. Elizabeth has resumed her riding lessons. And Maria is in Milan for the fashion shows.

Maria came back over the weekend to help her father celebrate his 54th birthday. (He has reached his awkward years, where he is feeling a little too old to rock and roll gracefully but not quite old enough to die.)

“Oh Daddy,” she explained on Sunday, tears in her eyes, “I know I can do this…I mean, I know I’ll be all right. But I get so homesick. I almost felt like quitting…giving up this whole modeling thing…”

But by Sunday night, the 16-year-old got an unexpected morale boost. My mother has lived with the family for the last 5 years. At 81, she is slowing down…but so good humored and helpful we have begun to feel sorry for families without an extension.

“I’d love to go to Italy,” she volunteered. And so it was resolved; Maria’s grandmother would leave today to spend the week in Milan.

The Daily Reckoning