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Contributed by Bill
Bonner
Publisher of: The
Fleet Street Letter |
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OUZILLY, FRANCE
FRIDAY, 31 AUGUST 2001 |
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Today:
Madame de St.
Georges
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*** Japanese stocks down again...so are U.S.
stocks...the race to the bottom continues!
*** Dow below 10,000 - will investors panic? End of
the "psychedelic era" for stocks...
*** Hope doesn't pay the bills...AMZN, too
expensive at any price...bond buyers saying: No
inflation...and more
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Today is an important day.
Here's the story:
*** Yesterday was a bad day for Wall Street...it
began badly - when Michael Jackson rang the opening
bell - and ended badly...with the Dow down 171
points and the Nasdaq down 51.
*** This brings the Dow below the 10,000 level...
and the Nasdaq below 1,800.
*** Dell and IBM each fell 3%. MSFT dropped 5%. GE
ended down 1%. These are the stocks that people
own...and count on for their retirement financing.
*** American stock holders are getting discouraged.
First, they lose money - most have lost money for
the last two years. Then, they lose interest. That
is why profits are sinking on Wall Street and why
Schwab announced, yesterday, that it was cutting
its payroll by 1,400 workers. Investors are still
holding, but they are not buying...so there are
fewer commissions for the brokerage houses.
*** "The '90s were the psychedelic era for stocks,"
writes Ben Stein. "There is no precedent for their
return in most of our lifetimes. But we still keep
hoping that the bubble will return - and then we'll
sell.
*** "[I]nvestors who lost big in the tech debacle
often cannot bring themselves to sell because that
would mean final recognition of their folly in
getting in on the wrong side of the bubble. Not
only that, but if they sold after colossal losses
and the stocks did by some miracle rebound, they
would be suicidal. Thus, they refrain from selling
because of a combination of fear they will be wrong
again and denial of the finality of the end of the
bubble.
*** "Through the prisms of fear or just plain self-
delusion investors see hope..."
*** But hope doesn't pay the bills. Eventually,
consumers lose income. They may have to cut back on
over-time pay...or get a smaller bonus...or lose
their jobs completely. For a while, they get by by
refinancing their house...or running up credit card
debt. But soon, the combination of lower income and
uneasiness causes them to cut back. In July,
personal spending rose - but only by 0.1%...only a
fifth as much as the rise in personal incomes.
People are beginning to do just what they've done
in Japan...they are spending less and paying off
debt.
*** As a bear market continues, investors finally
decide to get out of stocks. That hasn't happened
yet. But many investors must be beginning to think
about it...some because they want to, others
because they need to.
*** Credit card companies are having a harder time
collecting their payments. The delinquency rate
rose for the 8th month in a row in July - to 5.06%.
Hotels, restaurants and airlines all report
declining revenues. Consumer confidence is falling.
*** So far, housing has been a bright spot. But, as
the San Jose paper puts it, "Housing is due for a
crumble under weight of economy." (Do they speak
English in San Jose?)
*** As a group, housing stocks are up about 80%
from two years ago. Daily Reckoning readers will
remember builders such as Centex and Toll Bros. We
noticed that they were still cheap 18 months ago -
when techs were expensive. Now the techs are less
expensive...and the builders are less cheap.
*** The best move would probably be to get out of
both of them. Neither is a good thing to own at the
beginning of a recession. And the tech stocks are
still preposterously expensive. The FT reports that
software stocks still trade at a P/E of 58...and
telecoms are still at 60 times earnings.
*** Amazon shares fell 6% yesterday...to $9.31. But
AMZN is probably too expensive at any price. Very
likely, Amazon will go bankrupt - wiping out all
shareholders' equity. The latest news from the
River of No Returns is that the company announced
it was heading into the jungle of online PC sales.
Bezos is a little late, as, for the first time in
history, PC sales just began to contract.
*** While Wall Street falls, the Nikkei Dow in
Tokyo gives it a race for its money. The Nikkei
index hit a 17-year low on Wednesday...and dropped
another 41 points yesterday. Which will hit 5,000
first...Tokyo or New York?
*** But at least the financial press is on top of
this story:
"Japan's bad loans become worse," worries the
Financial Times.
"Japanese companies to cut more jobs," again, the
FT.
"Japan steps closer to recession," the BBC.
*** The situation in Japan has gotten so bad that
Gateway has closed its operations there.
What else can I tell you?
*** "If there is something that offers a bigger
bang for your buck than natural gas, I don't know
what the hell it is," relays our natural resource
man John Myers, all the way from Calgary. After
last winter's peak, "the sluggish economy," says
John, "moderate weather and rising inventories have
severely depressed natural gas prices this summer."
John's got his eye on two companies he thinks will
be Johnny-on-the-spot when the price begins to turn
again. Watch this space.
*** Oh yes, this is interesting - the bond market
is signaling that inflation is not going to be a
problem. The gap between inflation-adjusted T-notes
and those that are not adjusted for inflation has
narrowed to just 1.39%. Strangely - and perhaps
insanely - bond buyers are implying that inflation
will not exceed 1.39% annually for the next 10
years!
*** So what will it be today? Greed or Fear? Will
investors want to buy stocks at these "bargain"
prices? Or will they prefer to sell stocks today so
they can enjoy their Labor Day weekend without
worrying about more losses?
We will see, dear reader, we will see.
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MADAME DE ST. GEORGES
by Bill Bonner
Pierre was giving me a signal.
He waved his finger behind his back, urging me to
stop talking.
We were looking down from the ramparts of the
chateau at a field grown up in small trees and
bushes that needed to be cleared. I had just
suggested that perhaps Madame de St. Georges would
like some help from a man we knew who does that
kind of work, a Monsieur Dupont.
But Madame had already made Monsieur's acquaintance
and didn't care to be reminded of his existence.
That was what Pierre's index finger was telling me.
It turns out that Mr. Dupont and Madame de St.
Georges' late husband shared a common interest -
drinking...the late Mr. de St. Georges was out with
Mr. Dupont on the night the former died. Driving
home, the road took at sharp turn to the right -
the same turn it had always taken. But for the
first time in his life, Mr. de St. Georges
continued straight ahead, flipped his car over, and
died.
If Mr. Dupont feels guilty about letting his friend
drive while drunk, it is a guilt he seems to bear
privately and stoically. Perhaps he comforts himself
with the knowledge that however drunk Mr. de St.
Georges was that night, his companion was even
drunker. Alas, the two had failed to designate a
driver and shared the blame evenly.
We had come to visit Madame de St. Georges to see
her house - a magnificent chateau about 15 minutes
from Ouzilly. I will give you a brief description
of it, dear reader. For it is a reminder that
progress is far from guaranteed.
Like my own house, the chateau was reconstructed in
the 19th century on the foundation of a medieval
fortress. Built of gray limestone, it is just what
it appears to be - a massive stone house that had
been left to take care of itself for nearly half a
century. It would an ideal place to film a horror
movie...or stage a Halloween party.
Once tended by a team of maids, gardeners, and
laborers, the house now has only the widow de St.
Georges to look after it. The maids and gardeners
are gone. The shutters hang at various angles, with
paint peeling off so heavily they look like strange
animals shedding their skin. Trees and bushes grow
up where once there were gardens and lawn.
Inside, too, is more evidence that the de St.
Georges fortune has been declining for a very long
time. Family portraits grace the grand salon - none
more recent than 1910. Even the collection of dead
birds - so extensive that it attracted the interest
of ornithologists from Paris - stopped growing in
1955 or so.
"My husband's uncle collected them," Madame de St.
Georges explained.
The cabinet took up a good section of wall space.
In it, standing on the top shelf, were a few birds
that looked like terns or miniature sea gulls.
Below were row upon row of birds that looked as
though they had been brought in for lunch and
forgotten. They were bright colors and dull ones.
They were big and small...dozens, maybe hundreds,
of them.
"They were all found or shot here," the chatelaine
told us, "and all stuffed."
They did not look stuffed. They looked...dried out.
A grand stone staircase rose to the second floor,
supported by two stone columns. On the wall in
front of us as we went up the stairs was a
collection of swords and more old paintings.
Like the paintings, the furniture was ancient.
Except for the bedrooms that had been fixed up for
paying guests, all of the furniture had been in the
house for at least 50 years.
Most people take material progress for granted. But
it is not guaranteed. Investors are shocked by the
idea of a 17-year bear market. Economists are
appalled at the suggestion of a Japan-style 11-year
slowdown. But markets, assets, living standards,
and incomes can go down for very long periods.
The Romans brought innovations such as baths and
running water to Britain. When they left in 410 AD,
the quality of life fell dramatically. The standard
of living did not recover in Britain until,
perhaps, more than 1,000 years later. That
"perhaps" is there because no one really knows. But
it is almost certain that the Anglo-Saxons in
Britain lived more primitively than the Romans, at
least until after the Norman Conquest in 1066...and
probably until the 18th century.
Throughout Europe, the story was much the same. The
Romans began a long decline and fall early in the
First Millennium and finally "returned to trend"
when Rome was sacked by the Visigoths in 410
AD...the same year the Romans left Britain.
Thereafter, standards of material prosperity
declined...only to return to Roman Empire levels
many centuries later. Economists and historians
have used up many pens, much ink, and a lot of
typewriter ribbon attempting to explain why - but
no one really knows.
In the Middle Ages progress was very slow - with
some areas "backwards walking" for decades...and
all of Europe hit by periodic setbacks, caused by
disease, bad weather, and war.
The wars of religion, for example, created such
havoc that fields and whole towns were abandoned or
destroyed. Peasants took refuge from murderous
armies by hiding in the hills and forests - where
they often starved.
Most people grew richer in the 20th century, but not
all. In the Soviet Union, for example, people
labored hard for 70 years - only to get poorer each
year. And even while people made material progress,
trends in art, architecture, crime, politics, and
manners were mostly retrograde.
In America, stocks rose in the average year of the
20th century. But an investor could have held stocks
for 50 years - from 1929 to 1979 - with zero
capital gains in real terms.
Even in real estate, there are trends and
countertrends - as nature gives and takes. Property
prices in France fell for a 70-year period in the
19th century. In the 20th century, as I've described
in previous letters, our office building in
Baltimore probably peaked in value before WWI...and
has been in decline ever since. We bought it in
1993 for about 20% the cost of construction.
I do not know when or how the St. Georges family
made its money. But I know what happened to it.
Monsieur de St. Georges enjoyed a life that had
been set out for him by his father - a life that
seemed ideal.
He worked only about two days a week - overseeing
his farms. The rest of the time, he went hunting or
fishing, and participated in many local committees
and organizations, both public and private. He had
money; he had a beautiful wife; he had time; he had
the respect of the people around him. But the farm
economy in France changed dramatically after 1960.
Labor became more and more expensive. Huge sums
needed to be invested in equipment. World commodity
prices - in real terms - fell. Margins tightened.
Thus did Mr. de St. Georges buck the trend of a
century. Over the course of his entire 62-year
life, he became poorer.
He and his wife lived well and enjoyed it...even
now, his widow is a lively and attractive woman.
She does not look like the sort of woman a man
would want to leave.
But as time went on, Mr. de St. Georges lived less
and less well. Finally, he did not seem to enjoy
living at all, some people thought...and they
wonder why he missed the turn.
Nothing is guaranteed in life, dear reader.
Certainly, not progress.
Bill Bonner
P.S. In Business Week: "If you're looking for a
rosy economic forecast, don't knock on Warren
Buffett's door. The Berkshire Hathaway chairman,
and King of All Value Investing, has been telling
executives he meets with to brace themselves for a
long slowdown. Not only is there no turnaround in
sight this quarter or even this year, according to
Buffett, but those who've met with him say that he
is predicting eight years of economic stagnation."
People can walk backwards a long way.
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| About
The Daily Reckoning: |
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Daily Reckoning
author Bill Bonner
Bill Bonner is,
in spite of himself, a natural born contrarian. Early each morning, Bill
writes The Daily
Reckoning—his take on the financial markets and what’s going
on in the world—and sends it off by e-mail before most Americans’
alarm clocks have buzzed. Many readers say it's the first thing they want
to read when they get up—not only because it's informative and thought
provoking, but also it's inspiring, in its own quirky and provocative way.
Of course, there's
much more to Bill than his daily market commentary. He's also the founder
and president of Agora Publishing, one of the world's most successful
consumer newsletter publishing companies. Bill's passion for international
travel and big ideas are reflected in the company he's successfully built.
In 1979, he began publishing International Living and Hulbert's
Financial Digest . Since then, the company has grown to include
dozens of newsletters focusing on health, travel, and finance. Bill has
vigorously expanded from Agora's home base in Baltimore, Maryland since
the early ’90s—opening offices in Florida, London, Paris, Ireland, and
Germany.
Agora's publication
subsidiaries include Pickering
& Chatto, a prestigious academic press in London and Les
Belles Lettres in Paris, best known as a publisher of classical
literature in bilingual editions.
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