In Today's Daily Reckoning:
*** The sun is shining...stock prices rising...as summer
nears its end. What, me worry?
*** But pity the poor retailers...
*** The euro has its back to the wall...the effect of
stock options on profits...and I am now officially wrong:
a humble, miserable, snivelly confession.
*** Well...another bumptious summer day on Wall Street.
Everything was up - like corn in Iowa and the murder rate
*** 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
*** "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." (See: The All Important Ill Effects of Savings Collapse)
*** 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
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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
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
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
* "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
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.
(see: The Tipping Point: A Strategic Alternative History
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
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,
P.S. This poem, 'Dulce et Decorum est,' by Wilfred Owen
shows how attitudes changed on both sides as the war
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.
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Last modified: April 01, 2001
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