“If youth but knew…if age but could.” ~ Henri Estienne
Nature in her majesty gives few gifts to the old. They are taken over by disease and exploited by politicians and door-to-door fundraisers, which is to say, they are plagued by parasites. But an old fellow has an edge here and there. He doesn’t have to buy long-term insurance or top quality carpeting; there’s no point in owning things that will last longer than he will. And here in London, if he looks decrepit enough, he can sometimes get a seat on the subway. In the financial world, the geezers have another advantage: they’ve been around long enough to know better.
But Nature grants her favors grudgingly, even in financial matters. There are some markets where even experience is a liability, not an asset. Adam Smith (a nom de plume) wrote about the “Great Garbage Market” of the late ’60s on Wall Street. He noticed that shares were such bad bargains that the old timers wouldn’t buy them. Only young investors — those too naïve or too dumb to know what they were doing — would buy. So, the wily graybeards put the youngsters in charge of the funds. And the funds soared…until they crashed. After 1968, Wall Street went down, in real terms, for the next 14 years.
The Dow fell 184 points yesterday. All 30 Dow stocks were down. An investor with enough steel in his hair (if he still has any hair) would remember the period following 1966. It looked then, as it does now, as though stocks had peaked. But inflation was increasing, disguising what was really going on in the stock market. In nominal terms, stocks refused to go down. In 1968, the Dow even hit a new high. The youngsters came to believe that high prices were not just cyclical, but eternal. They had no experience with inflation, nor with a bear market. Of course, the markets were about to teach them a lesson. And they paid for their tuition, dearly. In real terms, stocks went down by nearly 80% until the next bull cycle began in 1982.
Generally, age and sagacity pay off in investment markets. Cycles can run for a long time. Longer than you can remain solvent, warned Lord Keynes. Maybe longer than you can remain alive, we add. Occasionally, during bubble periods particularly, what is called for is youth and witlessness; in other words, something of a redundancy. This was the case in the share market in the late ’90s. Who but a reckless neophyte would buy a dot.com with no earnings, no business plan, and no clue? Many people did. And then, they doubled their money as the silly thing soared! Who but a callow newcomer would buy un-built condos in Florida, expecting to flip them to a greater fool before the lights went on? Many people did, and they, too, plucked money off the trees…for a while.
In fact, according to the latest figures, the young whipper-flippers in the real estate market may still be making money, but barely. According to figures from California, property prices rose 10% in the last 12 months even though there were also large increases in inventories and large decreases in sales. Sales actually fell 21.4% during the same period.
How can prices rise while buyers disappear? Well, housing markets do not clear like a trading pit in Chicago. Owners are reluctant to believe that they can’t get their prices. They hold. They wait. They hope. Inventories of unsold houses increase. Here we have yet another version of the Law of Limp. Speculators may be jacking up prices with lightning speed on their properties, but they drag their feet bringing them back down. But unlike the phony legerdemain of the centrally controlled dollar or the phony bookkeeping of federal finances, the market for housing is broad and real. It can be ignored, for a while, but it can never be denied. When sales decline and prices rise, something has to give. Either the inventory is gradually cleared away so that tighter supplies can support higher prices, or prices fall. What will happen in California? Will the youthful speculators win their bet? Will prices continue to climb? Or, will the grumpy contrarians finally be proven right?
We can’t say for sure. But we have a feeling that it is time for the kids to take a beating. As many as 40% of the houses bought last year were second houses — meant either for vacation or investment. That is a lot of houses to carry in anticipation of a quick resale. As the teaser rates on new mortgages kick out, and taxes, condo fees and other costs kick in, our guess is that our youthful speculators are going to get a kick in the pants.
The youthful speculators in the financial markets might be in for painful derrieres as well. Last week, we had to laugh out loud at our own magazine. MoneyWeek included a profile of a 32-year-old fund manager in London, said to be a “born stock picker.” At that age, he was only eight years old when the last bull market in shares and bonds began. The bear market that preceded it started six years before he was born. He was only 13 when Alan Greenspan took over at the Fed. He was only 16 when the Japanese market started to tank. And he was only 18 when George Bush the elder vomited on the Japanese prime minister.
Still, his fund has gone up nearly 150% in the last three years. And you can’t argue with success, can you? “Investors could be forgiven for thinking that their money would be better placed with a more experienced manager,” said the article, in a bit of understatement. But when we raised the issue with the staff writer, he protested: “Wait a minute, at 32 years old, he’s probably about average age for fund managers.” Probably true. Which made us wonder: What kind of a market is this? Is it a garbage market, suitable only for kids, hustlers and mental defectives? Or, is it a serious market for serious investors?
As usual, we don’t have an answer, but we have a feeling. It’s the same one that comes to us after missing lunch, or looking at a chart of bond yields. Our feeling is that the long period of falling interest rates is over. For the next long period, which could last 20 or 30 years, money will be harder to come by; real rates will be headed higher, which will mean the bubble days may be over. The codgers may get another chance to say, “I told you so.”
u2022 Gold fell in overseas trading on Monday, below our target price of $650. Then on Tuesday, it bounced back. Is it time to buy? Is this the best price we’re going to get? Maybe. Personally, we are waiting to see how this correction develops. If gold shoots back up, we will have missed a fine buying opportunity. If it drops down to $600, we will have an even better one. Take your chances. Buy on dips. Be happy.
u2022 Now, the LA Times has decided to take a look at CEO compensation. In a study of 100 large California companies, the paper found that executive compensation has risen to 6.6% of net income. Why would shareholders give so much of their money away? We venture an answer: It is late in the game and because they are not really capitalists. They are but pseudo-capitalists…capitalist wannabe’s…lumpencapitalists. They have let themselves be out-maneuvered by the managers they employ. Instead of properly exploiting the working classes, the new “mass capitalists” are being gouged by their managers. Shame.
u2022 It is the last day of May. We recall, for no apparent reason, Mays past. At Owensville Elementary school in Southern Maryland the little girls would put on white dresses with garlands in their hair and dance around the maypole. For those who don’t remember it, the maypole was a tall lean mast erected in the playground. Paper streamers of white and red were attached at the top. As the music played, the girls would skip around, half to the left the other half to right, weaving in an out, so that the maypole itself was finally entirely wrapped up. Then, the girls would switch directions to unbraid it. The dance has ancient roots somewhere in the British Isles, we are told. It is a pagan festival, probably celebrating the arrival of good weather (perhaps the weather was better back then) and probably accompanied by lascivious, licentious behavior that wouldn’t be tolerated today, at least not outside a private club with an admission fee.
Charming little Owensville Elementary, with its wooden walls, shingle sidings, and six tiny classrooms has vanished. During the 1960s and 1970s, education was centralized into large buildings of cement, steel and glass…with ideas and methods every bit as drab and clunky. Now, we imagine, there are metal detectors at the entrance, drug counselors, and professional educators. The maypoles are gone, too, or so we’ve heard. They were considered too retrograde, too cute, too innocent, too European. Enlightened school boards have decided to emphasize other things, things thought to be more relevant and socially redeeming, such as multiculturalism, recycling, and sex hygiene.
And now, our own take on a thought from a dead man, G. K. Chesterton:
All centralized systems mean the rule of the few; and educational machinery is among the most centralized of all systems. If the modern American really wants to know what his fathers meant by democracy, he will never learn it in school. He must make the supreme and awful sacrifice. He must get out and think.
Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.
