The First Day or the Last

by Bill Bonner
by Bill Bonner

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This is either the first day of autumn or the last day of summer; we don't know. But in France, the mornings are now very gray, with fog settling in the valleys. Along the Champs Elysées, the chestnut trees are still green, but the light has an autumnal look about it. The days are mild; the nights are cool.

Everything passes away...like it or not. You can sink into a gloomy funk about the end of summer – but what's the point? It is like being saddened because you are getting old. Better to enjoy the sweetness of decay...

Yesterday, the Fed decided to sit tight again. Inflation is under control, said the feds; there is no need to raise rates.

What may not be under control is deflation...or at least the very early stage of it. Oil has dropped to $61. Gold is down to $586. The yield on the 10-year note is only 4.73%.

And the housing market continues to soften. In LA, home sales are down 25% from the year before. Friends report 'For Sale' signs in abundance.

"I'll probably take a loss of $100,000 on that house I bought near Miami," said a friend this morning.

He just bought the place two years ago for $500,000. Now, he is trying to get rid of it. Statistically, there is no proof of a 20% drop in housing prices. But out on the speculative frontier – eager sellers seem to be taking some significant losses.

Meanwhile, one market that is not deflating is the stock market. Falling bond yields give stocks a boost. Investors compare the returns they are likely to get from stocks to the returns offered by the bond market. As yields from bonds go down, stocks look like a better bet.

We spent time yesterday talking with a friend who is a full-time investor of his own money.

"I've looked at this business [investing] from practically every possible vantage point," he explained. "It's really very simple. You take the returns offered by bonds...or you take more risk and get higher returns. Not always...but over the long run. The risk premium from stocks is very well researched and well known. It is maybe only a couple of percentage points, but over the long run that is a lot of money. Now, everyone in America knows about it, so it is not as great as it used to be. But it is still there...and still worth getting.

"So the question is, how do you get it? That too is simple. You just buy an index fund. Or buy the S&P Index itself. Or, if you want to do a little better, you can follow a mechanical system for selecting the stocks that are likely to do better than the index itself, such as the Dogs of the Dow approach. I've done that for many, many years. There is no question that it works.

"Better yet, find someone who does a lot of homework to figure out which companies are likely to do better than a purely mechanical system. This is tricky. Because you have to be careful to get the right person. Warren Buffett, for example, picks stocks by doing intensive research over a long period of time, and sticking to a value investing approach. Value investing works too. It can work very well; it certainly has for me. Value investing is essentially what the Dogs of the Dow system gives you...but it is very crude without any room for individual judgment or deep research. If you can do the research yourself...or find someone you trust to do it...you'll probably get a better return. I follow many of your advisors, for example...and many of them are very good. They're getting some good results. Especially lately. [Our own Justice Litle, who writes the Outstanding Investments letter, is rated #1 by the Hulbert Financial Digest].

"The only thing you have to remember is that the risk premium isn't free. You have to be prepared to stick with stocks throughout the entire cycle – which is about 30 years. If we're at a high point now...and the market itself turns down...you can still do okay in stocks, but you may have to wait until, what, 2036 to realize it."

Ah, there's the rub, isn't it, dear reader? Here, we think stocks are near an epic peak. The market reached its zenith in January 2000 and has gone mostly nowhere since, all except the NASDAQ...but even that is considerably down. Stocks have enjoyed a long season in the sun...and an extended Indian summer. But nothing lasts forever. Summers end. Autumn...winter...still lie ahead. Many of our smartest friends and associates are still making money in the stock market. But we will wait for the market to die...and be reborn...before we get into it broadly. This stock market still has a lot of leaves left to drop.

• Everything passes away...even our time this week at the Chateau de Malesherbes, near Fontainbleau.

In 1787, Monsieur de Malesherbes – Chancellor Lamoignon – must have been on top of the world. The chateau that bore his name is a beautiful place even now, but then it was twice as big. Today, it still has 25 bedrooms...all of them grand...with spectacular views out over the park. Our bedroom had oak paneling, with huge windows directly in front, so we could look down a broad allee lined with linden trees.

Before the French Revolution, the house was frequented by the richest, most famous, most powerful people in the world. Even the famous writer, Chateaubriand, came for a visit...for his brother was married to Malesherbes' daughter. There, in the salon, the writer left his mark. He was fascinated by the movement of the sun and the heavenly bodies around it. So he drew out a long pattern on the floor...subsequently cut into the ceramic tiles...and attached a metal disk to the outside wall, with just a small hole in the center, so that on the 21st of June at precisely 12 noon – that is to say, at the very moment of the mid-summer solstice – the sun shone directly through the hole and lit up the long triangle inscribed on the floor. We can imagine the delight of Malesherbes and his guests. It must have appeared to them all that the Malesherbes family not only commanded the respect of Louis 16th – great, great grandson of the Sun King, Louis 14th – but actually seemed to command the sun itself. For hadn't the great sol come to the very point where it was supposed to come...where Chateaubriand's metal disk was waiting for it?

Adding to Malesherbes' status and wealth was the fact that the man was a lawyer...but not just any lawyer. He must have been the Johnny Cochran of his time...a man of the law so distinguished that the king himself turned to him for legal help. Lawyers, more than any other professional class, are able to insinuate themselves into the ranks of power and money. They are the most accomplished parasites; and, as a social/political system matures, they gradually take it over. That is why so many of the members of Congress are lawyers...and why when you have a traffic accident in the nation's capital, the odds are one in ten that you have run into a lawyer...and they are significantly higher if the person was driving a Mercedes (of course, we simply recall the statistic...we do not guarantee it).

Alas, Malesherbes' success in court and courtroom was the cause of his ultimate failure. He defended Louis 16th against charges of treason brought by the new revolutionary tribunal after the mobs had stormed the Bastille and a new government was installed. He argued his case well, but not well enough. Louis was beheaded...and his lawyer' s head followed! The revolutionaries were nothing if not thorough. Just to make sure that the Malesherbes seed was extinguished, they also beheaded his wife, his children, and his grandchildren – including the children of Mr. Chateaubriand.

September 22, 2006

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21^st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

Copyright © 2006 Bill Bonner

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