The Madness of the Crowds

I have two daughters. One dreams of becoming an actress. The other, in gloomy moods, talks of taking up a life of crime…or even prostitution. One disappears immediately when we get to the department store. The other won’t leave my side. One is shy, fearful…a worrier. The other is reckless and expansive.

First we had tea at a charming little spot near the office — the Foret Noire, specializing, as the name suggests, in Black Forest cake. Then we walked over the oldest bridge in Paris, the Pont Neuf, to the Samaritain…an old department store, a little like Harrod’s in London. (I saw no live models in their underwear.)

Maria and Sophia are both pretty girls. They are fun to be with. I am happy to have them. No worries about the greenhouse effect, or disappearing species or overcrowding on the Metro make me wish they hadn’t been born. Am I being selfish? Though I have as many concerns about the future as anyone, I am not convinced that anyone would be better off if they did not exist. Excuse me, I have made this discussion personal.

Yesterday’s reply by Virginia Abernethy went right to the heart of the matter. It’s all personal. Since there is no way to know whether the world will be better or worse off…or what the world’s carrying capacity really is…or what kinds of damage or lifestyle compromises will be required…ultimately, your position on issues like this tends to be determined by your "mentality"…your attitude…your tolerance for risk…your faith in the future…In short, it tends to be a matter that the heart decides…rather than the head.

Today is the anniversary of John Brown’s death. Brown led a group of abolitionists to seize a federal armory in Harpers Ferry, West Virginia. Robert E. Lee, at the time still in the service of the U.S. Army, put down the insurrection. Brown was captured…and later executed. Lee was no friend of slavery. By the time of the Battle of Gettysburg he was probably tired of being told, by the Northern press, that he was fighting to preserve it. Gettysburg was the most important battle in American history. And Lee blew it. For years after, General Longstreet argued that Lee wouldn’t listen to reason…and that he ordered a suicide charge up Cemetery Ridge. But the nation was in no mood to hear criticisms of Lee. For Lee was a decent man and fine soldier and everybody knew it.

And yet…Gettysburg was a blunder. "Gentlemen, there is the enemy," Lee is reported to have said, pointing towards the center of the Union line. "That is where we must go." But going there was easier said than done. The rebels were cut down. The army had to turn back. The fate of the war was sealed.

And all because Lee would not listen to reason. Historians have written that Lee, no longer a young man, was tired of war. He wanted to end it, once and for all, in a decisive battle. Gettysburg would be a Waterloo for one side or the other. Even that proved elusive…as the war continued for many long months after.

Historians also report that Lee was so beloved by his troops that thousands of them…hungry, tired soldiers on the march…tiptoed by his tent so they wouldn’t wake him from a nap. And what sense did this make? The war itself was a colossal blunder…one that cost the South one- quarter of its young men. Going to war was stupid beyond reason…it was insanity. Rhett Butler said as much in the opening scenes of "Gone with the Wind." But the war spirit…the mass psychology that whips up mobs, turns sensible people into morons and leads to the most appalling excesses…could not be stopped.

Even in a small gene pool…illustrated by my two daughters…you can see the extremes of human reason…and anti-reason. One would leap at the chance to sign up for battle. The other, more timid and cautious, would think twice. One would burst upon the world…embracing whatever idea appealed to her at the moment. The other would hold back…not wanting to take a chance on being wrong.

One would worry about the environment…the carrying capacity of the Earth.

The other doesn’t seem to worry about much at all. One would be a player in the Internet stock mania…the other would bury gold coins in the yard, along with her dad. But why would evolution allow such diverse personalities to coexist so closely to one another? Wouldn’t the expansive personality get bred out…or the fearful one? Even Christ seemed contemptuous of the timid investor in his parable of the talents. Instead of the "well done my good and faithful servant" that the others got…the servant who buried his gold to make sure it would still be around upon his master’s return was beaten. (This has never seemed fair to me.)

The reason nature tolerates different mental personalities must surely be that diverse points of view…arising from the heart, not the head…are useful to survival. The impetuous person ate the poisonous mushroom first…thus signaling to the others to avoid it. The cautious, conservative Cro-Magnon might have hoarded a few more nuts and thus saved the gene pool during a period of starvation. If the whole tribe were timid and fearful, however, it might be attacked and destroyed by another tribe…or be unable to take the risks of hunting. At the margin, a tribe is probably better off with both personality types. (I know my tribe is.)

Likewise, the perpetually fearful investor and the chronically expansive one are both doomed. The key to investing is to be contrary…not consistent. You must, as someone put it, be brave when others are fearful and fearful when others are brave. You make the most money by investing against mass delusion. You make money alone.

But this introduces another level of psychological nuance…mass psychology. The idea is that markets themselves have moods or personalities. They are either bullish…or bearish…or somewhere in between. Everything happens at the margin. And the marginal investor is neither consistently bearish nor consistently bullish…but someone subject to influence…depending upon the influences that come his way. Buy him a drink an election day, in other words, and he will vote whatever way you want. Stir him up with the right sort of demagoguery…he will lynch Mother Teresa.

And at the great bar of a bull market, it is "drinks on the house" all night long…for as long as the liquor holds out. Which turns a lot of knuckleheads into bulls. This is the Mass Psychology that Jim Dines is counting on. People do not think. They do not reason. Especially during the last stages of a bull market…the crowd gets very brave. Reason does not merely sleep…it drops on the floor unconscious like a bum on the sidewalk. Crowds tend to amplify whatever emotion an individual may feel. People who are normally sensible…who drive on the right hand side of the road…who can figure out how to use the electronic controls of their home sound system…who have no trouble picking out the lowest price at the supermarket…gradually become raving maniacs. Greed and fear are loosed…prices are bid up to levels that no sane man would pay if you put it to him on his own…or driven down to levels that no sane man could resist. But what does it matter? Sanity has gone out the window.

People will argue on television. Campaign speeches will lie about this or that. Analysts will point out why the market should go up…or down. But what will it really matter? Not much…when the mob’s blood is up. Girls seem to be wearing long, black cloth coats this winter. I bought one for Maria as an early Christmas present. A short, better-insulated coat would have been warmer. There were many that were cheaper. But who am I to argue with fashion?

Bill Bonner
Single parent
December 2, 1999

P.S. We walked back from the Samaritain. Christmas decorations are going up. So are decorations for the big Year 2000 celebration. They’ve bagged the trees on the Champs Elysee, as if to protect them from bugs, and lit them with different colors. And there’s a huge, lit up Ferris wheel down at the Tuileries. Then we walked to Trocadero, where we had dinner at a bright brasserie…and a long conversation about the family. It was a nice evening.
* * * * * * * * * * * * * * * * * * * * * *

THE REAL CAUSE OF THE IRISH FAMINE

It is refreshing to read your social commentary…But having studied history myself, especially Irish history, and being of Irish descent myself, I was taken back a bit by your scenario of the Irish "famine." There is a great dearth of facts about that sad period in Irish history so I can understand why even people of Irish lineage think that there was a famine in Ireland in the 1840s. The fact is that there was no famine at all. There was simply a potato blight on the only land that the native Irish were allowed to gather their food. They worked on foreign landlords’ farms reaping abundant harvests, but that produce was exported by England under armed soldiers. For an excellent account of the events leading up to and including the "Great Hunger" (An Gorta Mor) in Ireland, please read the essay written in 1847 by Archbishop John Hughs of New York at the "National Ancient Order of Hibernians. Click on "Irish Links" on the left side menu, then click on "The Irish Famine or The Great Hunger" under the Education subtitle, then scroll down to the last title in the list "A lecture on the antecedent causes of the Irish Famine in 1847". It is a very interesting read, especially being written at the time of the tragedy.

Vic Sackett
* * * * * * * * * * * * * * * * * * * * * *

DON’T BLAME THE ENGLISH

Oh Bill. You have opened a can of worms. You will learn that Ireland is a topic best not discussed in public or at dinner tables where the English or Irish feed.

The Irish do love to blame the English for all their woes. They relish reveling in the horror of the potato famine of the 1840s.

The 1845 potato blight that led to the Irish famine also affected much of Europe in 1845. The English were not responsible for that, surely! But the blight had more dire consequences in Ireland than elsewhere. Why was that? Let me review.

The population of Ireland had nearly doubled in the years 1800-1840. During this period, Irish political leaders rejected emigration — which would have relieved some pressure. There was widespread emigration from the mainland of Britain, which relieved poverty in England and Scotland.

Irish political leaders also encouraged the subdivision of holdings, contrary to the policy of all British governments of that time. That led to a steady reduction in the size of land holdings, of which in 1841 there were 300,000 under three acres each in size and another 250,000 from three to 15 acres. It also led to a dependence on a single (easy to grow) crop. As might be expected, the vast majority of the land workers lived from hand to mouth. The primary subsistence crop was the potato, and when the blight — which first appeared in North America in 1844 — reached England and Ireland, its effect was devastating.

Had landholdings been larger, some crop diversification would have been feasible, and the destruction of a single crop would not have had such devastating effects. The blight affected potatoes in many other countries without the same impact.

So the English did not cause the potato blight, nor were they responsible for the fact that the blight led to famine in Ireland. Nor, once the famine took hold, were the English responsible for the fact that its impact was so devastating. Remember, in 1845 there were no telephones or CNN. News of the scale of the famine reached London only gradually. The government of the day took the news very seriously: "I never witnessed such agony," said the Duke of Wellington, describing Prime Minister Sir Robert Peel’s reaction to the news. Peel promptly moved to repeal the protectionist Corn Laws, laws supported not only by the landed gentry but also by the new urban poor who wanted cheap bread. Repeal allowed the export of corn to Ireland, a courageous move that caused Peel’s resignation as prime minister and destroyed the Tory Party, which was replaced by the modern Conservative Party.

In addition, England did attempt to alleviate the hunger. It sent large amounts of food relief to Ireland, amounts that were extraordinarily large in the context of the day and in the context of relief provided for the hungry in England, Scotland and Wales. Many, including, for example, the Church of Ireland’s Archbishop Whatley, "gave liberally from his personal wealth" to famine relief. That is charity. Much of the government aid was ultimately counter-productive, as one would expect from any government program to assist the poor or disaster victims, but it would be difficult to castigate England for sending food to the Irish, and, certainly, it was not the lack of private ownership that caused the Irish to starve.

The Irish potato famine was tragic, but it was neither caused by nor exacerbated by England.

Sincerely
Adrian Day

In Today’s Daily Reckoning:

*** No sign of a crash…

*** Billions in Internet advertising…

*** The biggest fizzle of all time?

*** The Dow rose 120 points yesterday. But the Nasdaq made up only a little lost ground. It will be interesting to see if the Nasdaq returns to last week’s highs in our lifetimes.

*** The Advance-Decline ratio has dropped an amount equivalent to the bear market of 1973-74. But the damage has been disguised by the action of the Dow and a very thin spike in techs and Nets.

*** Sooner or later the divergence has to be corrected. Of course, it could be achieved by a rally in the A-D ratio…meaning that most stocks could start going up again. What happened in `29 and `73 was that the leading stocks turned around and followed the majority down.

*** Oil slipped down yesterday. And gold, too…trading as low as $287.

*** I don’t have a TV…but I’ve been told that advertising for Internet sites is becoming more and more common. The numbers tell us that the Nets are spending billions — capital raised from investors, not operating revenue — on advertising. They have to make a name for themselves…or the buzz may cease…

*** Is all this advertising going to pay off? In the only business I know anything about – publishing — it would be suicidal to advertise unless you had some test results proving that the effort would produce a profit. These guys don’t have a clue. And the numbers put out by Media Metrix, which keeps track of these things, are alarming. Internet growth slowed in the summer. It turned into an actual decline in early fall. The number of users has remained about the same…but the time spent on the Internet has dropped 5%.

*** Meanwhile, Morgan Stanley tells us that if you put all the Nets together, they’re worth $500 billion. Or 20 times revenues. Profits? Forget it. The only chance that Nets could ever be worth today’s capital values is if they were able to grow at a spectacular rate — both sales and profits. But it’s not happening.

*** Just a thought — could the Internet turn out to be the Biggest Fizzle of All Time? Or, as Jim Dines, who loves capital letters more than the Defense Department does, would say, TBFOAT?

*** Australia’s Department of Foreign Affairs has warned its people in Russia, Belarus, Ukraine and Moldova to clear out before the end of the year. The Ozzies think Y2K is going to cause big problems in the former Soviet countries…

*** Bill King reports that Wall Street analysts are wildly bullish. They’re recommending more than 70 buys for every sell.

*** Bill Clinton threw Big Labor a bone yesterday…and a curve to the WTO. In a bid to help the election chances of Al Gore, Clinton proposed to use the WTO — allegedly an organization designed to promote trade — to protect U.S. labor from foreign competition.

*** Drudge passes along a quote from Barney Frank — "Trade has the potential to…split the Democratic Party," just as civil rights and Vietnam did before. The labor wing is definitely opposed to free trade. But the New Democrats, of whom Bill Clinton is supposed to be a member, know that "it’s the economy, stupid." And the economy is helped by trade…especially the post- industrial economy.

*** But, speaking of the WTO, any organization that draws fire from Ralph Nader and Pat Buchanan can’t be all bad.

*** Where’s George Mitchell when we need him? A number of DR readers, with surnames suggesting bog-trotting origins similar to my own, have written to say that `twas not the fault of the Irish that there was famine in 1845.

*** "Beau Geste" — this was my favorite book as a child. The kid tries to protect his stepmother…and has to run off to join the French Foreign Legion. They didn’t take French citizens in the Legion. So the French who joined…usually on the run from the law…claimed to be Belgians. Most of the troops were Germans, Russians, Poles…And now the French government has made a decent gesture of its own…it has given French citizenship to any member of the Legion who was wounded in action.

*** Gosh, these letters seem to be getting longer and longer. There’s so much to talk about. But I’ll try to cut them back.

*** It is quiet around the Bonner apartment. Elizabeth has gone back to America to take care of some family business. Fortunately, Nadiege was able to come up from the country to help out for a few days. She cooks, cleans and takes the kids to school. But it is not the same as having Mom around…

*** I took my two daughters, Maria (pronounced Mariah) and Sophia, out shopping yesterday. More on that below…and thoughts about bubbles, too…

*** This royal throne of kings, this sceptred isle, This earth of majesty, this seat of Mars, This other Eden, demi-paradise This fortress built by Nature for herself…

This blessed plot, this earth, this realm…did this England cause the Irish famine? More below…including a sparkling defense of the precious stone set in the silver sea…by Adrian Day…