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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Oil stocks was a different investment storyAlthough the supply of new silver was scanty, the supply of old silver worldwide was huge. It wasnt in bars of bullion. It was in other forms, where melting and/or refining became profitable once silver prices rose above $15 an ouncelet alone $40. First to respond to this bonanza were hospitals. They began refining their old x-rays for their silver content, and, to coin a phrase, found they had a gold mine. Next came coin dealers, who started paying premiums for bagged silver coinsthe ones minted before the U.S. Mints supply of silver ran out. They were melted down into bars of bullion and sold into the commodity market. Then came hundreds of small furnace operators (like the store where I sold Stuarts cache for cash) who would buy anything silver, paying cash on the nail. They also produced bullion bars, which ended up in the commodity exchanges. The Hunts had virtually cornered the world market for bars of bullion and had also virtually cornered the world futures market for delivery of bullion. They owned all the silver there was, except for all the old silver out there that could be melted downand then everything old was new again. Afterward, two of the Hunt brotherswho had been members of the small league of the truly rich Big Leaguewere bankrupt. The financial survivor was Lamar, who had invested some of his share of the inheritance from their father in his football club, the Kansas City Chiefs. He was the only rich Hunt brother left standing amid the wreckage of the silver Triple Waterfall collapse. Oil Stocks Oil was a different investment story, because, apart from stories we heard from time to time of fully laden tankers resting for years in Norwegian fjords, investors did not load up on physical oil. They did buy futures, but the real story of this Triple Waterfall was in the prices of shares in the oil companies. At its peak in 1981, Dome Petroleum (the Nortel of its time) was roughly one-quarter of the weight of the Toronto Stock Exchange. It would be virtually bankrupt within three years. At their peak in 1982 (see Chart 3-4), oil stocksa group that includes integrated oil companies, refiners, exploration and production companies, and drilling and oil service companiesformed 29.5 percent of the weight of all stocks in the S&P 500. At their bottom in 1999, their weight was under 3.5 percent. Once again, a Buy and Hold strategy would prove disastrous. There were two components in the Shared Mistake that led to oil stocksTriple Waterfall: 1. The conviction that, with the possible exception of gold or silver, oil was the best and safest hedge against inflation, which would never be controlled. 2. The conviction that oil would remain in short supply forever; periods of weakness would mean modest price pullbacks, but they would be followed by periods of sustained shortage, which would drive prices to new peaks in each cycle, with $50-a-barrel prices likely to be the average. Moreover, near-permanent instability in the Middle East meant that oil prices would at times hit $100 a barrel. The two oil shocks of the 1970s had shown the power of OPEC and the willingness of the Middle Eastern oil producers to combine in political-driven strategies against the West. From the mid-1970s on, oil company shares became a special kind of growth stock. They were the glamour stocks of what came to be called the New Economy (a term that would help create the seventh and greatest Triple Waterfall two decades later). The futurists coined that term to describe companies that produced scarce commodities and thus benefited from a world of scarcity: not enough fuel, not enough food, not enough metals, and not enough forests. These were the New Economy companies. As oil stocks became glamour stocks, Shills & Mountebanks (yes, they had S&Ms in that New Economy, too) and Pied Pipers emerged to pitch the monstrous rewards of investing in the Arctic Ocean, drilling for geopressurized methane deep under the Louisiana crust, and shale deposits in the Rockies, let alone the projects in new African nations amid endless civil wars. After the collapse of the regime of the Shah of Iran, oil prices skyrocketed anew. A new sense of permanent crisis became ingrained in the thinking of oil companies, investment bankers, investors, academics, politicians in democracies, and among the dictators in the oil-exporting nations. Jimmy Carter, sweater-clad because the White House heat had been turned down, spoke to Americans of a new crisis of confidence, which became known as the malaise of America. With that kind of unanimity of opinion, companies in any aspect of the exploration, production, and refining of hydrocarbons found themselves showered with investment capital at a time when cashflows were rising rapidly. Although it would be a splendid ride for investors holding oil stocks, it would not create hordes of new billionaires, as would the next New Economy mania. Stock options were seldom seen and rarely heard of, so the executives and other insiders of the oil companies did not become billionaires during this boom. What they couldand diddo was invest in their own businesses. They poured money into every aspect of hydrocarbon exploration, production, refining, and marketing. Skyrocketing costs of drilling rigs and skyrocketing labor rates for oil service personnel were no deterrent to drilling in remote locations. Oil was king, and his courtiers showered him with their wealth. This would prove to be one of historys greatest examples of Shared Mistake. To quote P. J. ORourke (in another context): If you shower company executives with virtually free money in amounts beyond their wildest dreams, it is the equivalent of giving a party of teenage boys whiskey and car keys. During the late 1970s, oil companies built refineries and pipelines far beyond what the market could absorb, and technology improvement in the decades since then has meant that output from the refineries has continued to expand. They drilled for oil and gas in locations that, even if great discoveries had been made, only astronomic product prices could justify. In other words, they provided the world of the 1980sand for most of the 1990swith energy security and cheap energy. The disinflationary world of the 1980s and the quasideflationary world of the 1990s were driven, in significant measure, by the collapses of the inflation hedges, and in particular by the overinvestment in hydrocarbon production and refining from oils Triple Waterfall. Investors during those decades who invested in the former darlings of the 1970s were losers. Investors during those decades who invested in the disinflation-driven sectors of the marketsuch as technology, financials, consumer staples, and consumer cyclicalswere big winners from what proved to be the greatest bull market of all time. THE NIKKEI CRASH: 1985 TO ? Japans experience with a Triple Waterfall (see Chart 3-5) reflects the unique qualities of that society. As a conquered nation that had democracy imposed on it by General MacArthur, Japan had a special sense of vulnerability. This led to large-scale protectionism, particularly in food production. The nation has had the most autarkic agricultural policies on Earth. A recent OECD Report compares government support payments to farmers per agricultural hectare. Australian farmers receive $2, Canadians $53, American farmers $117a sum that will rise sharply because of the 2002 Farm Billand European Union farmers $676 per hectare. Japanese farmers receive $9709 per hectare. Because of the thriftiness that insecurity promotes, the formidable engineering and export prowess of Japan Inc., and because Japan never experienced a true postwar baby boom, the nation was an excess cash generator by the mid-1970s. (The United States never experienced the thriftiness of insecurity, and its Baby Boom meant that most of its internally generated capital was needed for housing, schools, superhighways, etc Data courtesy of Bloomberg Associates. Since it was national policy to keep the yens value low to protect local manufacturers and farmers, Japan used its swelling exchange and private capital reserves to invest abroad. It swiftly became the United States greatest creditor, a factor that Japanese prime ministers sometimes used to advantage in hardball negotiating between the two countries. Japans cheap yen policy ultimately foundered on the rocks of a dangerously overvalued dollar as the Twin Deficits of the Reagan erafiscal and Current Accountundermined global confidence in the reserve currency, despite the prudent monetary management of Paul Volcker. On September 21, 1985, at a meeting at the Plaza Hotel in New York, Treasury Secretary James Baker got the finance ministers of the other four leading industrial nations to agree to a managed devaluation of the dollar. Baker assured them that this would prevent the protectionists in Congress from imposing massive trade barriers on imports of foreign goods, thereby threatening the global recovery. They agreed. But the dollar fell so far and fast that by 1987 it was threatening to once again become an engine of global inflation. Meeting at the storied Louvre in Paris (see Monetarism, 1975-1989, in Chapter 6), the finance ministers agreed on a new joint policy of dollar support, conditioned upon control of U.S. budget deficits. The erosion of the dollar under that support agreement triggered the stock market crash of October 19, 1987, when stocks fell 22.6 percent. That pattern of global cooperation pulled Japan from its bystander role of the 1970s, and it became a key actor by the mid-1980s. So when the stock market plunged, the world called on Japan to reflate prodigiously to avert a global economic collapse. The Bank of Japan vigorously resisted the pressures imposed on it by the government and by the Ministry of Finance. However, it was forced to yield. It launched a sustained, massive monetary expansion that did indeed save the global economy and capital markets, but to the horror of the Bank of Japan, it sent Japanese stocks and real estate into orbit. The stock and real estate booms fed off each other as they soared. Struggling to export capital to prevent the domestic bubble from reaching the bursting point, Japan bought properties abroad. (Earlier, Japanese companies had bought U.S. and European companies, stirring massive protest, so the nation switched to buying assets.) Japanese companies set records for prices of Old Masters and Impressionists at global art auctions. Another useful feature of those trophy acquisitions was that they counted in the trade statistics as imports from the nations where the art auctions were held. American and European manufacturers were having tough times making anything that the Japanese would be willing to buy, so sell them a Rubens, Czanne, or Monet. Pebble Beach and Rockefeller Center became Japanese territory. I was told back then that five or six golf courses had been opened between Vancouver and Whistler, British Columbia, where only Japanese businessmen could play. It was cheaper to buy the land, build the courses, and fly them there to play than to buy land at home or buy memberships in local clubs, which were selling for the price of apartment buildings in the United States. Those were the days when entire Japanese wedding parties were being flown to Vancouver, because it was cost-effective to hold the weddings in Vancouver hotels, compared to Tokyo establishments. As astonishing as the rise in price of Japanese stocks was the Sinobubble in real estate. It was estimated in 1989 that if the Imperial Gardens in Tokyo were to come on the market, they would sell for more than the value of all the real estate in California. At least one American capitalized on this bubble. A leveraged buyout operator named Al Cecchi bought Northwest Airlines, then sold its Tokyo office building for nearly the entire value of the airline prior to his takeover bid. You might wonder: How could Japanese people buy real estate at those prices? This was not a society peopled with billionaires or even a large supply of centimillionaires. CEOs of companies such as Toyota earned roughly 20 times what their factory employees took home, apart from perks like golf club memberships. Answer: Almost anyone with a friendly banker could afford it. Japanese banks were awash in cash because of the monetary explosion and the endless buildup of bank depositsgiven Japanese habits of thriftthat they were eager to lend money out on any asset-based loans they could find. By the time the Bank of Japan got the freedom to tighten, the Nikkei had reached such towering levels that Japanese stocks had become the biggest weight in global indices, far outstripping the United States, which had an economy roughly twice the size of Japans. Nine of the ten biggest banks in the world were Japanese, and their loans were perilously tied to stocks and real estate. Japanese corporate profits peaked in the first half of 1989, but stock prices kept rising until the bank started tightening. |
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