BIGGS on FINANCE, ECONOMICS, and the MARKET

Barton’s Market Chronicles from the Years

BARTON BIGGS Cover image: © iStockphoto.com/nicoolay & © iStockphoto.com/Ursula Alter Cover design: Wiley

Copyright © 2014 by Barton Biggs. All rights reserved.

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Library of Congress Cataloging-in-Publication Data:

ISBN 978-1-118-5723-06 (Hardcover) ISBN 978-1-118-6546-68 (ePDF) ISBN 978-1-118-6548-66 (ePub)

Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 Contents

Acknowledgments ix Introduction xi

Section 1: What’s Old Is New Again 1 Section 1A: Market History and the Long View 3

In Search of History and a Word Processor That Works 3 Kondratieff and the Long Cycle 5 The Phony War 9 Ancient History 12 History, Market Deaths, and the Cult of the Equity 16

Section 1B: Fire and Ice 21

The Fire and Ice Debate 21 Ice Creeps On 26 A World Lit Only by Fire? 29

Section 1C: Bubbles and Panics 33

Manias, Panics, Crashes 33 Tulipomania 36 Anarchy 39 Life on the Good Ship Swine 43

iii iv CONTENTS

The New New Thing 46 When? 50

Section 1D: Wars and Rumors of War 55

The Last Supper 55 The Beam That Broke the Camel’s Back 59 Bioterrorism and the Case for Higher P/E Ratios? 61

Section 1E: Geopolitics 65

Popcorn and the Decline of the West 65 Diary of Mikhail S. Gorbachev—Sunday, May 4, 1986 69 Close-Up 72 Diary of Mikhail Gorbachev, May 1987 75 The Diary of Deng Xiaoping: Wistful and Wishful Musings 78 Bottomless Pits and Nuts with Missiles 81 Diary of Saddam Hussein 83 Islamic Fundamentalism 86

Section 2: Economics and Investing 91 Section 2A: Economics and Policy 95

The Evolution of the Supply Side 95 The Tax Cut Misconception 98 Running the Movie of the Seventies Backward 100 The Piper Must Still Be Paid 103 The Old President with the Right Intuitions 116 What Kind of People Are We? 119 Emerging Markets Are Only for the Brave 122

Section 2B: Discipline & Tactics 127

Discipline and Reading 127 How to Lose the Winner’s Game 130 You Gotta Believe 133

Section 2C: Market Psychology and Investing Philosophy 135

Contrarianism 135 Electronic War Rooms and Lying in the Sun 140 God Is a Mathematician? The Fibonacci Numbers 143 Beware of Linear Thinkers: Chaos on the Upside 146 How George Soros Makes Money: The Theory He Says Guides Him 148 The Horse Whisperers 151 Mr. Market Is a Manic-Depressive 155 Contents v

Section 2D: Alternative 159

Filthy Lucre 159 The Bull Market in Art: Mania or Magnificent Obsession? 162 Jewelry Is a Girl’s Best Friend 165

Section 2E: Market Predictions 169

First Class on the Titanic 169 “It’s a Bull Market, You Know . . .” 171 Beware the Conventional Wisdom . . . 175 Dear Diary: Up with Which I Have to Put 177 Praise the Lord and Pass the Ammunition 180 “Even Monkeys Fall from Trees” 183 Big Fish Do Not Live in Small Ponds 188

Section 3: The Global View 193 Section 3A: China and Hong Kong 197

Buy Hong Kong 197 Own Hong Kong Big 201 More on China 204 China: “The New Emperors” and the Risk/Reward Equation 208 How Fast Is China Really Growing? 212 China Tales 215 A China Traveler’s Tales 218 China Cooling, Us Heating 221

Section 3B: India 225

India Tilts to the Right and the Stock Market Explodes 225 India for the 1990s 228 Great Expectations 231 India: You Have to Go There to Understand 234

Section 3C: Japan 237

More on Japan 237 Long Trips 240 Japan Inc. Wants a Higher Yen 242 Japan Bought High and Will Sell Low 245

Section 3D: Europe, Middle East, Africa 249

In the Eye of the Storm 249 You Gotta Own Some Germany 253 Militant Fundamentalism Spoils the Middle East Story 256 vi CONTENTS

Section 3E: Latin America 259

South America for the Nineties 259 No More Siestas 263 Argentina: The Magic Show 268 Buy and Brazil 271 Case Study: Peru 275 Mexico Will Make It 278 Mexico: Virtuous or Vicious Circle? 282 Brazil: An Act of Faith 286

Section 3F: East Asia 289

The Best-Managed Country in the World 289 Korea: Fat Premiums, Thin Pickings 293 Camelot 296 Letter from Myanmar 299 Victory Has a Thousand Fathers 302

Section 3G: Emerging Markets Roundup 307

A Bigger, Faster World 307 Jewel in the Portfolio 311

Section 4: Characters and Culture 315 Section 4A: Lunches with Luminaries 317

Investment Alchemy 317 Lunch with the Global 321 Vanity Fair 325 Heroine Worship 327 Poker Games on the Titanic and Sir John 330

Section 4B: Jim the Trigger 333

The Summer of 83 333 The Trigger Comes Back for Lunch 336 U3 or “Many Shall Be Restored That Are Now Fallen and . . .” 339 The Trigger Finds an Arb 341 The Trigger Comes to Lunch 344 Investment Life Its Own Self 347 A Country of His Own 350 Talking Technology with Jim the Trigger 354 Contents vii

Section 5: Travelogues 359

Africa 361 The Idaho High Country 364 Making a New High on Your Own Time 367 Stretching the Mid-Life Envelope 370 Japanese Landscapes 373 The Snows of Kilimanjaro 377 Pitfalls in Tokyo, Sand Traps in Colorado 381

Section 6: Books and Letters 385 Section 6A: Book Reviews 387

“Groupthink” and What to Do about It 387 Captain Money and the Golden Girl Ponzi 391 The Alchemy of Finance 395 I Wish We Didn’t Have to Play for George Steinbrenner 398 Noise and Babble 401

Section 6B: Biggs’s Reading List 405

Too Much to Read 405 “Books, We Know, Are a Substantial World . . .” 408

Acknowledgments

he proceeds from this book will benefit the Morgan Stanley Foundation’s Global Alliance for Children’s Health—a more than 40-year effort to give children the T healthy start they need for consistent and meaningful achievement in life. Morgan Stanley would like to thank the many colleagues who volunteered their time and expertise to bring this book to life, especially Aine Abruscati, Lauren Bellmare, Laurence Bromberg, D’Arcy Carr, Richard Cunniff, Michele Davis, Joachim Fels, Michael Gallary, Brian Goldman, Karl Gunner, Vlad Jenkins, Wesley McDade, Andrew McCann, Joseph Aloysius McVeigh, Sandra Noonan, Adam Parker, Stephen Penwell, Joan Steinberg, and James Wiggins. And special thanks to Frederic Miller, Barton’s original editor, who had the foresight to keep paper copies of thousands of essays dating back to the early 1970s.

ix

Introduction

he untimely passing of Barton Biggs in 2012 created a void for many who never wanted to imagine a world devoid of his uniquely illuminating voice. It was a loss T widely felt, and we were inundated with requests for old essays. Seekers would rarely recall dates or titles but would easily refer to a phrase like “the one where he is overfed and maximum bullish.” Our team would happily search through the (mostly paper) archives, losing themselves in the guilty pleasure of reading Barton’s lucid and often prescient prose of one of Wall Street’s truly wise men. Biggs was a world apart from the cacophony of 21st century infotainment pundits of the twenty-first century; now shouting at us via every medium. The commentaries in this collection span the roughly two decades between 1980–2000 that corresponded with a great bull market in . It was a market that made people rich on paper through their IRAs and 401(k)s; it also broke their hearts. This was a cycle that Barton knew well. He understood that knowledge of human psychology and philosophy was more essential than any quantitative numbers crunching to truly insightful analysis. He was fond of personi- fying “Mr. Market” as an ingenious sadist or a manic-depressive. Like a therapist, Biggs sought to understand and accept his seemingly irrational companion instead of futilely attempting to change or control him. Along the way, he helped us discover that “the market” is really a mirror into the self and ultimately a foil that could lead to great per- sonal growth beyond mere monetary gain for those courageous enough to do the work. Biggs was the product of a superb education and insatiable intellectual curiosity that he cultivated throughout his life. His interests were wide-ranging and he read vociferously. He once, in a single paragraph, inventoried some 27 newspapers, periodicals, and com- mentaries that he consumed on a regular basis. This erudition contributed to a vivid and often beautiful prose style. He would enlighten his readers with a quote from the philoso- pher John Locke to illustrate the importance of informed judgment in successful investing,

xi xii INTRODUCTION and draw upon verses from the poets W.H. Auden to elucidate equity markets psychology, or W.B. Yeats to describe the panic of 1987: “The blood dimmed tide is loosed.” Instead of single-mindedly studying charts and quantitative models, Biggs suggested keeping an investment diary and examining our own biases and temperament. “Know thyself and know thy foibles. Study the history of your emotions and your actions,” he would write. This was a man who devoured life. Whether climbing Kilimanjaro, raging against the corrupting economics of college football, or studying the global impacts of govern- ment policy, Biggs felt that hard work and discipline were the qualities that mattered. He cheekily poked fun at the idea-of-the-month club with his satirical characters, including Jim the Trigger and his (fictional) Plumber. And his predictions were notable in both their prescience and transcendent views. In the early 1980s Biggs correctly believed the end of inflation was at hand which would lead to a mighty economic boom. All the while his contemporaries decried the end of the American economy itself. In 1989, he called the Japanese market downturn even as market observers-and broad popular culture-accepted Japan’s future of world economic dominance as a foregone conclusion. Biggs was also a keen student of bubbles and panics, dissecting the historical underpinnings and discovering their commonalities. “It is fascinating,” he wrote, “to be reminded of how little human nature has changed and how the pattern of events repeats itself over and over.” He called the “dot-bust” in 1997—a couple of years early perhaps but right on the mark in terms of magnitude and impact. “The most danger- ous phrase in the investment business,” he wrote, “is ‘this time it’s different’.” At heart, Biggs believed in fundamental intrinsic value-both personally and professionally. He believed equally in the value of a contrarian stance in a world where “hordes of inves- tors routinely plunge together off the cliff of financial destruction.” Reading through his work, it is remarkable how far ahead of the moment his mind operated. Biggs was one of the first true global strategists during a time when prevail- ing thought was locked in a binary us-versus-them world model dominated by the US-USSR Cold War standoff. He identified global flashpoints like Afghanistan and the growing threat of radical Islam decades before 9/11. In 1989 he wrote about the “Greening of Portfolios” and the coming trend toward environmental activism. In that same year, he predicted the skyrocketing costs of healthcare and a broken system we’re struggling with today. He was also a driving force behind the creation of “Emerging Markets” as an asset class. He had his own “boots on the ground” in countries like Kuwait, Singapore, Thailand, India, Brazil, and Argentina before most Wall Streeters could find them on a map. In some sense, Biggs may have been too far ahead of his time. When taking the long view, inevitable macro-trends can play out over decades despite wild market gyrations over minutes and seconds. Or in the famous words attributed to John Maynard Keynes: “The markets can remain irrational far longer than you or I can remain solvent.” All of which makes a compendium of Biggs’ forward thinking that much more compelling today now that the world has had a chance to catch up. James P. Gorman Chairman and CEO Morgan Stanley “We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different ways.” – Barton Biggs

With the passing of our friend and colleague Barton Biggs, the world seems a little less colorful, insightful and eloquent. He will be missed. Morgan Stanley © 2012 Morgan Stanley & Co. LLC. Member SIPC.