BIGGS on FINANCE, ECONOMICS, and the STOCK MARKET Barton’s Market Chronicles from the Morgan Stanley Years BARTON BIGGS Cover image: © iStockphoto.com/nicoolay & © iStockphoto.com/Ursula Alter Cover design: Wiley Copyright © 2014 by Barton Biggs. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. 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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: Investment 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 Investments 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 Mexico 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 Investor 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 stocks.