Fools Rush In...and out

By Bill Bonner

The central challenge to investors is to spot the biggest blockhead among them. In today’s column, we take a guess.

One of the conceits of market theorists is that prices are set rationally – based on investors’ independent judgments. In fact what happens is that mass sentiments and easy credit get them better of them. Even sophisticated investors get carried away by the crowd, like dead martyrs…or they are tempted away by artificially low lending rates. Instead of buying assets with predictable yields, they’re greedy for capital gains or fearful of losses. The trend continues, the emotion intensifies…one fool sells to another…until, finally, the greatest fool of all enters the market and the
trend reverses.

Who’s the greatest fool today? Sub-prime CDO buyers? Google shareholders? We might as well be looking for the biggest oaf on television; there are too many candidates to choose from. So, we begin by rounding up the usual suspects - central bankers and contemporary art buyers. The former have a long record; the latter, a flamboyant one.

Probably no central bankers are more prudent than the Swiss. At the end of the ’90s, the Swiss had the third largest gold horde in Europe – after Germany and France. But then, the Swiss central bank lost its head and decided to ‘diversify’ its holdings. The result: it dumped half its bullion – at the worst possible moment. The yodelers sold 1,300 tonnes in the five years between 2000 and 2005. From those sales, the Swiss realized about $14 billion. If they’d just held onto the stuff, it would be worth about $34 billion today – a difference that would be worth about $2,700 to every man, woman and child in Switzerland.

Meanwhile, closer to sea level, but with his head still in the clouds, the UK’s Chancellor of the Exchequer, Gordon Brown, had a similar notion. In 1999, he announced a plan to sell half of kingdom’s gold. In the event, he sold 395 tonnes, at an average price of about $275 per ounce – or, in real terms, the lowest price since the early ’70s. Some sales were recorded at the absolute lowest price - $256 per ounce, which came to be known as the “Brown bottom” of the great bear market in gold, 1980-1999. The Greatest Fool of All had made his move.

This week, the fools bumped into each other…coming and going. The Greatest Fools of yesteryear – the poor fellows who bought Kruggerands in January, 1980 – were finally back to breakeven. Twenty-seven years ago, gold sold for more than $800. It took more than a quarter century; but now it has recovered. And now, the fools who sold Britain’s gold in 2000-2005 are out nearly $7 billion.

What are central banks doing now? Gold sales by the banks are said to be at an 18-year low. When they begin buying gold, we will begin to wonder. When gold purchases by central banks rise to an epic high, it will be time to sell.

Meanwhile, art – like gold - has no real, intrinsic value. But as contrary indicators, art buyers are probably nearly as reliable as central bankers. Wayne Thiebaud’s “Seven Suckers” sold for $4.5 million on Tuesday. It was a “record for the artist,” said the International Herald Tribune. Above the caption is the photo…of, well, seven suckers. No, not a photo of Gordon Brown and his colleagues; it is a still life of silly little candy lolly-pops. The piece was part of a collection of dubious works, which passed from the hands of knaves into the hands of fools via Christies in New York earlier this week.

A new record was also reached by John Chamberlain, who crushed some sheet metal in 1960 and called it “Hatband.” The work brought $2.81 million, more than twice the previous record, set earlier this year, for a work by Chamberlain.

Another feature of the collection was a group of what we know in America as “Cigar Store Indians.” For reasons unexplained, shops that sold cigars, in the 19th century, set out a wooden Indian as a marker of their retail trade, similar to the way barbers used a barber pole. The most anyone ever paid for one of these wooden Indians came in 1990, when a buyer bought a 1875 sculpture, “Cigar Store Princess,” for $10,450. But that was before the great credit bubble expanded investors’ wallets and squeezed their brains. This past Tuesday, someone bought one of these wooden Indians for $217,000. Contemporary art has gone up 55% this year alone. Fools rushed in every time the auction houses opened their doors. But the very day that the “Seven Suckers” was sold for $4.5 million, not a single sucker could be found willing to spend more than $6 million for Willem de Kooning’s untitled 1942 “nondescript” painting. It brought only $5.3 million, barely half the upper estimate. Even in the art market, the Greatest Fool may have already come and gone.