OUZILLY, France – Typical for August, the markets are going nowhere and doing nothing.
Sometimes, though, there will be a foreshadowing of a major plunge in the summer.
A dip… a sudden softness… an advance notice – hold that date! – of something bigger, coming in the fall.
But so far… nothing. U.S. stocks are near all-time highs.
An Important Anniversary
Going by the Nobel Prize winner Robert Shiller’s favorite valuation measure, the CAPE ratio (which looks at stock prices relative to 10 years of earnings) only in 1929, 1999, and 2007 has the S&P 500 been so expensive.
Because the prospects for growth and profits are so promising?
After the big scare at the start of the year, central banks got to work.
“Rate hike?” said Ms. Yellen. “What rate hike?”
“Whatever it takes,” assured Mr. Draghi, announcing more QE.
“Banzai!” added Mr. Kuroda at the Bank of Japan, threatening to go even fuller retard.
And then it was “risk on!”
We much prefer the 1926 comment of Émile Moreau, then governor of the Banque de France: “Au revoir.”
Moreau died in 1950. He was a central banker nonpareil. That is to say he was a guy who really understood what banking is all about.
As you know, we have just passed an important anniversary – August 15 – a day that will live in infamy… and “famy,” too.
The infamy comes because it was when President Nixon ended the Bretton Woods gold standard by defaulting on America’s promise to convert its foreign creditors’ dollars to gold at a fixed rate of $35 an ounce – a black mark on the monetary escutcheon.
The famy comes because it was day when the Virgin was taken up into Heaven; no cause for shame or regret there.
And perhaps most important: August 15 was the day when hunting season, traditionally, opened in this region of France.
Cocktail en Blanc
Today, we were going to elaborate our “Clash of Myths” concept.
But yesterday these three historical events collided in a curious way – only a few miles from here.
We were invited to a cocktail en blanc (a white cocktail) at a neighbor’s house.
People gather to celebrate the passing of summer (the weather usually turns bad after the 15th… and, indeed, it is raining today). And everyone wears white in homage to the Virgin.
The event was held at a 19th-century relais de chasse (a hunting lodge now classified as a historic monument and used as a summer house) to the south of our farm. It was a half-hour drive down winding lanes; we didn’t see a single soul or pass a single automobile.
Once there, about 150 people – all dressed in white – gathered on the lawn, cocktails and hors d’oeuvres in hand.
As the evening progressed, the crowd made a huge circular motion, clockwise from one table to another.
If the drinks were at 3 p.m., the entrées (starters) were at 6 p.m. We moseyed over at 9 p.m. for the more serious plats principaux (main courses). It was almost midnight when we reached for the desserts.
Each of the participants had brought something. And after 10 p.m. it was fairly dark; even with candles on the tables, you couldn’t quite make out what you were getting. Each mouthful was a surprise.
It was on the way to this soiree where the collision occurred…
We rounded a bend, and there was the house of Émile Moreau, a half-timbered house in the Normandy style, unusual in these parts.
A Most Important Meeting
It reminded us of the story – told in the book Lords of Finance by Liaquat Ahamed – of how, in 1926, Moreau was attending the most important meeting of central bankers in history.
British economist John Maynard Keynes was there. Benjamin Strong represented the Fed. Moreau was the man from the Banque de France.
They were trying to resolve the problem posed by German war reparations, which were sending the Weimar Republic into a depression… and perhaps dragging the rest of the world down, too.
In the middle of windy talks, Moreau simply got up and announced that he was leaving.
Hunting season opened! He didn’t want to miss it.
Later, in 1936, Moreau was chairman of a large French private bank, Paribas. A big-spending, socialist government had come to power in France. Naturally, it needed to borrow money to fund its deficit spending. So, it went to the banks.
Today, the big banks are practically public utilities. They readily buy the government’s flimsy paper, without question. After all, government bonds are the “safest credits in the world.”
Besides, it’s not as though it were the banks’ own money at risk. They are licensed to “print” money by the government… and are protected from their own mistakes by the same feds.
They are not going to resist governments’ demands. “Render unto Caesar…” they must say to themselves.
An Honest Banker
But back in Moreau’s time it was different.
An honest banker could still oppose the feds… and even bring down a government.
Because there was still a gold standard in place at the time, the funds Moreau had available came from savers who had put their money in the bank for safekeeping.
Moreau refused to lend it to the government, saying he did not regard the government of Leon Blum as a safe place for his customers’ savings.
Other bankers followed Moreau’s lead. As a result, the government was unable to finance its programs. It collapsed the following year.
It was this experience that caused the Mitterrand government, in 1982, to nationalize the banks.
Émile Moreau understood what bankers should be. Not activists, not meddlers, not world improvers nor manipulators of the world’s money… and certainly not enablers for government’s wanton spending.
Instead, a good banker should be quiet as a vault and solid as the concrete that encases it. He should make sure his customers’ money is protected – and that’s all he should do.
If he has done that, he can go hunting!
Moreau’s recollections were published in 1954, appropriately entitled: The Golden Franc.
Tomorrow: Hillary… Donald… the myth of the “strong” leader… the myth of the “fallen hero”…and more!