Is it a revolt?” Louis XVI asked the Duke de La Rochefoucauld.

“No, sire, it is a revolution.”

We are already at the Ides of July. More than half of the year is already behind us.

Friday, markets were flat. Neither gold nor stocks did anything worth reporting.

July 21 is statistically the hottest day of the year in the Northern Hemisphere. And it’s already smokin’ hot in Baltimore. The forecast calls for 98 degrees Fahrenheit today. More than 100 later in the week. We’re glad we’re not there. We lived through 48 summers in Baltimore, more than enough for any man.

Sometimes, in the summer months, the TV meteorologists might as well go on vacation. Day after day, the same forecast: hazy, hot, humid… with a chance of afternoon thundershowers. It can go on like that for weeks. Or even months.

It’s hot here in Normandy too. But every hell hath its own heat. It’s Normandy’s version of hot, not Maryland’s version. Yesterday, the temperature must have gotten up into the low 80s here.

When the weather is nice in Normandy, it’s very nice. But sometimes, a whole year can go by with only a few weeks of really nice weather. The good weather here began only very recently. A couple of weeks ago, we were wearing sweaters and jackets and lighting fires in fireplaces. Now the days are sunny and warm. The nights are cool and clear.

It’s finally summer in France… the way it oughta be.

France’s Minsky Moment

Yesterday was Bastille Day.

The French celebrated with fireworks, as usual. On more than one occasion over the years, we asked what they were celebrating. Never did we get a good answer.

“It was the beginning of the revolution,” one said. “But I don’t know why we would celebrate that.”

“It marks the beginning of the French Republic and the establishment of the Rights of Man,” said another, grandly.

And yes, the Republic and the proclamation of the Rights of Man did happen after the Bastille was stormed. But neither depended on it. The Bastille was irrelevant. It held only seven prisoners. Two counterfeiters. Two mental cases. One pervert. It would have held another famous pervert, the Marquis de Sade, but he had been transferred 10 days before.

But in the summertime, things can get hot…

Temperatures had begun to rise in France long before the Bastille was taken.

France had enjoyed a fair period of growth and stability under the Louis. Modern France was put together under them.

By the 18th century, the king was supposed to have a divine right to rule. He was supposed to be an “absolute” monarch. But each Louis found that – to hold onto power – he had to give up a little bit more of it… a little privilege here and there… a right to do this or that… a sinecure… a pension.

Over time, as Professor Mancur Olson explained, groups get together to push programs that benefit them – at the expense of the general welfare. They hire lobbyists. They solicit favors. They get monopolies and set up trade barriers. He did not say so, but they become what we call “zombies.”

“Stability causes instability,” was how Hyman Minsky described it. The accumulation of special favors weakened the authority of the king.

The Power of Talk

And God didn’t seem to help him much.

The clergy had its own lands… and its own government.

The aristocrats insisted on making their own rules too and, importantly, on having the right to approve the taxes Louis laid upon them.

And then, even the Third Estate – the common people – wanted its privileges too.

By the time the 16th Louis came along, the tinder was dry. And a warm wind of revolutionary ideas blew through Paris. In the Palais-Royal, for example, a public meeting continued almost around the clock. All of sudden, talk seemed to matter.

You could talk to each other about how to improve the world. You could talk about giving more food to the poor, for example. You could even set up an assembly of the people’s representatives at which they could talk too.

You could talk about liberty… about justice… And why not about redistributing the lands of the church? And why not a zombie uprising… so everybody got what he wanted?

If you could say something… you could do it, too.

In the summer of 1789, sparks flew. Soon, the dry tinder was lit. Crowds began looting stores and attacking the king’s military bases. Muskets were seized. Revolutionary groups were formed. The proletariat was hot now… and it saw no limit to its power or its prospects. Surely, it could pass laws too… and make itself rich.

Even many of Louis’ soldiers were talking about it… and taking the proles’ side.

Then, on July 14, a mob of about 1,000 people attacked the Bastille. Nearby troops did nothing to aid the small garrison of the fortress. The mob routed the defenders and murdered the Bastille’s governor, Bernard-René de Launay. De Launay’s head was sawed off and put upon a pike that was paraded around Paris.

Louis XVI was executed, by guillotine, on January 21, 1793.

Regards,

Bill

Market Insight:
If This Is a New Bull Market,
Why Are Stocks So Expensive?

by Chris Hunter

Cliff Asness, a former Goldman Sachs “quant” and co-founder of hedge fund AQR Capital Management, has calculated that the prospective returns from a typical stock and bond portfolio (with 60% in stocks and 40% in bonds) is 2.4% per year – the worst predicted return in 112 years.

The problem is stocks and bonds are expensive. And money is made in the markets “in the buying.” In other words, buying low and selling high… not the other way around.

One way to measure how expensive stocks are is by using the cyclically adjusted price to earnings ratio, or CAPE. Unlike the normal P/E ratio, which looks at just 12 months’ worth of earnings or forecast earnings, the CAPE compares share prices to average inflation-adjusted earnings over the previous 10 years.

This smoothes out any anomalies created by unusually high or unusually low earnings over a 12-month period. And it has been a good guide to long-run returns.

At today’s CAPE of 24.6, history suggests returns of less than 1% over the next decade for buying and holding the S&P 500.

This is a problem for the bull case for US stocks. Because it suggests stocks have not yet reached their final secular bear market bottom – where valuation levels are low enough to give above-average returns.

This usually happens with the CAPE in single digits… not far above the historic average, where it sits today.

History suggests we’ll see one last big fall in stocks before the next secular bull begins.

Chris Hunter 
Investment Director
Bonner & Partners Family Office